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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, 1999
[ ] 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
<TABLE>
<CAPTION>
DATA TRANSLATION, INC.
(Exact name of registrant as specified in its charter)
<S> <C>
DELAWARE 04-3332230
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
100 LOCKE DRIVE
MARLBORO, 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
(TITLE OF CLASS)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _________
---------------
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
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 $13,102,000 as of January 31, 2000. The number of
shares of Common Stock, $0.01 par value, outstanding as of January 31, 2000 was
2,161,487.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 6, 2000 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"). In November 1996, Parent
sold a substantial portion of the assets of the networking distribution business
and during 1998 the Company discontinued the remainder of such business. The
Company continues 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 is 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'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 and
capitalize on growth opportunities in the data acquisition, imaging and machine
vision markets.
An outgrowth of the Company's core technology of analog to digital conversion
is its commercial products line which includes a low-cost, high-performance
video capture and encoding system for Microsoft(R) Windows(R) 95/98-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
Company's Broadway product has many applications, including incorporation of
video into web pages on the world wide web (the "Web"), multimedia
presentations, Webstreaming, CD-ROM titles and computer-based training.
DATA ACQUISITION AND IMAGING
Market
The market for the Company's data acquisition and imaging products ("Core
products") is composed primarily of technical users, such as engineers and
scientists, interested in incorporating the Company's products 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 data acquisition and imaging markets are highly fragmented and have been
adversely affected in recent years by reduced prices for PCs and peripherals.
Business Strategy
In the data acquisition and imaging area, the Company is focused on providing
system solutions built around development of its Peripheral Component
Interconnect ("PCI") and Universal Serial Bus ("USB") based products. These
developments are being driven by rapid adoption of PCI and USB slots by personal
computer manufacturers.
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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 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.
The Company sells over 100 data acquisition and imaging products, which range
in retail price from $199 to $2,995. Domestically, the Company sells such
products to end users, value-added resellers ("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, system
integrators and OEMs have been the predominant data acquisition users in the
past, new data acquisition markets have emerged in the industrial and medical
areas, such as industrial inspection, medical diagnostic/therapeutic
applications, high-performance control, vibration analysis, acoustics and test
and measurement applications. Customers incorporate the Company's data
acquisition boards into PCs to measure real-world parameters, including
temperature, pressure, acceleration and sound; to analyze this data; and to use
the results to control real-world events and processes.
The Company's imaging products may be used in a number of applications. In
machine vision applications, images can be captured and processed immediately,
in real time, for fast, accurate inspection of manufactured parts. In scientific
imaging applications, images can be captured from video cameras for analysis, or
images can be captured from cameras mounted on microscopes to identify and count
cells. In medical applications, images can be captured from different diagnostic
devices, such as CAT scanners or ultrasound imaging devices, for enhancement,
analysis and display.
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 telesales 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 10 employees in the United
States to support sales. Two subsidiaries and various distributors throughout
Europe, Asia and the Pacific Rim support international sales.
Competition
The Company competes in the data acquisition market principally with National
Instruments Corporation and Computer Boards, Inc. In the imaging market the
Company competes with Matrox and Imaging Technology, Inc. The aforementioned
competitors 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.
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COMMERCIAL PRODUCTS
Market
The convergence of voice, video and data, the advancements in personal
computing, and the growth of the Internet have changed the way in which the
world communicates. As computing processor power and telecom/digital/cable modem
technologies evolve, so too does the PC user's ability to harness these venues
for creating and delivering video content. As PC costs continue to reach new
lows with substantial increases in computing power, the majority of PC users
will have access to an affordable tool for video creation. The Company believes
the most lucrative market segments for PC video are Web page creators/hosts,
business users for use in presentations, training, sales and marketing and CD-
ROM/Digital Video Disk ("DVD") title producers developing entertainment, gaming
and education content.
Product and Technology
Broadway is a high-performance video capture and encoding system for Windows
98 and Windows NT PCs. Broadway is a complete streaming and video editing
solution, and its videos can also be integrated with third party video editing
software packages to edit and produce Web streaming video based on Real Networks
technology, as well as, 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 distribute it on the Web or in hard media form. Users can also
incorporate the finished video into multimedia applications, such as Web home
pages, multimedia presentations and CD-ROMs. Broadway is composed of a PCI
integrated circuit board and a graphical user interface compatible with Windows.
The Company's standard Broadway package is shipped complete with Ulead Systems,
Inc.'s MediaStudio Pro/TM/ video editing software and M1-Edit Lite MPEG editing
software. Broadway is also designed to be integrated with a variety of other
video editing packages, including Adobe Premiere(R).
Broadway utilizes a robust implementation of the MPEG-1 standard that uses a
combination of hardware and software to fully compress video clips into the
MPEG-1 format. Users utilizing the latest Pentium III processors can compress
into MPEG-1 format in real-time. PCs with less speedy processors utilize
hardware compression to get real-time compression. Advances in processor speed
can utilize various software techniques to achieve faster compression and
enhanced editing capability.
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. Additionally, many users choose to share video content via the Internet.
These clips may be streamed, utilizing RealNetworks technology and played back
at their destination via a RealNetworks player. Since many users have this
player installed on their machine this ability to communicate with video is
rapidly gaining adherents.
Customers and Sales
The Company's sales and marketing strategy is to move down the technical
sophistication curve and up the volume curve by targeting audio/video
professionals, business presentation and education developers, home hobbyists
and family/home users as primary customers.
Worldwide, the Company's commercial products are sold directly on-line, as
well as, through a two-tier distribution network. Users can order directly from
the Company's Web site for rapid delivery. The Company maintains direct
relationships with international mass market distributors as well as resellers
and 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 virtually any method used by its customers to purchase
their products. The Company offers a 30-day money back guarantee on its
commercial products.
The Company currently provides end users with free technical support with the
purchase of any 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.
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Competition
The Company has a number of competitors. Some competitors sell products which,
like Broadway, employ MPEG encoding, while others sell products based on
different platforms and video standards. The Company's Broadway product competes
principally on the basis of ease of installation and use, brand name awareness,
and on price.
The Company's principal competition for the Broadway product includes other
products with MPEG encoding such as Pinnacle System's DC30, Matrox's Rainbow
Runner, Videonics' Python and Dazzle Multimedia's Snazzy and Dazzle products.
These companies may have substantially greater financial, technical and
marketing resources than the Company. 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.
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 17.5% of net sales. For the fiscal year ended November 30, 1999,
the Company invested approximately $2,569,000, or 15.8% of net sales, in product
development compared to $2,444,000, or 14.6% of net sales in the prior fiscal
year.
The Company employed, as of January 31, 2000, approximately 20 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 Company's focus on hardware
development includes the integration of application specific integrated circuits
("ASICs") into circuit boards, which may 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 95/98 and Windows
NT/TM/.
MANUFACTURING
The Company manufactures all of its products at a leased facility in Marlboro,
Massachusetts. The Company believes its control of manufacturing significantly
contributes to hardware design improvements, and allows for quicker turn-around
of product development to the marketplace. The Company periodically assesses its
production efficiencies against the benefits of outsourcing certain hardware
production. The Company has been ISO 9001 certified since 1994.
The Company's fully integrated assembly and test operations have sufficient
capacity to meet the Company's current 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
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point-of-use bonding, a program in which 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 became
available.
PROPRIETARY RIGHTS
The Company holds ten United States patents, expiring from March 2001 through
March 2015, and has one pending patent application in the United States, none of
which the Company believes is material to its business or operations. Pursuant
to an agreement with Parent, the Company also has cross-licenses to technology
under Parent's current patents and patent applications, together with technology
resulting from patent applications, which Parent applied for through December 2,
1998.
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 and is not material to operations.
EMPLOYEES
As of January 31, 2000, the Company employed approximately 96 persons
worldwide. None of the employees is represented by a labor union. The Company
believes it has good relations with its employees.
Competition for employees with the skills required by the Company is intense
in the geographic areas in which the Company's operations are located. The
Company believes that its future success will depend on its continued ability to
attract and retain qualified employees, especially in research and development.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------- ----- -----------------------------------------------------------------------
<S> <C> <C>
Alfred A. Molinari, Jr... 58 Chairman and Chief Executive Officer
Jeffrey M. Cronin........ 35 Vice President, Operations
Annette C. Crossen....... 40 Vice President, Sales
Michael A. DiPoto........ 32 Vice President, Finance, CFO and Treasurer
Clifford G. Wilson....... 46 Vice President, Engineering
</TABLE>
Mr. Molinari has been the Chief Executive Officer and Chairman of the Company
since December 1996. Mr. Molinari is the founder of Parent and served as the
Chief Executive Officer and a director of Parent from its inception in 1973
until November 1996.
Mr. Cronin was appointed Vice President, Operations in February 1999. Prior to
that Mr. Cronin served as the Director of Manufacturing of Parent from March
1992 to December 1996 and as Director of Operations and Manufacturing of the
Company from December 1996 to February 1999.
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Mrs. Crossen was appointed Vice President of Sales in July 1999. Prior to that
Mrs. Crossen served as the Domestic Sales Manager of the Company from August
1997 to June 1999. Prior to joining the Company Mrs. Crossen served as Principal
Business Manager of SIMiN Business Systems from June 1996 to July 1997. Mrs.
Crossen also served as the Sales Operations Manager of Parent from February 1994
to May of 1996.
Mr. DiPoto was appointed Vice President of Finance, Chief Financial and
Treasurer in July 1999. Prior to that Mr. DiPoto served as the Chief Accounting
Officer of the Company from March 1999 to June 1999. Prior to joining the
Company Mr. DiPoto served as Corporate Controller of NuMega Technologies, Inc.
from January 1996 to March 1999. Prior to that Mr. DiPoto served as Accounting
Manager and Controller of Acuity Imaging, Inc. from January 1994 to December
1995.
Mr. Wilson joined the Company in June 1999 as Vice President of Engineering.
Prior to joining the Company, Mr. Wilson was employed by Imagraph Corporation as
the Vice President of Engineering from 1996 to March 1999. In addition, Mr.
Wilson served as Director of Software Product Development for Eastman Kodak
Company from 1987 - 1996.
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 2009. The Company sublets a portion of the building to
certain tenants. The minimum annual net basic rent for the building is
approximately $1,300,000, which is allocated between the Company and its tenants
pursuant to certain sub-lease agreements.
The Company's United Kingdom sales operations are conducted in a 1,000 square
foot office facility in Basingstoke, Hants, England that is leased by the
Company under a quarterly net lease. The minimum quarterly basic rent is
approximately $11,000 per quarter.
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 $40,000 per year.
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
There were no matters submitted to a vote of stockholders during the fourth
quarter of fiscal 1998.
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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 SmallCap Market System under the symbol: DATX. The
Company's 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 since the
Distribution Date through January 31, 2000 as reported on the Nasdaq SmallCap
Market System were $9.91 and $.53, respectively. The table below sets forth the
high and low quarterly sales prices of the Common Stock during the two most
recent fiscal years:
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<CAPTION>
1999 1999 1998 1998
High Low High Low
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<S> <C> <C> <C> <C>
First quarter $2.000 $1.125 $3.125 $1.500
Second quarter 4.000 1.500 2.438 1.406
Third quarter 5.500 2.937 2.000 1.063
Fourth quarter 6.625 4.500 2.125 0.531
</TABLE>
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, 2000, there were approximately 300 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 that 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, 1999. The data should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Consolidated Financial Statements and the notes thereto and other financial
information included elsewhere in this Form 10-K.
For the period presented prior to the Distribution Date, the 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 financial information included herein for periods prior to the
Distribution Date may not, however, reflect the results of operations or
financial position that would have been obtained had the Company been a
separate, independent company. The consolidated financial data for all periods
subsequent to the Distribution Date reflect the results of operations, financial
position, changes in stockholders' equity and cash flows of the independent
company.
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<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales....................................................... $16,254 $16,781 $20,452 $21,201 $21,826
Cost of sales................................................... 7,048 8,070 9,932 8,181 8,187
------- ------- ------- ------- -------
Gross profit.................................................. 9,206 8,711 10,520 13,020 13,639
Research and development expenses............................... 2,569 2,444 3,808 3,736 2,806
Selling and marketing expenses.................................. 4,100 5,621 10,481 9,696 6,799
General and administrative expenses............................. 1,943 2,001 2,426 2,032 1,627
------- ------- ------- ------- -------
Income (loss) from operations................................. 594 (1,355) (6,195) (2,444) 2,407
Interest income................................................. 100 149 269 560 (7)
Other income (expense).......................................... -- (46) (53) (51) 2
------- ------- ------- ------- -------
Income (loss) from continuing operations before provision
(benefit) for income taxes................................... 694 (1,252) (5,979) (1,935) 2,402
Provision (benefit) for income taxes............................ 32 -- -- (658) 966
------- ------- ------- ------- -------
Income (loss) from continuing operations...................... 662 (1,252) (5,979) (1,277) 1,436
Discontinued operations(1)...................................... -- -- -- (3,555) 24
------- ------- ------- ------- -------
Net income (loss)............................................. $ 662 $(1,252) $(5,979) $(4,832) $ 1,460
======= ======= ======= ======= =======
Basic net income (loss) from continuing operations per common
and potential common share..................................... $0.31 $(0.60) $(2.94) $ (0.64) $ 0.86
======= ======= ======= ======= =======
Diluted net income (loss) from continuing operations per common
and potential common share..................................... $0.30 $(0.60) $(2.94) $ (0.64) $ 0.86
======= ======= ======= ======= =======
Basic and diluted net income (loss) from discontinued operations
per common and potential common share.......................... $ - $ - $ - $ (1.78) $ 0.01
======= ======= ======= ======= =======
Basic weighted average number of common and potential common
shares outstanding............................................. 2,123 2,083 2,033 1,998 1,675
======= ======= ======= ======= =======
Diluted weighted average number of common and potential common
shares outstanding............................................. 2,241 2,083 2,033 1,998 1,675
======= ======= ======= ======= =======
</TABLE>
NOVEMBER 30,
--------------------------------------
1999 1998 1997
---------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............... $4,098 $2,780 $ 3,922
Working capital......................... 4,988 4,102 6,110
Total assets............................ 9,049 7,576 10,559
Total liabilities....................... 2,799 2,024 3,830
Total stockholders' investment......... 6,250 5,552 6,729
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain "forward-looking" information (as
defined in the Private Securities Litigation Reform Act of 1995). The words
"believe", "expect", "anticipate", "intend", "estimate", "assume" and other
similar expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. Reliance should not be placed on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors, which are
in some cases beyond the control of the Company and may cause the actual
results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements.
For further discussion identifying important factors that could cause actual
results to differ materially from those anticipated in forward-looking
statements, see "Certain Factors that May Affect Future Results" herein.
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 during 1998 the Company discontinued 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 financial statements of the Company,
which present the Company's results of operations, financial position and cash
flows. For the periods presented prior to the Distribution Date, the 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 consolidated financial statements for all
periods subsequent to the Distribution Date reflect the results of operations,
financial position, changes in stockholders' equity and cash flows of the
independent company.
The financial information included herein for periods prior to the
Distribution Date may not, however, necessarily reflect the results of
operations, financial position and cash flows of the Company as it would have
been had the Company been a separate, stand-alone entity during these periods.
This is due, in part, to the historical operation of the Company as an integral
part of the larger Parent.
Following the Distribution, the Company became a stand-alone entity with
objectives and strategies separate from those of Parent. The Company is focused
on providing products in the data acquisition, imaging, machine vision and PC
video editing industries.
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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, Parent sold certain assets of the
networking distribution business, primarily inventories, equipment and its
ongoing business, for approximately $1.3 million. In fiscal 1996, Parent
recognized a gain of approximately $340,000 on this transaction. The Company
estimated a loss on the disposal of the remaining business assets and settlement
of liabilities of approximately $1,561,000 before applicable income taxes, in
fiscal 1996. Net sales from Networking were approximately $16,522,000 for the
year ended November 30, 1996. During 1998, the Company completed winding-up the
remainder of such business.
COMPARISON OF FISCAL YEAR ENDED NOVEMBER 30, 1999 TO FISCAL YEAR ENDED NOVEMBER
30, 1998
Net sales for the fiscal year ended November 30, 1999 were $16,254,000
compared to $16,781,000 for the same period in the prior year, which represents
a decrease of approximately 3.1% or $527,000. Sales from the Company's data
acquisition and imaging products decreased approximately $119,000, or .83% from
the prior fiscal year. The Company believes that sales continue to be adversely
impacted by various market conditions including a perceived shift in the data
acquisition and imaging markets toward new, lower priced hardware and software
products (particularly in PC prices), competitive pricing pressures and a
decline in the financial markets of certain regions abroad. Sales from the
Company's commercial product, Broadway, decreased approximately $408,000, or
16.7%, from the comparable period in fiscal 1998, which the Company believes is
due primarily to a decrease in the size of the Company's sales force and a
consolidation of the Company's marketing programs.
Gross profit for the period ended November 30, 1999 was 56.6%, compared to
51.9% in the comparable period of the prior year. The increase in gross profit
from the comparable prior year period was the result of lower manufacturing
overhead expenses as well as a more favorable product mix.
The Company's income from operations for fiscal 1999 was $662,000, compared to
a loss from operations of $1,252,000 in the comparable period of the prior year.
A decrease in operating expenses as well as higher gross profits contributed to
the increase in income from operations. Operating expenses for fiscal 1999 were
$8,612,000 representing 53.0% of sales, compared to $10,066,000, representing
60.0% of sales, in the prior year. Prior year operating expenses include a
significant investment in advertising, promotion and sales channel development
for the Company's Broadway product. Research and development expenses were
$2,569,000, representing 15.8% of sales, compared to $2,444,000, representing
14.6% of sales, in the prior year period. The increase is primarily attributable
to an increased development effort in the Company's data acquisition and imaging
product lines. Sales and marketing expenses were $4,100,000 representing 25.2%
of sales, compared to $5,621,000, representing 33.5% of sales, in the prior year
period. The decrease in sales and marketing expenses is primarily a result of a
decrease in the size of the Company's sales force and a consolidation of the
Company's marketing programs. General and administrative expenses were
$1,943,000, representing 12.0% of sales, compared to $2,001,000, representing
11.9% of sales, for the comparable period in fiscal 1998.
Net income for the period ended November 30, 1999 was $662,000, or $.30 per
diluted share, compared to a net loss of $1,252,000, or $0.60 per diluted share,
for the same period in fiscal 1998.
COMPARISON OF FISCAL YEAR ENDED NOVEMBER 30, 1998 TO FISCAL YEAR ENDED NOVEMBER
30, 1997
Net sales for the fiscal year ended November 30, 1998 were $16,781,000
compared to $20,452,000 for the same period in the prior year, which represents
a decrease of approximately 17.9%, or $3,671,000. Sales from the Company's data
acquisition and imaging products decreased approximately $2,860,000 or 16.6%
from the prior fiscal year. The Company believes that sales continue to be
adversely impacted by various market conditions including a perceived shift in
the data acquisition and imaging markets toward new, lower priced hardware and
10
<PAGE>
software products (particularly in PC prices), competitive pricing pressures and
a decline in the financial markets of certain regions abroad. Sales from the
Company's commercial product, Broadway, decreased approximately $811,000, or
24.9%, from the comparable period in fiscal 1997 primarily due to lower
international sales.
Gross profit for the period ended November 30, 1998 was 51.9%, compared to
51.4% in the comparable period of the prior year. The slight increase in gross
profit was primarily the result of lower overall manufacturing overhead
expenses, offset partially by lower overhead absorption due to decreased
production levels as well as lower average selling prices.
Loss from operations for fiscal 1998 was $1,355,000, compared to a loss of
$6,195,000 in the comparable period of the prior year. A decrease in operating
expenses contributed to a reduction in the loss from operations. Operating
expenses for fiscal 1998 were $10,066,000, representing 60.0% of sales, compared
to $16,715,000, representing 81.7% of sales, in the prior year period. Research
and development expenses were $2,444,000, representing 14.6% of sales, compared
to $3,808,000, representing 18.6% of sales, in the prior year period. Selling
and marketing expenses were $5,621,000, representing 33.5% of sales, compared to
$10,481,000, representing 51.2% of sales, in the prior year period. General and
administrative expenses were $2,001,000, representing 11.9% of sales, compared
to $2,426,000, representing 11.9% of sales for the comparable period in fiscal
1997. Prior year operating expenses include a significant investment in product
development, advertising, promotion and sales channel development for the
Company's commercial products. In the fourth quarter of fiscal 1997, the Company
took certain measures to lower its operating expenses across all categories and
improve its operating results.
The Company incurred a net loss of $1,252,000, or $0.60 per diluted share, for
the fiscal year ended November 30, 1998 compared to $5,979,000 or $2.94 per
diluted share, in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 1999, the Company had cash and cash equivalents totaling
$4,098,000 as compared to cash and cash equivalents of $2,780,000 as of November
30, 1998.
During fiscal 1999, the Company generated $1,981,000 from operating
activities, resulting from net income, increases in accounts payable and accrued
expenses and a decrease in prepaid expenses, partially offset by increases in
accounts receivable and inventory.
The Company used $806,000 for investing activities during fiscal 1999, mainly
as a result of acquisitions of property, equipment and marketable securities.
The Company generated funds from financing activities of $87,000 during fiscal
1999 related to the exercise of stock options and the issuance of stock under
the employee stock purchase plan, partially offset by the repurchase on the
market of 15,000 shares of the Company's Common Stock.
The Company believes that its existing cash, cash equivalents and short-term
investment balances and cash flows expected to be generated from future
operations, will be sufficient to meet its capital requirements at least through
the next 12 months, although the Company may be required, or could elect, to
seek additional funding prior to that time. The Company's future capital
requirements will depend on many factors, including the rate of revenue growth,
the timing and extent of spending to support product development efforts and
expansion of sales and marketing, the timing of introductions of new products
and enhancements to existing products, and market acceptance of the Company's
products. There can be no assurances that additional funding, if required, will
be available on acceptable terms or at all.
11
<PAGE>
RESULTS OF OPERATIONS
The following table shows certain statements of operations data as a
percentage of net sales.
FISCAL YEAR ENDED
--------------------------------------
NOVEMBER 30,
--------------------------------------
1999 1998 1997
----------- ------------ -----------
Net sales.............................. 100.0% 100.0 % 100.0 %
Gross margin........................... 56.6 51.9 51.4
Research and development expenses...... 15.8 14.6 18.6
Selling and marketing expenses......... 25.2 33.5 51.2
General and administrative expenses.... 12.0 11.9 11.9
----- ----- ------
Income (loss) from operations.......... 3.7 (8.1) (30.3)
Interest income (expense) and other, net 0.6 0.6 1.1
----- ----- ------
Income (loss) from operations before
benefit from income taxes.............. 4.3 (7.5) (29.2)
Provision (benefit) from income taxes... 0.2 (0.0) (0.0)
----- ----- ------
Net loss................................ 4.1% (7.5)% (29.2)%
===== ===== ======
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the matters discussed
in this Annual Report on Form 10-K are forward-looking statements, and are based
on current expectations, and involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from those
expressed in such forward-looking statements. The risks and uncertainties
associated with such statements include the following:
SIGNIFICANT FLUCTUATIONS AND UNPREDICTABILITY OF OPERATING RESULTS
Our quarterly operating results may vary significantly for a number of
reasons, including new product announcements and introductions by us or our
competitors, changes in pricing, and the volume and timing of orders received
during each quarter. Historically a significant percentage of our net sales
have resulted from orders received from universities, research laboratories and
government agencies. These sales are historically slower during our third
quarter as a result of seasonal vacation schedules and university shutdowns. We
have also in the past experienced delays in the development of new products and
enhancements, and such delays may occur in the future. These factors make the
forecasting of revenue inherently uncertain. Additionally, a significant
portion of our operating expenses is relatively fixed, and operating expense
levels are based primarily on internal expectations of future revenue. As a
consequence, quarterly operating expense levels cannot be reduced rapidly in the
event that quarterly revenue levels fail to meet internal expectations.
Therefore, if quarterly revenue levels fail to meet internal expectations, our
operating results would be adversely affected.
DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS
Our future success depends upon our ability to address the rapidly changing
needs of our customers by developing and introducing high-quality, cost-
effective products, product enhancements and services on a timely basis and by
keeping pace with technological developments and emerging industry standards.
We have new product launches and upgrades to our existing products planned for
fiscal year 2000. Our future revenue growth will be dependent on the success of
these new product launches. We have in the past experienced delays in product
development and such delays may occur in the future. In addition, as we
introduce new or enhanced products, we will have to manage successfully the
transition from older products in order to minimize disruption in our customers'
ordering patterns, avoid excessive levels of older product inventories and
ensure that enough supplies of
12
<PAGE>
new products can be delivered to meet our customers' demands. Our ability to
develop and successfully introduce new products and product enhancements, which
are broadly accepted, will affect our revenues.
DEPENDENCE ON A FEW KEY ORIGINAL EQUIPMENT MANUFACTURERS (OEMS)
We depend on a few key original equipment manufacturer customers (OEMs).
For example, in the year ended November 30, 1999, sales to our OEM channel
represented 30% of our total revenue. We anticipate that our operating results
will continue to depend on sales to the OEM channel. Therefore, the loss of any
of our OEMs or a significant reduction in sales to these OEMs could
substantially reduce our revenues.
ABILITY TO MANAGE DISTRIBUTION CHANNEL
We rely primarily on a worldwide network of independent value-added
resellers(VARs) to distribute and sell our products to end-users. Our resellers
generally offer products of several different companies, including, in some
cases, products which are competitive with our products. In addition, many of
these VARs are small organizations with limited capital resources. There can be
no assurance that the our resellers will continue to purchase our products or
provide them with adequate levels of support, or that our efforts to expand its
VAR network will be successful. Any significant failure of the preceding factors
could have a material adverse effect on our business and operating results.
RELIANCE ON INTERNATIONAL SALES
Sales of our products outside of North America represented approximately
46% of our net sales for the fiscal year ended November 30, 1999. International
sales and operations may be subject to risks such as the imposition of
government controls, export license requirements, restrictions on the export of
critical technology, less effective enforcement or proprietary rights; currency
exchange fluctuations, generally longer collection periods, political
instability, trade restrictions, changes in tariffs, difficulties in staffing
and managing international operations, potential insolvency of international
resellers and difficulty in collecting accounts receivable. Our international
sales are also subject to more seasonal fluctuation than domestic sales. In
this regard, the traditional summer vacation period, which occurs during our
third fiscal quarter, may result in a decrease in sales, particularly in Europe.
There can be no assurance that these factors will not have an adverse effect on
our future international operations and consequently, on our business and
operating results.
DEPENDENCE ON SINGLE OR LIMITED SOURCE SUPPLIERS
We are dependent on single or limited source suppliers for several key
components used in our products. The availability of many of these components
is dependent on our ability to provide suppliers with accurate forecasts of its
future requirements, and certain components used by us have been subject to
industry-wide shortages. We do not carry significant inventories of these
components and have no guaranteed supply arrangements with such suppliers.
There can be no assurance that our inventories would be adequate to meet the our
production needs during any interruption of supply. Our inability to develop
alternative supply sources, if required, or a reduction or stoppage in supply,
could delay product shipments until new sources of supply become available, and
any such delay could adversely affect our business and operating results in any
given period.
DEPENDENCE ON KEY PERSONNEL
Competition for employees with the skills required by us is intense in the
geographic areas in which our operations are located. We believe that our
future success will depend on its continued ability to attract and retain
qualified employees, especially in research and development. In addition,
companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
We cannot assure you that we will not receive such claims in the future as we
seek to hire qualified personnel or that such claims will not result in material
litigation. We could incur substantial costs in defending ourselves against
these claims, regardless of their merits.
13
<PAGE>
YEAR 2000 COMPLIANCE
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
To date, we have not experienced any year 2000 issues with any of our internal
systems or our products, and we do not expect to experience any in the future.
To date, we have not experienced any year 2000 issues related to any of our key
third party suppliers and customers nor do we expect to experience any in the
future. Costs associated with remediating our internal systems were not
material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's investing strategy, to manage interest rate exposure, is to
invest in short term highly liquid investments. Currently, the Company's short
term investments are in highly rated government securities. At November 30,
1999, the fair value of the Company's short term investments approximated its
market value.
The Company faces exposure to movements in foreign currency exchange rates.
The Company does not use derivative financial instruments or other financial
instruments to hedge economic exposures or for trading. The Company's primary
exposures have been related to the operations of its European subsidiaries. In
1999, the net impact of foreign currency charges was not material.
14
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of November 30, 1999 and 1998............. F-3
Consolidated Statements of Operations for the Years Ended
November 30, 1999, 1998, and 1997................................... F-4
Consolidated Statements of Stockholders' Investment for the Years Ended
November 30, 1999, 1998, and 1997................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
November 30, 1999, 1998, and 1997................................... F-6
Notes to Consolidated Financial Statements............................... F-7
1
<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 subsidiaries as of November 30,
1999 and 1998, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended November 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards acceptable in
the United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1999, in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Boston, Massachusetts
January 3, 2000
2
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30,
--------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 3,989,000 $ 2,780,000
Marketable securities .............................. 109,000 --
Accounts receivable, net of reserves of $289,000
and $397,000 in 1999 and 1998, respectively ...... 2,035,000 1,763,000
Inventories ........................................ 1,294,000 1,202,000
Prepaid expenses ................................... 357,000 378,000
------------ ------------
Total current assets ............................ 7,784,000 6,123,000
Property and equipment, net .......................... 1,243,000 1,328,000
Other assets, net .................................... 22,000 125,000
------------ ------------
Total Assets .................................... $ 9,049,000 $ 7,576,000
============ ============
CURRENT LIABILITIES:
Accounts payable ................................... $ 646,000 $ 256,000
Accrued expenses ................................... 2,150,000 1,765,000
------------ ------------
Total current liabilities ....................... 2,796,000 2,021,000
Deferred income taxes ................................ 3,000 3,000
Commitments and Contingencies (Note 6)
STOCKHOLDERS' INVESTMENT:
Preferred stock, $.01 par value--
Authorized: 5,000,000 shares, none issued and
outstanding ...................................... -- --
Common stock, $.01 par value--
Authorized: 30,000,000 shares, 2,160,780 and
2,096,920 shares issued in 1999 and 1998,
respectively; 2,175,780 and 2,096,920 shares
outstanding in 1999 and 1998, respectively ....... 22,000 21,000
Treasury stock, common, at cost,
15,000 and 0 shares in 1999 and 1998, respectively (43,000) --
Additional paid-in capital ........................... 12,891,000 12,764,000
Accumulated deficit .................................. (6,569,000) (7,231,000)
Cumulative translation adjustment .................... (51,000) (2,000)
------------ ------------
Total stockholders' investment .................. 6,250,000 5,552,000
------------ ------------
Total Liabilities and Stockholders' Investment .. $ 9,049,000 $ 7,576,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended November 30,
---------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Net sales .......................................... $ 16,254,000 $ 16,781,000 $ 20,452,000
Cost of sales ...................................... 7,048,000 8,070,000 9,932,000
------------ ------------ ------------
Gross profit ................................. 9,206,000 8,711,000 10,520,000
Research and development expenses .................. 2,569,000 2,444,000 3,808,000
Selling and marketing expenses ..................... 4,100,000 5,621,000 10,481,000
General and administrative expenses ................ 1,943,000 2,001,000 2,426,000
------------ ------------ ------------
Income (loss) from operations ................. 594,000 (1,355,000) (6,195,000)
Interest income .................................... 100,000 149,000 269,000
Other expense, net ................................. -- (46,000) (53,000)
------------ ------------ ------------
Income (loss) before provision for income taxes 694,000 (1,252,000) (5,979,000)
Provision for income taxes ......................... 32,000 -- --
------------ ------------ ------------
Net income (loss) ............................. $ 662,000 $ (1,252,000) $ (5,979,000)
============ ============ ============
Basic net income (loss) per common share ........... $ 0.31 $ (0.60) $ (2.94)
============ ============ ============
Diluted net income (loss) per common and potential
common share ....................................... $ 0.30 $ (0.60) $ (2.94)
============ ============ ============
Basic weighted average number of common shares
outstanding ........................................ 2,123,000 2,083,000 2,033,000
============ ============ ============
Diluted weighted average number of common and
potential common shares outstanding ................ 2,232,000 2,083,000 2,033,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Common Stock TREASURY STOCK
---------------------- ----------------------
ADDITIONAL
INVESTMENT NUMBER $.01 PAR PAID-IN NUMBER
BY PARENT OF SHARES VALUE CAPITAL OF SHARES AMOUNT
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER
30, 1996 $ 3,822,000 -- $ -- $ -- -- $ --
Contribution from
Parent............ 8,827,000 -- -- -- -- --
Dividend
distribution of
Investment by
Parent ............ (12,649,000) 2,022,021 20,000 12,629,000 -- --
Proceeds from
stock
plans.............. -- 26,744 -- 62,000 -- --
Translation
adjustment......... -- -- -- -- -- --
Net
loss............... -- -- -- -- -- --
- -------------------------------------------------------------------------------------------
TOTAL
COMPREHENSIVE LOSS
BALANCE, NOVEMBER -- 2,048,765 20,000 12,691,000 -- --
30, 1997
Proceeds from
stock
plans......... -- 48,155 1,000 73,000 -- --
Translation
adjustment......... -- -- -- -- -- --
Net
loss............... -- -- -- -- -- --
---------------------------------------------------------------------------
TOTAL
COMPREHENSIVE LOSS
BALANCE, NOVEMBER -- 2,096,920 $21,000 12,764,000 -- --
30, 1998
Proceeds from
stock
plans......... -- 78,860 1,000 127,000 -- --
Purchase of
treasury
stock......... -- -- -- -- 15,000 (43,000)
Translation
adjustment......... -- -- -- -- -- --
Net
income............. -- -- -- -- -- --
---------------------------------------------------------------------------
TOTAL
COMPREHENSIVE
INCOME
BALANCE, NOVEMBER $ -- 2,175,780 $22,000 $12,891,000 15,000 $(43,000)
30, 1999
===========================================================================
<CAPTION>
CUMULATIVE TOTAL COMPREHENSIVE INCOME
ACCUMULATED TRANSLATION STOCKHOLDERS' (LOSS)
DEFICIT ADJUSTMENT INVESTMENT
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, NOVEMBER $ -- $(31,000) $ 3,791,000 $ --
30, 1996
Contribution from
Parent............ -- -- 8,827,000 --
Dividend
distribution of
Investment by
Parent............. -- -- -- --
Proceeds from
stock
plans.............. -- -- 62,000 --
Translation
adjustment......... -- 28,000 28,000 28,000
Net
loss............... (5,979,000) -- (5,979,000) (5,979,000)
- ------------------------------------------------------------------------------------------
TOTAL $( 5,951,000)
COMPREHENSIVE LOSS
BALANCE, NOVEMBER (5,979,000) (3,000) 6,729,000 --
30, 1997
Proceeds from
stock
plans......... -- -- 74,000 --
Translation
adjustment......... -- 1,000 1,000 1,000
Net
loss............... (1,252,000) -- (1,252,000) (1,252,000)
---------------------------------------------------------------------
TOTAL $(1,251,000)
COMPREHENSIVE LOSS
BALANCE, NOVEMBER (7,231,000) (2,000) 5,552,000 --
30, 1998
Proceeds from
stock
plans......... -- -- 128,000 --
Purchase of
treasury
stock......... -- -- (43,000) --
Translation
adjustment......... -- (49,000) (49,000) (49,000)
Net
income............. 662,000 -- 662,000 662,000
- -----------------------------------------------------------------------------------------
TOTAL $ 613,000
COMPREHENSIVE
INCOME
===========================
BALANCE, NOVEMBER
30, 1999 $(6,569,000) $(51,000) $ 6,250,000
=====================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years Ended November 30,
----------------------------------------------------------
1999 1998 1997
----------------- ------------------- ------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................. $ 662,000 $(1,252,000) $(5,979,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization ................... 879,000 1,049,000 1,214,000
Loss on disposal of equipment ................... 6,000 -- 7,000
Reserve for doubtful accounts ................... (108,000) 8,000 257,000
Changes in current assets and liabilities:
Accounts receivable ........................... (164,000) 983,000 (270,000)
Inventories ................................... (92,000) 205,000 83,000
Prepaid expenses .............................. 21,000 52,000 260,000
Net liabilities of discontinued
operations ................................... -- (1,424,000) --
Accounts payable .............................. 390,000 82,000 (203,000)
Due to related party .......................... -- (546,000) 546,000
Accrued expenses .............................. 387,000 82,000 (256,000)
----------- ----------- -----------
Net cash provided by (used in) operating
activities ................................... 1,981,000 (761,000) (4,341,000)
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment .............. (679,000) (407,000) (588,000)
Purchase of marketable securities ................ (109,000) -- --
Increase in other assets ......................... (18,000) (50,000) (70,000)
----------- ----------- -----------
Net cash used in investing activities ........ (806,000) (457,000) (658,000)
----------- ----------- -----------
Cash Flows from Financing Activities:
Contribution from Parent ......................... -- -- 8,827,000
Purchase of treasury stock ....................... (43,000) -- --
Proceeds from stock plans ........................ 128,000 74,000 62,000
----------- ----------- -----------
Net cash provided by financing
activities ................................... 85,000 74,000 8,889,000
Exchange Rate Effects ............................. (51,000) 2,000 31,000
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents ...................................... 1,209,000 (1,142,000) 3,921,000
Cash and cash equivalents, beginning of period .... 2,780,000 3,922,000 1,000
----------- ----------- -----------
Cash and cash equivalents, end of period .......... $ 3,989,000 $ 2,780,000 $ 3,922,000
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes ...................... $ -- $ -- $ --
=========== =========== ===========
Cash paid for interest .......................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
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 completed the winding-up of the remainder of such
business during 1998. 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 Company
continues to operate the data acquisition and imaging and commercial products
groups.
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 have qualified 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 have
qualified as a tax-free distribution. Parent did not request and does not intend
to request a letter ruling from the Internal Revenue Service (the "IRS") nor did
Parent receive 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 have satisfied 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 qualified 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.
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) Cash and Cash Equivalents
Cash equivalents are carried at cost, which approximates market value, and
have original maturities of less than three months. Cash equivalents include
money market accounts, U.S. Treasury bills and repurchase agreements with
overnight maturities.
The Company accounts for marketable securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under this standard, the Company is
required to classify all investments in debt and equity securities into one or
more of the following three categories: held-to-maturity, available-for-sale or
trading. The Company's marketable securities mature in April 2000 and are
classified as held-to-maturity as the Company has the positive intent and
ability to hold to maturity. Marketable securities are reported at amortized
cost. The Company's cash equivalents and marketable securities are invested in
highly rated government securities.
7
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(c) Inventories
Inventories are stated at the lower of first-in, first-out ("FIFO") cost or
market and consist of the following:
November 30,
--------------------------
1999 1998
------------ ------------
Raw materials ............ $ 899,000 $ 817,000
Work-in-process .......... 89,000 54,000
Finished goods ........... 306,000 331,000
---------- ----------
$1,294,000 $1,202,000
========== ==========
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 method, by charges to operations in amounts that allocate the cost of the
equipment and leasehold improvements over the following estimated useful lives:
Description Useful Lives
- ---------------------------------------------
Machinery and equipment........ 3 to 7 years
Furniture and fixtures......... 7 years
Vehicles....................... 3 years
Leasehold improvements are amortized over the shorter of their economic life
or the life of the lease.
(e) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization, and consist of the following:
November 30,
----------------------------
1998 1998
------------- -------------
Machinery and equipment......................... $15,671,000 $14,930,000
Furniture and fixtures.......................... 2,076,000 2,136,000
Vehicles........................................ 117,000 103,000
Leasehold improvements.......................... 2,424,000 2,497,000
----------- -----------
20,288,000 19,666,000
Less--Accumulated depreciation and amortization 19,045,000 18,338,000
----------- -----------
$ 1,243,000 $ 1,328,000
=========== ===========
(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 stockholders' investment in the accompanying
consolidated balance sheets. Foreign currency transaction gains and
8
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
losses are included in "Other expense" in the accompanying consolidated
statements of operations. Foreign currency transaction gains and losses were not
significant for the years ended November 30, 1999, 1998 or 1997.
(g) Revenue Recognition
The Company recognizes revenue when products are shipped, 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
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 $0 and $121,000 as of November 30, 1999 and 1998, 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 $121,000, $120,000 and $135,000 in 1999, 1998 and
1997, respectively.
(i) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with Off-
Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk,
requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet risk or
concentration of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. Financial instruments that
subject the Company to credit risk consist primarily of trade accounts
receivable. As of November 30, 1999 and 1998, no customers accounted for greater
than 10% of accounts receivable. For the years ended November 30, 1999, 1998
and 1997, no customers accounted for greater than 10% of revenues.
(j) 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 financial instruments.
The Company's financial instruments include accounts receivable and accounts
payable. The carrying amounts of these financial instruments approximate their
fair value.
(k) Stock-Based Compensation
The Company accounts for its stock-based compensation under Accounting
Principle Board Opinion No. 25, Accounting for Stock Issued to Employees, and
complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-
Based Compensation. SFAS No. 123 establishes a fair-value-based method of
accounting for stock-based compensation plans.
(l) Long-Lived Assets
The Company follows the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, and
reviews its long-lived assets for impairment as events and circumstances
indicate that the carrying amount of an asset may not be receivable. Management
believes that as of November 30, 1999, none of the Company's long-lived assets
was impaired.
9
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(m) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. Comprehensive income consists of the net income (loss) plus the
company's translation adjustment accounts (see Note 2 (f)) and is disclosed in
the accompanying consolidated statements of stockholders' investment.
(n) Disclosures about Segments of an Enterprise
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in the fiscal year ended November 30, 1999.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate financial
information is available for evaluation by the chief decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The Company's chief operating decision-maker, as defined under SFAS
No. 131, is the Chief Executive Officer. (see Note 8).
(o) New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Pursuant to SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB No. 133, SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.
In March 1999, the FASB issued a proposed interpretation, Accounting for
Certain Transactions Involving Stock Compensation-An Interpretation of APB
Opinion No. 25. The proposed interpretation would clarify the application of
Opinion 25 in certain situations, as defined. The proposed interpretation would
be effective upon issuance (expected to be in early 2000) but would cover
certain events that occur after December 15, 1998, but before issuance of the
final interpretation, the effects of applying this proposed interpretation would
be recognized on a prospective basis from the effective date. Accordingly, upon
initial application of the final interpretation, (a) no adjustments would be
made to financial statements for periods before the effective date and (b) no
expense would be recognized for any additional compensation cost measured that
is attributable to periods before the effective date. The Company expects that
the adoption of the Interpretation would affect the accounting for stock options
repriced during the fiscal year 1999 (see Note 4(e)).
(p) 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.
10
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
3. NET LOSS 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.
The Company applies SFAS No. 128, Earnings Per Share. This statement
established standards for computing and presenting earnings per share and
applies to entities with publicly traded common stock or potential common stock.
Basic earnings per share was determined by dividing net income (loss) by the
weighted average common shares outstanding during the period. Diluted earnings
per share was determined by dividing net income (loss) by diluted weighted
average shares outstanding. Diluted weighted average shares reflects the
dilutive effect, if any, of potential common stock. Potential common stock
includes common stock options to purchase common stock to the extent their
effect is dilutive. Basic net loss per share is the same as diluted net loss
per share for the years ended November 30, 1998 and 1997 as the effects of the
potential common stock are antidilutive.
A reconciliation of basic and diluted weighted average shares outstanding is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------------------------------------
1999 1998 1997
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Basic weighted average shares
outstanding........................ 2,123,000 2,083,000 2,033,000
Weighted average common
equivalent shares.................. 109,000 -- --
--------- --------- ---------
Diluted weighted average
shares outstanding................ 2,232,000 2,083,000 2,033,000
========= ========= =========
</TABLE>
Diluted weighted average shares outstanding do not include approximately 14,100,
125,777, and 93,141 shares of potential common stock for the years ended
November 30, 1999, 1998 and 1998, respectively, as their effect would be
antidilutive.
4. STOCKHOLDERS' INVESTMENT
(a) Stock Purchase Rights Plan
On April 14, 1999, the Board of Directors of Data Translation, Inc. declared a
special dividend distribution (a right) for each outstanding share of common
stock of the Company outstanding as of April 30, 1999. The rights will become
exercisable only if a person or group (i) acquires 15 percent or more of the
Company's common stock, or (ii) announces a tender offer that would result in
ownership of 15 percent or more of the common stock. Each right would entitle a
stockholder to buy one one-hundredth of a share of preferred stock. Once a
person or group has acquired 15 percent or more of the outstanding common stock
of the Company, each right may entitle its holder (other than the 15 percent
person or group) to purchase $21.00 worth of newly issued shares of common stock
of the Company (or of any company that acquires Data Translation) at a price
equal to 50 percent of their current market price. The rights are redeemable at
the option of the Board of Directors up until ten days after public announcement
that any person or group has acquired 15 percent or more of Data Translation's
common stock. The redemption price is $0.001 per right. The rights will expire
on April 30, 2009, unless redeemed prior to that date. Distribution of the
rights is not taxable to stockholders.
11
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) Stock Option Plans
REPLACEMENT STOCK OPTION PLAN
Effective December 2, 1996, the Company's Board of Directors adopted the
Company's Replacement Stock Option Plan (the "Replacement Plan"). The
Replacement Plan provided for the issuance of options to purchase shares of the
Company's common stock (the "Replacement Options") to holders of options to
purchase shares of Parent Stock that were granted under Parent Plans and which
were outstanding on the Distribution Date (the "Parent Options") as part of an
adjustment to the Parent Options. The Company has authorized the issuance of up
to 275,000 shares of the Company's common stock under the Replacement Plan, of
which options for 264,794 shares of common stock were granted as of November 30,
1999. No additional options may be granted under the Replacement Plan.
The number of Replacement Options granted equals the number of Parent options
divided by four and rounded down to the nearest whole share. The exercise price
of Replacement Options equals the exercise price of Parent options multiplied by
.285714 and rounded up to the nearest full cent.
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 continue to qualify as Incentive Options pursuant to Section
424(a) of the Code. Replacement Options that do not qualify as Incentive Options
will be Non-Qualified Options.
1996 PLAN
Effective with the Distribution, the Company adopted the 1996 Stock Option
Plan (the "1996 Plan") for its key employees, directors, and others, which
permits the grant of stock options as approved by the Company's Board of
Directors. Under the 1996 Plan, 500,000 shares of common stock have been
reserved for issuance. Options granted pursuant to the 1996 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 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.
As of November 30, 1999, 88 shares of common stock were available for future
issuance under the 1996 Plan.
The stock option activity under the Replacement Plan and the 1996 Plan for the
three years ended November 30, 1999 follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICE WEIGHTED AVERAGE
RANGE
<S> <C> <C> <C>
Outstanding, November 30, 1996......... - $ - $ $ -
Granted under the Replacement
Plan..................................... 264,794 $ 0.52 - $ 5.08 $3.08
Granted under the 1996 Plan.................. 167,125 $ 3.00 - $ 4.00 $3.26
Exercised.................................... (13,035) $ 0.52 - $ 3.15 $1.63
Expired/canceled............................. (43,035) $ 0.52 - $ 5.08 $3.09
------------------------------------------------------------
Outstanding, November 30, 1997................. 375,254 $ 0.52 - $ 5.08 $3.21
Granted under the 1996 Plan.................. 137,200 $ 1.31 - $ 2.41 $2.11
Exercised.................................... (9,830) $ 0.81 - $ 3.00 $0.82
Expired/canceled............................. (107,894) $ 0.52 - $ 5.08 $2.69
------------------------------------------------------------
Outstanding, November 30, 1998................. 394,730 $ 0.61 - $ 5.08 $3.03
Granted under the 1996 Plan.................. 396,450 $ 1.50 - $ 5.53 $3.11
Exercised.................................... (53,228) $ 0.61 - $ 4.11 $2.03
Expired/canceled............................. (238,040) $ 0.97 - $ 5.08 $2.51
------------------------------------------------------------
Outstanding, November 30, 1999................. 499,912 $ 1.44 - $ 5.53 $3.24
============================================================
Exercisable, November 30, 1999................. 54,388 $ 1.44 - $ 5.53 $2.68
============================================================
</TABLE>
12
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(b) Employee Stock Purchase Plan
Effective with the Distribution, the Company established an Employee Stock
Purchase Plan (the "ESPP") which permits the eligible employees of the Company
and its subsidiaries to purchase shares of the Company's common stock, at 85% of
the lower of the Company's closing market price on the first day or last day of
the applicable six-month period. Employees may participate in the ESPP 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 ESPP. Through
November 30, 1999, 77,666 shares of common stock have been purchased under the
ESPP.
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(c) Stock-Based Compensation
The Company has computed the pro forma disclosure required under SFAS No. 123
for all stock compensation plan grants during the years ended November 30, 1999,
1998 and 1997 using the Black-Scholes option pricing model prescribed by SFAS
No. 123. The assumptions used in 1999, 1998 and 1997 are as follows: dividend
yield of 0% for all years; expected volatility of 95.8%, 95.0% and 91.5%, risk-
free interest rates of 4.48% - 5.92%, 5.52% - 5.86%, and 6.33% - 6.76%; and
expected lives of 5, 6 and 4 years, respectively. The weighted average grant
date fair value of options granted during 1999, 1998 and 1997 was $3.11, $1.87
and $2.07, respectively. The weighted average remaining contractual life of
outstanding options at November 30, 1999 was 4.1 years.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income (loss) and net income (loss) per share would
have been decreased (increased) to the following pro forma amounts for the years
ended November 30, 1999, 1998 and 1997, as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------
1999 1998 1997
--------------- -------------------- --------------------
<S> <C> <C> <C>
Net income (loss), as $662,000 $(1,252,000) $(5,979,000)
reported............................................
Pro forma net income (loss), as
adjusted............................................ $292,000 $(1,411,000) $(6,083,000)
Basic net income (loss) per common and
potential common shares outstanding:
As reported...................................... $ 0.31 $ (0.60) $ (2.94)
Pro forma........................................ $ 0.14 $ (0.68) $ (2.99)
Diluted net income (loss) per common and
potential common shares outstanding:
As reported..................................... $ 0.30 $ (0.60) $ (2.94)
Pro forma........................................ $ 0.13 $ (0.68) $ (2.99)
</TABLE>
The resulting pro forma compensation expense may not be representative of the
amount to be expected in future years, as the pro forma expense may vary based
on the number of options granted. The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option pricing
models require the input of highly subjective assumptions, including expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
(d) Stock Buyback Plan
On March 26, 1999, the Company announced that its Board of Directors had
approved the "Stock Buyback Plan", which allows for the purchase of up to
$1,000,000 of its shares of common stock over the remainder of the calendar
year. Purchases will be made at prevailing prices as market conditions and cash
availability permit. As of November 30, 1999, the Company has purchased 15,000
shares of its Common Stock for an aggregate purchase price of $43,000.
13
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(e) Repricing
In December 1998, the Company's Board of Directors authorized the repricing
of options to purchase 100,000 shares of common stock at $1.50 per share. As
discussed in Note 2(o), these options will be subject to variable plan
accounting, as defined in the Proposed Interpretation, if the Interpretation is
adopted in its current form.
5. 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 immediately. Contributions to the Savings
Plan charged to operations with respect to Company's employees were $26,000,
$56,000 and $61,000 in 1999, 1998 and 1997, respectively.
The Company does not provide postretirement benefits to any employees as
defined under SFAS No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions.
6. COMMITMENTS AND CONTINGENCIES
(a) 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.
(b) Lease Commitments
The Company has operating lease agreements expiring December 1, 2009 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, net of sub-lease and
rent allocations, was approximately $254,000, $335,000 and $359,000 for each of
the years ended November 30, 1999, 1998 and 1997, respectively.
In addition, the Company leases sales facilities and equipment under leases
expiring through 2001. Rent expense, net of sub-lease and rent allocations to
Parent, under these agreements totaled $152,000, $146,000 and $193,000 in the
years ended November 30, 1999, 1998 and 1997, respectively. Future minimum lease
payments, net of estimated sub-lease payments to be received, under all
operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, AMOUNT
- ---------------------------------------- -------------
<S> <C>
2000................................. $ 357,000
2001................................. 252,000
2002................................. 514,000
2003................................. 1,159,000
2004................................. 1,252,000
Thereafter........................... 6,500,000
-----------
Total minimum lease payments......... $10,034,000
===========
</TABLE>
14
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, whereby a deferred tax asset or liability is
recognized for the expected future tax consequences of temporary differences
between the financial statement and the tax bases of the assets and liabilities.
The components of the income tax provision are approximately as follows:
FISCAL YEARS ENDED
NOVEMBER 30,
1999 1998 1997
-------------- ----------- -----------
Federal:
Current $32,000 $ -- $ --
============== =========== ===========
The difference in the combined federal and state tax rate of 40% and the
effective tax rate during 1999 is due to the Company's use of federal and state
net operating loss carryforwards. At November 30, 1999, the Company had
approximately $5,364,000 of federal and state net operating loss carryforwards
available to offset future taxable income, which expire in varying amounts
beginning in 2019.
Deferred income taxes related to the following temporary differences are as
follows:
November 30,
------------------------------------
1999 1998 1997
---------- ----------- -----------
Net operating loss........... $2,145,000 $2,108,000 $1,732,000
Depreciation................. 188,000 348,000 519,000
Nondeductible accruals....... 650,000 700,000 694,000
Capitalized software costs... -- (56,000) (77,000)
---------- ---------- ----------
2,983,000 3,100,000 2,868,000
========== ========== ==========
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.
15
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. SEGMENT AND GEOGRAPHIC INFORMATION
(a) Segment Reporting
The Company's reportable segments are Core and Broadway. The Core segment is
comprised of the imaging and data acquisition business which consists of plug-in
cards and Windows-based software that provide an integrated, high performance
system solution to the general scientific and measurement marketplace. The
Broadway segment is comprised of a plug-in video capture card, Broadway, which
is a high-performance video capture and encoding system for Windows 98 and
Windows NT PCs. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on revenues and operating margin. Revenues are
attributed to geographic areas based on where the customer is located. Segment
information for the years ended November 30, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
CORE BROADWAY TOTAL
--------------- -------------- --------------
<S> <C> <C> <C>
FISCAL 1999
Revenues from unaffiliated customers............. $14,221,000 $ 2,033,000 $16,254,000
Cost of revenue.................................. 5,991,000 1,057,000 7,048,000
Research and development......................... 2,312,000 257,000 2,569,000
----------- ----------- -----------
Operating margin (1)............................. $ 5,918,000 $ 719,000 $ 6,637,000
=========== =========== ===========
FISCAL 1998
Revenues from unaffiliated customers............. $14,340,000 $ 2,441,000 $16,781,000
Cost of revenue.................................. 6,749,000 1,321,000 8,070,000
Research and development......................... 1,768,000 676,000 2,444,000
----------- ----------- -----------
Operating margin (1)............................. $ 5,823,000 $ 444,000 $ 6,267,000
=========== =========== ===========
FISCAL 1997
Revenues from unaffiliated customers............. $17,200,000 $ 3,252,000 $20,452,000
Cost of revenue.................................. 7,679,000 2,253,000 9,932,000
Research and development......................... 2,528,000 1,280,000 3,808,000
----------- ----------- -----------
Operating margin (1)............................. $ 6,993,000 ($ 281,000) $ 6,712,000
=========== =========== ===========
</TABLE>
(1) The Operating Margins reported reflect only the expenses of the line of
business and do not represent the actual margins for each operating segment
since they do not contain an allocation for selling and marketing, general
and administrative, development and other corporate expenses incurred in
support of the line of business.
PROFIT RECONCILIATION:
<TABLE>
<CAPTION>
Fiscal Years Ended November 30,
----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Total operating margin for reportable segments... $ 6,637,000 $ 6,267,000 $ 6,712,000
Selling and marketing expenses................... (4,100,000) (5,621,000) (10,481,000)
General and administrative expenses.............. (1,943,000) (2,001,000) (2,426,000)
Interest income.................................. 100,000 149,000 269,000
Other expense, net............................... -- (46,000) (53,000)
----------- ----------- ------------
Income (loss) before provision for income
taxes..................................... $ 694,000 $(1,252,000) $ (5,979,000)
=========== ============ ===========
</TABLE>
16
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(b) Geographic Information
<TABLE>
<CAPTION>
UNITED
UNITED STATES KINGDOM GERMANY ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
FISCAL 1999
Sales to unaffiliated customers(1)............... $12,136,000 $1,529,000 $2,589,000 $ -- $16,254,000
Sales or transfers between geographic areas...... 1,835,000 -- -- (1,835,000) --
----------- ---------- ---------- ----------- -----------
Total net sales.................................. $13,971,000 $1,529,000 $2,589,000 $(1,835,000) $16,254,000
=========== ========== ========== =========== ===========
Income (loss) from continuing operations before
provision for income taxes................... $ 673,000 $ 68,000 $ 68,000 $ (115,000) $ 694,000
============= ========== =========== =========== ===========
Long-lived assets................................ $ 1,163,000 $ 76,000 $ 17,000 $ (13,000) $ 1,243,000
=========== ========== ========== =========== ===========
FISCAL 1998
Sales to unaffiliated customers(1)............... $13,054,000 $1,533,000 $2,194,000 $ -- $16,781,000
Sales or transfers between geographic areas...... 1,755,000 -- -- (1,755,000) --
----------- ---------- ---------- ----------- -----------
Total net sales.................................. $14,809,000 $1,533,000 $2,194,000 $(1,755,000) $16,781,000
=========== ========== ========== =========== ===========
Income (loss) from continuing operations before
provision for income taxes................... $(1,229,000) $ 12,000 $ 32,000 $ (67,000) $(1,252,000)
=========== ========== ========== =========== ===========
Long-lived assets................................ $ 1,255,000 $ 68,000 $ 18,000 $ (13,000) $ 1,328,000
=========== ========== ========== =========== ===========
FISCAL 1997
Sales to unaffiliated customers(1)............... $17,133,000 $1,447,000 $1,872,000 $ -- $20,452,000
Sales or transfers between geographic areas...... 1,616,000 -- -- (1,616,000) --
----------- ---------- ---------- ----------- -----------
Total net sales.................................. $18,749,000 $3,319,000 $3,319,000 $(1,616,000) $20,452,000
=========== ========== ========== =========== ===========
Income (loss) from continuing operations before
provision for income taxes................... $(5,913,000) $ 33,000 $ (25,000) $ (74,000) $(5,979,000)
=========== ========== =========== =========== ===========
Long-lived assets................................ $ 1,765,000 $ 71,000 $ 28,000 $ (13,000) $ 1,851,000
=========== ========== ========== =========== ===========
</TABLE>
(1) Foreign sales from the United States to unaffiliated customers for the
years ended November 30, 1999, 1998 and 1997 were approximately $3,309,000,
$2,655,000 and $3,622,000, respectively.
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
November 30,
---------------------------
1999 1998
------------ -------------
Payroll and related taxes........... $ 648,000 $ 361,000
Fringe benefits..................... 384,000 150,000
Marketing........................... 128,000 109,000
Other............................... 990,000 1,145,000
---------- ----------
$2,150,000 $1,765,000
========== ==========
10. 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, 1997..................... $132,000 $302,000 $ 45,000 $389,000
For the Year Ended November 30, 1998..................... $389,000 $ 60,000 $ 52,000 $397,000
For the Year Ended November 30, 1999..................... $397,000 $ 36,000 $144,000 $289,000
</TABLE>
17
<PAGE>
11. SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTERS ENDED:
FEBRUARY 28, MAY 31, AUGUST 31, NOVEMBER 30,
------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
1999
- ----
Net sales $3,857 $4,079 $4,061 $4,257
Gross profit 2,186 2,347 2,307 2,366
Loss from operations 74 132 153 235
Net income 102 156 177 227
Basic net income per share $ 0.05 $ 0.07 $ 0.08 $ 0.11
Diluted net income per share $ 0.05 $ 0.07 $ 0.08 $ 0.10
1998
- ----
Net sales $4,556 $4,435 $3,919 $3,871
Gross profit 2,326 2,422 1,929 2,034
Loss from operations (299) (233) (797) (26)
Net income (loss) (274) (225) (763) 10
Basic net loss per share $(0.13) $(0.11) $(0.36) $ 0.00
Diluted net loss per share $(0.13) $(0.11) $(0.36) $ 0.00
</TABLE>
18
<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 April 6, 2000 (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.
19
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS AND EXHIBITS.
(a)(1) Financial Statements. The Index to Consolidated Financial Statements
appears at page 17 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.
3.1 Certificate of Incorporation of Registrant1
3.2 By-laws of Registrant1
4.1 Specimen Stock Certificate of Common Stock (See also Exhibits 3.1 and
3.2) 1
10.1 Distribution Agreement dated as of November 19, 1996 with Media 100
Inc.2
10.2 Intellectual Property Agreement dated as of December 2, 1996 with Media
100 Inc.3
10.3 Corporate Services Agreement dated as of December 2, 1996 with Media 100
Inc.4
10.4 Use and Occupancy Agreement dated as of December 2, 1996 with Media 100
Inc.5
10.5 Lease dated December 1, 1979, as amended, for Locke Drive with Nason
Hill Trust1
10.6 1996 Stock Option Plan6
10.7 Employee Stock Purchase Plan7
10.8 Replacement Stock Option Plan8
10.9* Software Bundling Master License Agreement1
10.10* Distribution Agreement dated June 26, 1996 by and between Data
Translation, Inc. and DS Datenverarbeitung und Sensortechnik GmbH1
21 List of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- --------------
* 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
1
<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.
By: /s/ Alfred A. Molinari, Jr.
---------------------------
ALFRED A. MOLINARI, JR.,
CHIEF EXECUTIVE OFFICER
Date: February 28, 2000
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, 2000
- ---------------------------- Chairman
ALFRED A. MOLINARI, JR.
/s/ Michael A. DiPoto Vice President, Finance and CFO February 28, 2000
- ----------------------------
MICHAEL A. DIPOTO
/s/ Dr. David Cyganski Director February 28, 2000
- ----------------------------
DR. DAVID CYGANSKI
/s/ D'Anne Hurd Director February 28, 2000
- ----------------------------
D'ANNE HURD
</TABLE>
1
<PAGE>
EXHIBIT INDEX
EXHIBIT
- --------
NUMBER DOCUMENT DESCRIPTION
- -------- --------------------------------------------------------------------
21 List of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
1
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES OF THE REGISTRANT
1. Data Translation Ltd
Basingstoke, Hants
England
2. Data Translation GmbH
Bietigheim-Bissingen, Germany
1
<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 25, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<CASH> 3,989,000
<SECURITIES> 109,000
<RECEIVABLES> 2,035,000
<ALLOWANCES> 289,000
<INVENTORY> 1,294,000
<CURRENT-ASSETS> 7,784,000
<PP&E> 20,288,000
<DEPRECIATION> 19,045,000
<TOTAL-ASSETS> 9,049,000
<CURRENT-LIABILITIES> 2,796,000
<BONDS> 0
0
0
<COMMON> 22,000
<OTHER-SE> 6,228,000
<TOTAL-LIABILITY-AND-EQUITY> 9,049,000
<SALES> 16,254,000
<TOTAL-REVENUES> 16,254,000
<CGS> 7,048,000
<TOTAL-COSTS> 7,048,000
<OTHER-EXPENSES> 8,612,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 694,000
<INCOME-TAX> 32,000
<INCOME-CONTINUING> 662,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 662,000
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.30
</TABLE>
