UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2000 Commission File No. 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0864123
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10525 Willows Road N.E., Redmond, Washington, 98052
(address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (425) 881-6444
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (No Par)
Series A Junior Participating Preferred Stock
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 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. [X]
Aggregate market value of voting stock held
by non-affiliates of the registrant as of March 7, 2001
$19,372,928
7,560,167 shares of no par value Common Stock outstanding as of March 7, 2001
Documents incorporated by reference
Portions of the registrant's Proxy Statement relating to its May 16, 2001
Annual Meeting of Stockholders are incorporated into Part III of this
Annual Report on Form 10-K.
Page 1 of 54
Exhibit Index on Page 46
DATA I/O CORPORATION
FORM 10-K
For the Fiscal Year Ended December 28, 2000
INDEX
Part I Page
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Stockholders 14
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 14
Item 6. Selected Five-Year Financial Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosure 23
About Market Risk
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants 45
on Accounting and Financial Disclosures
Part III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial 45
Owners and Management
Item 13. Certain Relationships and Related Transactions 45
Part IV
Item 14. Exhibits, Financial Statement Schedules, 45
and Reports on Form 8-K
Signatures 53
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PART I
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward Looking
Statements."
General
Data I/O-C- Corporation ("Data I/O" or the "Company") is engaged in the design,
manufacture, and sale of programming systems that are used by designers and
manufacturers of electronic products. The Company's programming system products
are used to program integrated circuits ("ICs" or "devices" or "semiconductors")
with the specific unique data for the product within which the ICs will be used,
and are an important tool for the electronics industry which is experiencing
growing use of programmable ICs. Data I/O markets and distributes its
programming systems worldwide, and is a global leader in this market. The
Company was incorporated in the state of Washington in 1969.
Business Restructuring Progress
During 2000, Data I/O continued to see the results of the restructuring that
began in 1998. The Company was profitable the last two quarters of 2000. This
reflects both the results of our restructuring efforts and the success the
Company has had with its new product introductions. Data I/O continued to reduce
its manufacturing costs by introducing lean manufacturing. Lean manufacturing
was implemented by reorganizing the Redmond factory into manufacturing cells. In
addition the Company broke-up support departments and moved those employees into
the newly established operating groups. We believe this will serve to improve
communications among the team members, resulting in reduced inventories, product
lead times and waste.
The prior year 1999 was also a pivotal year for Data I/O. The accomplishments of
1999 significantly added to the foundation needed for a turnaround of the
Company. The restructuring plan begun in 1998 resulted in a lower corporate cost
structure, more focused and strategically oriented research and development
spending, and the elimination of certain aging, lower-margin products during
1999. Also during 1999, the Company focused considerable effort toward
integrating SMS Holding GmbH, Wangen, Germany ("SMS"), and the SMS products,
which were acquired in November 1998, into its operations and its product lines.
The Company believes that progress made in these areas has positioned the
Company for a successful turnaround. However, the Company cannot guarantee that
the Company will continue to remain profitable, nor is there any assurance that
the turnaround efforts will be successful.
Industry Background
Data I/O Corporation operates in a niche of the electronics equipment industry
that provides programming systems used to code specific data and design
information into programmable ICs. These systems are purchased by companies that
design and manufacture electronic products that utilize programmable ICs. These
companies, who are Data I/O's primary customers, design and manufacture a broad
range of electronic products for both consumer and industrial use.
Programmable ICs represent an approximately $13 billion segment of the
semiconductor industry, and have grown more rapidly than the semiconductor
industry as a whole in recent years. Programmable ICs offer advantages to the
electronic product designer to bring products to market more quickly and
inexpensively than using fixed-function ICs, and can offer the advantage of
simpler product upgrades. Programmable ICs also offer attractive functionality
to the user of the electronic product, such as storing personal information or
customizing product functionality. As a result, use of programmable ICs is
growing rapidly in both high-volume consumer electronic products and more
complex electronic systems.
Due to this growth, there are currently over 100 vendors of programmable ICs,
and thousands of different programmable ICs on the market, designed with a
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variety of different technologies developed by the different vendors. The
technology trends driving the programmable IC market result in a broad range of
requirements for programming information into these devices. These technology
trends include high-density flash memory, complex and high pin-count
programmable logic, small chip-scale packages, low-voltage operation, in-system
programming protocols, and multiple semiconductor technologies requiring
different programming methods. These technology advances require advanced
programming equipment to support them.
Automated programming systems are increasingly used to handle the miniaturized
and fine-pitch programmable IC packages in high-volume manufacturing and
programming. This automated handling equipment is critical for minimizing damage
to the delicate leads of the ICs and for increasing handling and programming
capacity. The integration of programming and handling functions into one product
for the high-volume customer has been a significant development for the Company
over the past few years as it tries to provide a complete programming solution
for both high-volume manufacturing environments and high-volume programming
center customers.
Products
In order to accommodate the expanding variety of programmable ICs being
manufactured today, the Company's programming systems must have the capability
to program many different types of ICs. ICs vary in terms of technology,
features and functions, package type, pin arrangement, and number of pins. The
Company works closely with major manufacturers of programmable ICs to develop
its products in accordance with these requirements. Many of these IC
manufacturers endorse Data I/O's programming systems as equipment they recommend
for end-user applications, as well as for use in their own environments. With
their broad range of capabilities, some of Data I/O's systems can program more
than 10,000 programmable ICs, which accounts for the vast majority of the types
of programmable ICs currently available. Just as breadth of device support is a
critical product feature, high performance is also a critical product feature,
particularly to high-volume manufacturers using programmable ICs within their
products. The Company has developed products to address the needs of these high
volume customers as well.
Data I/O's line of programming systems includes a broad range of products,
systems, modules, and accessories, which the Company groups into two general
categories: non-automated programming systems and automated programming systems.
Automated programming systems are broken down further into two categories:
off-line and in-line. In addition, the Company provides device support and
service on all of its products.
Tasklink is the Company's software platform that provides a common user
interface and enhances the quality of the customers' programming process. The
Company has recently expanded its industry standard Tasklink software to include
support for the Sprint family of programmers as described below.
Non-Automated Programming Systems
The Company's line of non-automated programming systems provides solutions for
both engineering and low-to medium-volume manufacturing customers. Non-automated
programming systems require a user to physically handle the ICs being
programmed. These types of programmers are also sometimes referred to as
"manual" or "desktop" programmers. The Company has three families of
non-automated programmers: the Sprint, the UniSystem and the ChipWriter
families.
Engineering customers typically use single-site programming systems during the
prototype phase of a new design, and may purchase inexpensive systems for
limited device needs or more expensive systems to support more complex devices
or a large variety of device types. Single-site programming systems can perform
programming on only one programmable IC at a time.
The Company offers a range of single-site programming systems. The Sprint family
single-site models include the Plus 48 programmer and the Optima programmer. The
Optima programmer offers a broader range of device package support than the Plus
48 by utilizing interchangeable TOPs and upgradeable pin drivers. The Company
also offers two higher-end single-site models in its UniSystem family: the 3980
Programming System and the UniSite Universal Programming System. Both the 3980
and the Unisystem utilize the Company's proprietary socketing technology which
permits the user to program the majority of IC package types. Pricing for the
Company's non-automated programming systems range from just under $1,000 to
approximately $23,000 for a fully loaded UniSite Universal Programming System.
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Low- to medium-volume manufacturing customers often use multiple site (or gang
or parallel) non-automated programming systems for increased programming
capacity. These "multi-site" systems can program multiple devices
simultaneously. The Company's Sprint family multi-site models include the Dual
(two sites), the Quad (four sites) and the Octal (eight sites) programming
systems, which sell from approximately $6,000 to $16,000. Each of these
programmers are also sold with the Company's new Flashtop option which enables
customers to increase their Flash memory programming capacity by a factor of
four.
With the recent addition of Tasklink to the Sprint line of programmers, the
Company's Tasklink software now supports all of the Company's proprietary
non-automated programming systems.
Under a worldwide distribution agreement with a third party supplier, the
Company sells a line of low-priced programmers under the brand name ChipWriter.
The ChipWriter and ChipWriter Portable single-site programming systems and the
ChipWriter Gang multi-site programming systems offer very cost-effective
programming solutions.
Automated Programming Systems
The Company offers a range of automated programming systems that provide
electronic equipment manufacturers with an automated pick and place method for
handling, programming, testing and marking programmable ICs. Automated
programmers are most frequently used by medium- to high-volume manufacturers and
IC programming centers to automate the programming process, to reduce labor
costs, to increase programming capacity, to eliminate potential damage to
devices due to human handling, and to more accurately handle more complex and
delicate IC package types. The automated programming system feeds the
programmable IC out of its protective media (trays, tubes, or tape and reel),
places the IC into the socket of the programmer, completes programming, applies
a label or laser mark, rejects the ICs that could not be programmed correctly,
and loads correctly programmed ICs back into protective media (trays, tubes or
tape & reel). The IC is then ready to be assembled onto a printed circuit board
using other automated production equipment. The Company offers automated
programming system products within its ProMaster product line and with its PP100
product. Prices range from approximately $50,000 for the ProMaster 2500 up to
approximately $500,000 for the PP100 with options.
The Company's PP100 automated programming system offers a range of programmer
and device media options and requires limited floor space. The system can be
configured with 4 to 12 programmer sites utilizing the same programmer
technology as the Sprint family of programmers to support a wide range of
programmable ICs including fine pitch logic devices. The PP100 utilizes precise
pick-and-place technology, has optional marking capabilities, and can handle ICs
in trays, tubes, or tape and reel media. System pricing starts at approximately
$150,000. The PP100 has been installed in the facilities of consumer, medical
and automotive electronics manufacturers, and is also supporting contract
manufacturers and IC programming centers.
The Company also provides a complete line of labels for use with its automated
programming systems. These labels are custom manufactured by the Company for the
PP100 and its ProMaster products.
In the first quarter of 2000, the Company introduced a new automated programming
system which employs a unique concept for in-line programming. These
programmers, which mount onto insertion machines, allow the user to program
flash memory chips immediately prior to their use. By programming the chips at
the point of use, customers are able to avoid an off-line programming process,
saving them both time and space, resulting in lower manufacturing costs. The
ProLINE-RoadRunner targets high-volume production applications using
high-density Flash memory devices, such as cellular telephones. The Company is
working with the top Original Equipment Manufacturers (OEM) of Surface Mount
Technology (SMT) equipment to create automated systems which are compatible with
the OEM's equipment. By attaching directly to the automated insertion machines,
the ProLINE-RoadRunner is able to do on-line programming without increasing the
space required for manufacturing. By programming in-line, at the time of use,
the ProLINE-RoadRunner can facilitate "lean" manufacturing techniques.
Device Support and Service Support
The Company offers device support updates, which contain algorithms to program
new ICs as they are introduced by the semiconductor manufacturers. These updates
may also include enhancements to existing algorithms and may add new features
and functionality to the programmers. The device support updates are essential
Page 5
to the Company's customers to keep the programmers current so that new devices
can be programmed. Customers may purchase update contracts that entitle them to
receive periodic updates throughout the year.
The Company also offers out-of-warranty service and repair of its products.
Service contracts are offered for repair, preventative maintenance and
calibration of the systems. This additional support enables the Company's
customers to keep their programming products at current support levels.
Customers
The Company sells its products to customers worldwide in a broad range of
industries including telecommunications, consumer electronics, computers, test
and measurement, medical, transportation, military, aerospace, electronic
contract manufacturing, and semiconductors. These customers either design and/or
manufacture electronic products that incorporate programmable ICs or provide IC
programming services.
The Company believes that its most significant current market opportunity is
with users of Flash memory programmable ICs. Flash memory has become the
programmable technology of choice for many applications. As the technology
improves, Flash memory will become denser, yielding higher capacity and lower
cost per bit of information stored. The more dense Flash memory ICs become, the
more important programming becomes to users of those ICs because it can become a
bottleneck in the electronic product production line. The Company is focusing on
solutions for its customers to address those manufacturing bottlenecks. The
Company believes that the most significant users of Flash memory are the
manufacturers of products for wireless communications, personal computers,
automotive electronics and consumer products such as set-top boxes for cable
television, but particularly cellular telephones.
During 2000, the Company sold products to over 2,500 customers throughout the
world, one of whom accounted for 23% of the Company's net sales. No other
customer accounted for more than 10% of the Company's net sales. None of the
Company's independent distributors or representatives accounted for more than 5%
of the Company's net sales.
Geographic Markets and Distribution
The Company markets and sells its products through a combination of direct
sales, internal telesales, and indirect sales representatives and distributors.
The Company continually evaluates its sales channels against its evolving
markets and customers.
U.S. Sales
The Company markets its products throughout the U.S. using a variety of sales
channels including its own field sales management personnel, independent sales
representatives, and a direct telesales organization. The Company's U.S.
independent sales representatives obtain orders on an agency basis, with
shipments made directly to the customer by the Company. Sales of the Company's
semiconductor programming equipment products requiring installation by the
Company that is other than perfunctory are recorded when installation is
complete, or at the later of customer acceptance or installation, if an
acceptance clause is specified in the sales terms. Revenue from other product
sales is recognized at the time of shipment. Revenue from the sale of service
and update contracts is recorded as deferred revenue and recognized on a
straight-line basis over the contractual period.
Foreign Sales
Foreign sales represented between 52%, 58% and 64% of net sales of programming
systems in each of 1998, 1999, and 2000 (see Note 16 of "Notes to Consolidated
Financial Statements"). Foreign sales are made through the Company's wholly
owned subsidiaries in Germany, China and Canada, as well as through independent
distributors and sales representatives located in 35 other countries. Sales made
through foreign subsidiaries requiring installation by the Company that is other
than perfunctory are recorded when installation is complete, or at the later of
customer acceptance or installation, if an acceptance clause is specified in the
sales terms. Revenue from other product sales is recognized at the time of
shipment. Revenue from the sale of service and update contracts is recorded as
deferred revenue and recognized on a straight-line basis over the contractual
period. The Company's independent foreign distributors purchase Data I/O
products in U.S. Dollars for resale; the sale is recognized at the time of
shipment to the distributor. Distributors are allowed to return a portion of
their Data I/O product inventory for credit on future purchases, subject to
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limitations. As with U.S. sales representatives, sales made by international
sales representatives are on an agency basis with shipments made directly to the
customer by the Company. These sales are denominated in U.S. Dollars and are
recognized upon shipment, if installation is perfunctory or does not need to be
performed by the Company, or when the equipment is installed at the end-user's
site, if installation is more than perfunctory and is to be performed by the
Company, or in the case of an acceptance clause in the terms of the contract,
upon acceptance.
Total foreign sales are determined by the geographic area into which the
products are sold and delivered, and include not only sales by foreign
subsidiaries but also export sales from the U.S. to the Company's foreign
distributors and representatives' customers. Foreign sales do not include
transfers between the Company and its foreign subsidiaries. Export sales are
subject to U.S. Department of Commerce regulations. The Company has not,
however, experienced any difficulties to date as a result of these requirements.
Fluctuating exchange rates and other factors beyond the Company's control, such
as international monetary stability, tariff and trade policies, and U.S. and
foreign tax and economic policies, affect the level and profitability of foreign
sales. The Company is unable to predict the effect of such factors on its
business. The Company does hedge against certain currency exposures in order to
minimize their impact.
Competition
The competitors in the market for programming systems are highly fragmented,
consisting of a large number of companies in many regions of the world. The
Company believes that it has a leading market share for programming systems,
with approximately 25-30% of the total worldwide revenue. Although independent
market information is not available, this estimate is based on internal analysis
by the Company, supplemented with external research. Competitive factors include
product features, programmable IC support, brand awareness and preference,
price, ease of use, fit with customer's manufacturing process, quality,
reliability, throughput, distribution channels, availability, post-sales
support, and service. The Company's competitiveness depends on offering the most
effective combination of these factors.
Many of the competitors in non-automated programming systems are small companies
that distribute their products in limited geographical regions, and compete
primarily on price, local support, and response to specific customer
programmable IC needs. Programmable IC companies who offer programming systems
for their own devices through their distribution channels hold a small portion
of the market. Data I/O competes in the non-automated programming systems area
primarily on the breadth of its product line and programmable IC support, the
strength of its worldwide distribution channels, brand awareness and preference,
post-sales support, and service.
There are fewer competitors in the automated programming systems category. This
category includes several companies that offer integrated systems, and other
companies that offer automated handling systems that require integration with a
programming system by the customer. The Company's largest competitor for
automated programming systems is BP Microsystems. The primary factors on which
the competitors with integrated systems compete are cost per programmed IC,
capacity, programmable IC support, post-sales support, reliability and service.
Certain customers are using their in-circuit test equipment to also program ICs
after they have been assembled onto printed circuit boards. The Company believes
that the trends in high-density Flash memory devices coupled with decreasing
production cycle times make in-circuit test equipment unattractive in many
high-volume applications, and therefore has introduced the ProLINE-RoadRunner
in-line programming system. The high performance of the ProLINE-RoadRunner
eliminates the programming bottlenecks caused by the ever-increasing densities
of Flash memory devices.
Manufacturing, Raw Materials, and Backlog
During 2000, Data I/O conducted manufacturing operations at its principal
facility in Redmond, Washington, where it manufactures automated and
non-automated programming systems and in Amtzell, Germany where it manufactures
adapters. In its manufacturing processes, the Company uses a combination of
standard components, proprietary custom ICs and fabricated parts manufactured to
Data I/O specifications. Most components used are available from a number of
different suppliers and subcontractors but certain items, such as some handler
and programmer subassemblies, custom ICs, hybrid circuits and connectors, are
purchased from single sources. The Company believes that additional sources can
be developed for present single-source components without significant
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difficulties in obtaining supplies. There can, however, be no assurance that
single-source components will continue to be readily available. If we cannot
develop alternative sources for these components, or if we experience
deterioration in our relationship with these suppliers, there may be delays or
reductions in product introductions or shipments, which may materially adversely
affect our operating results. To best support its long-term direction, the
Company continues to evaluate its manufacturing capabilities against future
requirements for new products and technologies and the related investment
required to enhance or upgrade capabilities versus its options for outsourcing.
Manufacturing of the Sprint non-automated programming systems, which were
integrated into the Data I/O product line during 1999 after the acquisition of
SMS in November 1998 is currently provided by an outside supplier located in
Germany. Shipments from the outside supplier are received at the Company's plant
in Amtzell, Germany where they are combined with internally produced tops and
adapters to complete the manufacturing process.
In accordance with industry practices, generally all orders are subject to
cancellation prior to shipment without penalty except for contracts calling for
custom configuration. To date, such cancellations have not had a material effect
on the Company's sales volume. To meet customers' fast delivery requirements,
Data I/O manufactures certain of its products based upon a combination of
backlog and anticipated orders. Most orders are scheduled for delivery within
one to 60 days after receipt of order. The Company's backlog of pending orders
was approximately $3.0 million, $1.7 million and $4.2 million as of December 28,
2000, December 30, 1999 and December 31, 1998, respectively. The size of backlog
at any particular date is not necessarily a meaningful indicator of the trend of
the Company's business.
Research and Development
Because Data I/O's future growth is to a large extent dependent upon the timely
development and introduction of new products and its support of the latest
programmable ICs, the Company is committed to a substantial research and
development program. Research and development activities include design of new
products and continual enhancement and support of existing products. The Company
is currently focusing its research and development efforts in its strategic
growth markets, namely new programming technology and automated handling systems
for the manufacturing environment. The Company is also focusing on increasing
its capacity and responsiveness for new device support requests from customers
and programmable IC manufacturers by revising and enhancing its internal
processes and tools.
During 2000, 1999 and 1998 the Company made expenditures for research and
development of $8,716,000, $8,403,000, and $9,109,000 respectively, representing
20.3%, 24.6%, and 25.8% of net sales, respectively.
At the time of the acquisition of SMS in 1998 the Company recognized a charge
for in-process research and development of $2.0 million. This research and
development was primarily focused on a new generation programming technology.
During 1999 this research and development work continued although at a reduced
pace as a significant portion of engineering resources were dedicated toward
support and enhancement of existing products, including those automated and
non-automated programming system products acquired with SMS. The Company
continues to evaluate the results of this research and development work and will
continue development of those elements which are deemed to be commercially
viable.
Patents, Copyrights, Trademarks, and Licenses
Intellectual property rights applicable to various Data I/O products include
patents, copyrights, trade secrets and trademarks. Rather than depend on patents
and copyrights, which are frequently outdated by rapid technological
advancements in the electronics industry, Data I/O relies primarily on product
development, engineering, manufacturing and marketing skill to establish and
protect its market position. However, for certain strategic technology the
Company uses patent protection as an additional means of protecting its
intellectual property.
The Company attempts to protect its rights in proprietary software products,
including its Tasklink product, by retaining the title to and copyright of the
software and documentation, by including appropriate contractual restrictions on
use and disclosure in its licenses, and by requiring its employees to execute
non-disclosure agreements. The Company's software products are typically shipped
in sealed packages on which notices are prominently displayed informing the
end-user that, by breaking the seal of the packaging, the end-user agrees to be
bound by the license agreement contained in the package. The license agreement
includes limitations on the end-user's authorized use of the product, as well as
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restrictions on disclosure and transferability. The legal and practical
enforceability and extent of liability for violations of license agreements that
purport to become effective upon opening of a sealed package are unclear. The
Company is not aware of any situation where a license agreement restricting an
end-user's authorized use of a licensed product resulted in enforcement action.
The Company's software products are not normally sold separately from sales of
programming systems. However, on those occasions where software is sold
separately, revenue is recognized when a sales agreement exists, when delivery
has occurred, when our fee is fixed or determinable, and when collectibility is
probable.
Because of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, there is a possibility that portions of the
Company's products might infringe upon existing patents or copyrights, and the
Company may, therefore, be required to obtain licenses or discontinue the use of
the infringing technology. The Company believes that any exposure it may have
regarding possible infringement claims is a reasonable business risk similar to
that being assumed by other companies in the electronic equipment and software
industries. However, any claim of infringement, with or without merit, could be
costly and a diversion of management's attention, and an adverse determination
could adversely affect the Company's reputation, preclude it from offering
certain products, and subject it to substantial liability.
Employees
As of December 28, 2000, the Company had 224 total employees, of which 52 were
located outside the U.S. The Company also utilizes independent contractors for
specialty work, primarily in research and development, and utilizes temporary
workers to adjust capacity to fluctuating demand. Many of Data I/O's employees
are highly skilled and the Company's continued success will depend in part upon
its ability to attract and retain employees who are in great demand within the
industry. At times the Company, along with most other electronic equipment
manufacturers and software developers, experiences difficulty in hiring and
retaining experienced personnel, particularly in technical areas. There is no
assurance that the Company will be able to attract and retain qualified
personnel in the future. None of the Company's employees are represented by a
collective bargaining unit and the Company believes relations with its employees
are favorable.
Environmental Compliance
The Company's facilities are subject to numerous laws and regulations concerning
the discharge of materials or otherwise relating to the environment. Compliance
with environmental laws has not had, nor is it expected to have, a material
effect on capital expenditures, the financial position, the results of
operations or the competitive position of the Company.
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of the
Company as of March 7, 2001:
Name Age Position
Frederick R. Hume 58 President and Chief Executive Officer
Joel S. Hatlen 42 Vice President Finance
Chief Financial Officer
Secretary and Treasurer
Jim Rounds 52 Vice President
Chief Technical Officer
John Vicklund 55 Vice President Human Resources
Frederick R. Hume joined the Company as President and Chief Executive Officer in
February 1999. He was appointed to the Board of Directors of the Company in
January 1999. From 1988 until his retirement in 1998, Mr. Hume was Vice
President and General Manager of Keithley Instruments in Cleveland, Ohio.
From 1972 to 1988, he held various management positions at Fluke Corporation,
including Group Vice President for Manufacturing and Research and Development.
Page 9
Joel S. Hatlen joined the Company in September 1991 as a Senior Tax Accountant
and became Tax Manager in December 1992. He was promoted to Corporate Controller
in December 1993. In February 1997, he was named Chief Accounting Officer and
Corporate Controller. In January 1998, he was promoted to Vice President of
Finance and Chief Financial Officer, Secretary and Treasurer. From September
1981 until joining the Company, Mr. Hatlen was employed by Ernst & Young LLP,
where his most recent position was Senior Manager.
Jim Rounds joined the Company in September 1998 as Vice President of
Engineering. In October 1999 Mr. Rounds was named Vice President and General
Manager of Programming Systems. Prior to joining the Company, Mr. Rounds spent
23 years at Hewlett-Packard Corporation, where he last served as Research and
Development Manager for one of the company's new business initiatives from 1995
to 1998. Prior to that, he served as Research and Development Manager for
Hewlett-Packard's Lake Stevens Division from 1993 to 1995, which supported many
product lines and introduced many new products.
John Vicklund joined the Company in January 2001 as Vice President of Human
Resources. Prior to joining Data I/O Mr. Vicklund served as Director of Human
Resources at Canyon Creek Cabinet Company. Mr. Vicklund also served as Director
of Human Resources at Pacific Aerospace & Electronics, Inc., and Hatch & Kirk
Inc. Mr. Vicklund served as a Project Coordinator for South King County Tech
Prep Consortium. Mr. Vicklund was employed as Vice President of Human Resources
at ELDEC for 20 years.
Cautionary Factors That May Affect Future Results
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. The reader can identify these statements by the fact
that they do not relate strictly to historical or current facts. In particular,
these include statements relating to future action, prospective products, new
technologies, future performance or results of current and anticipated products,
sales efforts, expenses, outsourcing of function, the outcome of contingencies,
and financial results.
Any or all of our forward-looking statements in this report or in any other
public statement made may turn out to be wrong. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors -- for example, product competition and our product
development -- will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may
materially vary.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. The reader
is advised, however, to consult any future disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC and press releases. Also,
note that we provide the following cautionary discussion of risks, uncertainties
and possible inaccurate assumptions relevant to our business. These are factors
that we think could cause our actual results to differ materially from expected
and historical results. Other factors besides those listed here could also
adversely affect the Company. This discussion is permitted by the Private
Securities Litigation Reform Act of 1995.
Development, Introduction and Shipment of New Products
The Company currently is developing new engineering and automated programming
systems. Significant technological, supplier, manufacturing or other problems
may delay the development, introduction or production of these products.
For example, we may encounter these problems:
o technical problems in the development of a new programming system
platform or the robotics for new automated handling systems
o inability to hire qualified personnel
o delays or failures to perform by third parties involved in our
development projects
Our sales in the past three years have been significantly adversely affected by
delays in developing and releasing new products. Some customers waited for our
new products, while many others purchased products from our competitors. Delays
in the completion and shipment of new products, or failure of customers to
accept new products, may result in a decline in sales in 2001.
Page 10
Variability in Quarterly Operating Results
Our operating results tend to vary from quarter to quarter. Our revenue in each
quarter is substantially dependent upon orders received within that quarter.
Conversely, our expenditures are based on investment plans and estimates of
future revenues. We may, therefore, be unable to quickly reduce our spending if
our revenues decline in a given quarter. As a result, operating results for that
quarter will suffer. Our results of operations for any one quarter are not
necessarily indicative of results for any future periods.
Other factors which may cause our quarterly operating results to fluctuate
include:
o increased competition
o timing of new product announcements
o product releases and pricing changes by us or our competitors
o market acceptance or delays in the introduction of new products
o production constraints
o the timing of significant orders
o customers' budgets
o foreign currency exchange rates
Due to all of the foregoing factors, it is possible that in some future
quarters, our operating results will be below expectations of analysts and
investors.
Rapid Technological Change
Product technology in our industry evolves rapidly, making timely product
innovation essential to success in the marketplace. The introduction of products
with improved technologies or features may render our existing products obsolete
and unmarketable. Technological advances that may negatively impact our business
include:
o new IC package types requiring hardware and software changes in
order to be programmed by our products
o electronics equipment manufacturing practices, such as widespread
use of in-circuit programming
o customer software platform preferences different from those on which
our products operate
o more rigid industry standards, which would decrease the value-added
element of our products and support services
If we cannot develop products in a timely manner in response to industry
changes, or if our products do not perform well, our business and financial
condition will be adversely affected. Also, our new products may contain defects
or errors which give rise to product liability claims against us or cause them
to fail to gain market acceptance.
Economic and Market Conditions
Our business is impacted by capital spending plans and other economic cycles
that affect the users and manufacturers of ICs. These industries are highly
cyclical and are characterized by rapid technological change, short product life
cycles, fluctuations in manufacturing capacity and pricing and gross margin
pressures. Our operations may in the future reflect substantial fluctuations
from period-to-period as a consequence of such industry patterns, general
economic conditions affecting the timing of orders from major customers, and
other factors affecting capital spending. These factors could have a material
adverse effect on our business and financial condition.
Page 11
Competition
Technological advances have reduced the barriers of entry into the programming
systems markets. We expect competition to increase from both established and
emerging companies. Certain competitors have increased their market share in our
business. We believe this is due in part to our product development delays. If
we fail to compete successfully against current and future sources of
competition, our profitability and financial performance will be adversely
impacted.
Dependence on IC Manufacturers
We work closely with most semiconductor manufacturers to ensure that our
programming systems comply with their requirements. In addition, many
semiconductor manufacturers recommend our programming system for use by users of
their programmable devices. These working relationships enable us to keep our
programming systems product line up-to-date and provide end-users with broad and
current programmable IC support. Our business may be adversely affected if our
relationships with semiconductor manufactures deteriorate.
Dependence on Suppliers
Certain parts used in our products are currently available from either a single
supplier or from a limited number of suppliers. If we cannot develop alternative
sources of these components, or if we experience deterioration in our
relationship with these suppliers, there may be delays or reductions in product
introductions or shipments, which may materially adversely affect our operating
results.
Because we rely on a small number of suppliers for certain parts, we are subject
to possible price increases by these suppliers. Also, we may be unable to
accurately forecast our production schedule. If we underestimate our production
schedule, suppliers may be unable to meet our demand for components. This delay
in the supply of key components may materially adversely affect our business.
The non-automated programming system products we acquired when we acquired SMS
in November 1998 are currently manufactured to our specifications by a
third-party contract manufacturer. We may not be able to obtain a sufficient
quantity of these products if and when needed, which may result in lost sales.
Reliance on Third-Party Distribution Channels
We have an internal sales force and also utilize third-party representatives,
and distributors. Therefore, the financial stability of these distributors is
important to us. Highly skilled professional engineers use most of our products.
To be effective, third-party distributors must possess significant technical,
marketing and sales resources and must devote their resources to sales efforts,
customer education, training and support. These required qualities limit the
number of potential third-party distributors. Our business will suffer if we
cannot attract and retain a sufficient number of qualified third-party
distributors to market our products.
International Operations
International sales represented 64% of our net revenue for the fiscal year ended
December 28, 2000. We expect that international sales will continue to be a
significant portion of our net revenue. International sales may fluctuate due to
various factors, including:
o unexpected changes in regulatory requirements
o tariffs and taxes
o difficulties in staffing and managing foreign operations
o longer average payment cycles and difficulty in collecting accounts
receivable
o fluctuations in foreign currency exchange rates
o impact of the Euro
o compliance with applicable export licensing requirements
o product safety and other certification requirements
o political and economic instability
Page 12
The European Community and European Free Trade Association have established
certain electronic emission and product safety requirements ("CE"). Although all
our products currently meet these requirements, failure to obtain either a CE
certification or a waiver for any product may prevent us from marketing that
product in Europe.
We operate subsidiaries in Germany, China and Canada. The operations in China
opened during the third quarter of 2000. Our business and financial condition is
sensitive to currency exchange rates or any other restrictions imposed on their
currencies. Currency exchange fluctuations in Canada, China and Germany may
adversely affect our investment in our subsidiaries.
Protection of Intellectual Property
Refer to the section captioned "Patents, Copyrights, Trademarks and Licenses" in
Item 1 above.
Acquisitions
We may pursue acquisitions of complementary technologies, product lines or
businesses. Future acquisitions may include risks, such as:
o burdening management and our operating teams during the integration
of the acquired entity
o diverting management's attention from other business concerns
o failure to successfully integrate the acquired products
o lack of acceptance of the acquired products by our sales channels
or customers
o entering markets where we have no or limited prior experience
o potential loss of key employees of the acquired company
o additional burden of support for an acquired programmer architecture
Future acquisitions may also impact our financial position. For example, we may
use significant cash or incur additional debt, which would weaken our balance
sheet. We may also capitalize goodwill and intangible assets acquired, the
amortization of which would reduce our profitability. We cannot guarantee that
future acquisitions will improve our business or operating results.
Dependence on Key Personnel
Refer to the section captioned "Employees" above.
Potential Volatility of Stock Price
The stock prices of technology companies tend to fluctuate significantly. We
believe factors such as announcements of new products by us or our competitors
and quarterly variations in financial results may cause the market price of our
Common Stock to fluctuate substantially. In addition, overall volatility in the
stock market, particularly in the technology company sector, is often unrelated
to the operating performance of companies. If these market fluctuations continue
in the future, they may adversely affect the price of our Common Stock.
Item 2. Properties
In May 1997, we completed the sale of the land and building comprising our
Redmond, Washington corporate headquarters and are currently leasing the 96,000
square foot building on a 10-year leaseback agreement with an option to renew
the lease for an additional 10 years. This lease required base annual rental
payments in 2000 of approximately $981,000. See Note 7 of "Notes to Consolidated
Financial Statements." As part of our restructuring plan implementation, we
vacated one floor of the leased Redmond facility (approximately 25,000 square
feet) and have sublet the majority of this space for a period of 28 months
beginning January 1, 2000, at a rate of approximately $33,000 per month.
In addition to the Redmond facility, approximately 20,000 square feet is leased
at four foreign locations including our Canadian sales and service office
located in Mississauga, Ontario, our German sales, service and engineering
operations located in Amtzell and Munich, Germany, and our sales and service
office in Hong Kong, China. During the first quarter 2000, our Wangen operations
Page 13
moved from its 5,000 square foot leased facility to a new 11,000 square foot
leased facility in Amtzell near Wangen. The lease for this new facility extends
through March 2010. See Note 11 of "Notes to Consolidated Financial Statements."
Item 3. Legal Proceedings
Data I/O is party in various legal proceedings, and in addition, there are
various other contingent liabilities arising in the normal course of business.
After consultation with legal counsel, management does not anticipate the
disposition of these proceedings and contingent liabilities will have a material
effect on the consolidated financial statements.
Item 4. Submission of Matters to a Vote of Stockholders
No matters were submitted for a vote of stockholders of the Company during the
fourth quarter of the fiscal year ended December 28, 2000.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The following table shows, for the periods indicated, the market sales price
range for the Company's common stock as reported by the NASDAQ National Market
tier of The NASDAQ Stock Market (NASDAQ symbol is DAIO).
Period High Low
2000 Fourth Quarter $5.25 $1.88
Third Quarter 4.88 3.63
Second Quarter 5.25 2.00
First Quarter 7.13 2.38
1999 Fourth Quarter $3.50 $1.06
Third Quarter 2.00 1.25
Second Quarter 1.47 1.00
First Quarter 2.75 1.25
The approximate number of shareholders of record and approximate number of
beneficial shareholders of record on March 7, 2001 was 782 and 3,500,
respectively.
Except for a special cash dividend of $4.15 per share paid on March 8, 1989, the
Company has not paid cash dividends on its common stock and does not anticipate
paying regular cash dividends in the foreseeable future.
Item 6. Selected Five-Year Financial Data
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained herein in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company adopted SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101) in the fourth quarter of fiscal year 2000, effective beginning of the first
quarter of fiscal year 2000. The pro forma information in the table below
results from the adoption of SAB 101. Historical results are not necessarily
indicative of future results.
Page 14
Year Ended
- -----------------------------------------------------------------------------------------------------------------------------
Dec. 28, Dec. 30, Dec. 31, Dec. 25, Dec. 26,
(in thousands, except employee and per share data) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
For The Year:
Net sales $42,909 $34,113 $35,338 $46,284 $48,860
Cost of goods sold 22,760 17,948 24,933 22,748 25,934
----------------------------------------------------------------
Gross margin 20,149 16,165 10,405 23,536 22,926
Research and development 8,716 8,403 9,109 7,807 8,121
Selling, general and administrative 10,616 11,022 14,386 13,924 14,618
Write-off acquired inprocess R&D (1) 0 0 1,959 0 0
Net provision for business restructuring (2) (255) (215) 4,370 0 0
----------------------------------------------------------------
Operating income (loss) 1,072 (3,045) (19,418) 1,805 187
Non-operating income (expense) 876 1,920 952 2,757 (59)
----------------------------------------------------------------
Income (loss) from continuing operations before income
taxes and cumulative effect of accounting change 1,948 (1,125) (18,466) 4,562 128
Income tax expense 36 (55) (58) (176) (121)
----------------------------------------------------------------
Income (loss) from continuing operations , before
cumulative effect of accounting 1,912 (1,180) (18,524) 4,386 7
change
Income (loss) from discontinued operations (3) 90 831 894 7,114 (1,108)
Cumulative effect of accounting change (2,531) 0 0 0 0
----------------------------------------------------------------
Net income (loss) ($529) ($349) ($17,630) $11,500 ($1,101)
Pro forma net income (loss) ($2,880) ($17,630) $11,500 ($1,101)
------------------------------------------------------------------------------------------------------------------------
At Year-end:
Working capital $16,792 $16,179 $15,084 $33,226 $10,054
Total assets $28,746 $30,050 $40,089 $57,736 $39,319
Long-term debt 0 0 0 0 $1,500
Total debt 0 0 $564 $2,000 $1,605
Stockholders' equity $18,039 $18,058 $18,909 $34,614 $22,559
Number of employees from continuing operations 224 199 270 328 332
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock Data (4):
Basic earnings per share:
From continuing operations, after taxes, before
cumulative effect of accounting change $0.26 ($0.16) ($2.59) $0.63 $0.00
Net income (loss) ($0.07) ($0.05) ($2.46) $1.66 ($0.16)
Pro forma net income (loss) ($0.40) ($2.46) $1.66 ($0.16)
Diluted earnings per share:
From continuing operations, after taxes, before
cumulative effect of accounting change $0.26 ($0.16) ($2.59) $0.62 $0.00
Net income (loss) ($0.07) ($0.05) ($2.46) $1.62 ($0.16)
Pro forma net income (loss) ($0.40) ($2.46) $1.62 ($0.16)
Book value per share at year-end $2.41 $2.48 $2.63 $4.92 $3.33
Shares outstanding at year-end 7,495 7,290 7,187 7,039 6,778
Weighted-average basic shares outstanding 7,405 7,254 7,154 6,909 6,857
Weighted-average diluted shares outstanding 7,405 7,254 7,154 7,087 7,035
- -----------------------------------------------------------------------------------------------------------------------------
Key Ratios:
Current ratio 2.9 2.7 1.8 2.7 1.7
Gross margin to sales 47.0% 47.4% 29.4% 50.9% 46.9%
Operating income (loss) to sales 2.5% (8.9%) (54.9%) 3.9% 0.4%
Income (loss) from continuing operations to sales 4.5% (3.5%) (52.4%) 9.5% 0.0%
Return on average stockholders' equity 10.6% (6.3%) (63.5%) 16.8% 0.0%
- -----------------------------------------------------------------------------------------------------------------------------
Page 15
Footnotes:
(1) For further discussion, see Note 3 of "Notes to Consolidated Financial
Statements."
(2) For further discussion, see Note 2 of "Notes to Consolidated Financial
Statements."
(3) For further discussion, see Note 4 of "Notes to Consolidated Financial
Statements."
(4) For further discussion, see Note 1 of "Notes to Consolidated Financial
Statements."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves as long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Annual Report on Form 10-K are forward-looking. In particular,
statements herein regarding industry prospects; future results of operations or
financial position; integration of acquired products and operations; market
acceptance of the Company's newly introduced or upgraded products; development,
introduction and shipment of new products; and any other guidance on future
periods are forward-looking statements. Forward-looking statements reflect
management's current expectations and are inherently uncertain. The Company's
actual results may differ significantly from management's expectations. The
following discussions and the section entitled "Business - Cautionary Factors
That May Affect Future Results" describes some, but not all, of the factors that
could cause these differences.
BUSINESS RESTRUCTURING PROGRESS
During 2000, the Company continued to see the payoffs of its earlier
restructuring efforts. The profits generated in the third and fourth quarters of
the year were the result of the earlier restructuring efforts undertaken and new
product sales. The remaining restructuring reserve of $117,000 relates to
payments on abandoned lease space. The Company reversed $255,000 of reserves
during the second quarter of 2000, primarily because costs accrued to abandon
leased property and return leased property to its original condition were not
required.
Results of Continuing Operations
For all periods presented in this section, results of operations reflect the
classification of the Company's Semiconductor Equipment and Synario Design
Automation Divisions as discontinued operations (see "Discontinued Operations").
Net Sales
(in thousands)
Net sales by product line: 2000 Change 1999 Change 1998
- -----------------------------------------------------------------------------------------------------------------------------
Non-automated programming systems $17,672 (16.0%) $21,043 (20.5%) $26,459
Automated programming systems 25,237 93.1% 13,070 47.2% 8,879
------------------ ----------------- ---------------
Total Programming Systems Division $42,909 25.8% $34,113 (3.5%) $35,338
================== ================= ===============
Net sales by location:
United States $15,588 8.8% $14,330 (15.2%) $16,900
% of total 36.3% 42.0% 47.8%
International $27,321 38.1% $19,783 7.3% $18,438
% of total 63.7% 58.0% 52.2%
- -----------------------------------------------------------------------------------------------------------------------------
Page 16
2000 vs. 1999
The Company adopted SAB 101 in the fourth quarter of fiscal year 2000, effective
as of the beginning of the first quarter of fiscal year 2000. Year 2000 Net
Sales were increased by $4,062,000, net of $575,000 as a result of adopting SAB
101. Of the increase in Net Sales of $4,637,000 due to the adoption of SAB 101,
$4,579,000 relates to the finalization of installation of the PP100 product in
accordance with agreed upon specifications, $4,425,000 of which relates to sales
made by our German subsidiary. Including the effects of adopting SAB 101, sales
increased by 26% from 1999 to 2000. Automated systems increased by $12,167,000
or 93%, primarily due to increased PP100 sales and the introduction of the
ProLINE-RoadRunner. Sales of non-automated systems decreased by $3,371,000 or
16%, primarily due to a decline in sales of the Company's older non-automated
programming systems. Sales of automated systems overtook non-automated systems
for the first time in 2000. Automated systems are expected to continue to
make-up a majority of Net Sales. The introduction of the ProLINE-RoadRunner is
expected to add to automated sales as we continue to work with SMT equipment
manufacturers and design ProLINE-RoadRunners to work with other versions of SMT
equipment.
Product sales in the US increased by $1,300,000 or 8.8% in 2000. International
sales increased $7,538,000 or 38.1%.
1999 vs. 1998
Overall sales decreased for the Company's programming system products during
1999 as compared to 1998. Overall orders during the year were essentially flat;
increasing approximately 1% to $32.0 million compared with $31.5 million in
1998. Orders during 1999 for the Company's automated programming systems
increased 93% compared to 1998. This increase was offset by an 18% decline in
orders for the Company's non-automated programming systems.
The increase in sales and orders of the Company's automated programming systems
is primarily attributable to the PP100-TM- automated programming system which
was integrated into the Data I/O product line during the first half of 1999
following the acquisition of SMS in November 1998. The PP100 replaced the
Company's PM970 fine pitch automated programming system. Sales during 1999 of
the Company's non-automated programming systems decreased significantly compared
to 1998 due to a decline in sales of the Company's older non-automated products,
some of which have been discontinued, offset partially by sales of the SMS
Sprint non-automated products which were integrated into the Data I/O product
line during the first half of 1999 following the acquisition of SMS.
During 1999 sales to Europe increased, but sales in the U.S. and other foreign
countries decreased. Partially offsetting the increased sales in Europe was a
negative impact from foreign currency translation due primarily to the German
Mark to U.S. Dollar exchange rate. The net impact of exchange rate changes
during 1999 was approximately $1.0 million. When the U.S. Dollar is weaker,
sales of the Company's products in local currency translate into more U.S.
Dollars. However, offsetting the revenue translation impact is the translation
of local currency costs and expenses.
Gross Margin
(in thousands) 2000 Change 1999 Change 1998
- -----------------------------------------------------------------------------------------------------------------------------
Gross margin $20,149 24.6% $16,165 55.4% $10,405
Percentage of net sales 47.0% 47.4% 29.4%
- -----------------------------------------------------------------------------------------------------------------------------
2000 vs. 1999
The Company adopted SAB 101 in the fourth quarter of fiscal year 2000, effective
as of the beginning of the first quarter of fiscal year 2000. The 24.6% increase
in gross margin from 1999 to 2000 is attributable to the 25.8% increase in
revenue from year to year including the effects of adopting SAB 101. The net
impact of the adoption of SAB 101 was to increase the gross margin in 2000 by
$2,317,000.
Page 17
1999 vs. 1998
The gross margin increased by $5,760,000 or 55% during 1999 compared to 1998.
This increase is primarily due to $4.6 million of inventory reserves recorded
during 1998 related to discontinued products as a result of the Company's
restructuring activities (see "Business Restructuring Progress"). Also
contributing to the increased gross margin as compared to 1998 was less spending
during 1999 on PM970 customer support as this product became more stable, and
lower overall costs in the manufacturing organization due to headcount
reductions from the Company's restructuring.
Research and Development
(in thousands) 2000 Change 1999 Change 1998
- -----------------------------------------------------------------------------------------------------------------------------
Research and development $8,716 3.7% $8,403 (7.8%) $9,109
Percentage of net sales 20.3% 24.6% 25.8%
- -----------------------------------------------------------------------------------------------------------------------------
2000 vs. 1999
Research and Development (R&D) spending increased slightly in 2000 from the
prior year. The $313,000 increase in spending is due to increased spending for
device research and development for new products. The Company has committed to
developing new products to upgrade its product offering. During 2000 the
ProLINE-RoadRunner was introduced. The Company will continue to rollout new
products to meet customer demands and replace products which no longer meet
customer requirements. The R&D spending as a percentage of net sales decreased
substantially as a result of flat spending and significantly increased revenues
from year to year.
The Company believes it is essential to invest in research and development to
support its existing products and to create new products as markets develop and
technologies change. The Company is focusing its research and development
efforts in its strategic growth markets, namely new programming technology and
automated programming systems for the manufacturing environment, particularly
for high-density Flash memory applications.
1999 vs. 1998
Research and Development spending decreased $700,000 or 8% in 1999 as compared
with 1998. The Company initiated a restructuring plan in the third quarter of
1998 which resulted in certain new product development program cancellations and
significant layoffs in the Redmond headquarters engineering staff in the third
and fourth quarters of 1998, as well as the first quarter of 1999. Partially
offsetting the cost reductions realized from the Company's restructuring
activities were incremental research and development expenses in the Company's
operations in Wangen, Germany, which were acquired in November 1998, and an
increased investment in certain areas of new product development and software
support during 1999. The November 1998 acquisition of SMS has also allowed the
Company to reduce its emphasis on support of certain older products that have
been replaced due to overlap with SMS products which were integrated into the
Data I/O product line during the first half of 1999.
During 1999 the Company invested in its Sprint family of non-automated
programmers and in the PP100 automated programming system, both of which were
acquired with SMS in November 1998. The Company believes this investment was
required to raise the level of performance of these products. Also during 1999
the Company invested substantial resources in the development of a new automated
programming system that employs a unique concept for in-line programming using
an on-line implementation. This product, called the ProLINE-RoadRunner, is
targeted at high-volume production applications using high-density Flash memory,
and was introduced in the first quarter of 2000.
At the time of the acquisition of SMS in 1998 the Company recognized a charge
for in-process research and development of $2.0 million. During 1999 this
research and development work continued although at a reduced pace as the
majority of engineering resources were dedicated toward support and enhancement
of existing products and the development of the ProLINE-RoadRunner, as described
above.
Page 18
Selling, General and Administrative
(in thousands) 2000 Change 1999 Change 1998
- ----------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative $10,616 (3.7%) $11,022 (23.4%) $14,386
Percentage of net sales 24.7% 32.3% 40.7%
- ----------------------------------------------------------------------------------------------------------------------------
2000 vs. 1999
Selling, General and Administrative (SG&A) expenses decreased both in dollars
and as a percentage of net sales in 2000 compared to 1999. The total
expenditures decreased $406,000 and as a percentage of net sales, expenditures
dropped by 7.6%. Sales and marketing expenses were relatively flat year to year,
the majority of the decrease in spending coming from general and administrative
expenses due to one time cost reductions which occurred in the fourth quarter.
As a result of moving from a self-insured medical plan to a medical plan covered
by insurance, the Company was able to reduce the reserve established to cover
medical payments for submitted claims. This one-time savings accounted for the
majority of the savings from year to year.
1999 vs. 1998
The decrease in selling, general and administrative expenditures in 1999 as
compared to 1998 both in amount and as a percentage of sales is due primarily to
a reduction in headcount across most SG&A departments as a result of the
Company's restructuring which was initiated in the second half of 1998 (see
"Business Restructuring Progress"). Also, the sale of the Company's Japan
subsidiary in February 1999 resulted in lower spending in selling, general and
administrative expenses as compared to the prior year. Furthermore, 1998
expenses included a non-cash charge in the amount of $540,000 related to the
modification of stock options of a former CEO of the Company, and decreased
employee performance bonuses in 1999. Partially offsetting the reduced spending
are incremental expenses of the Company's Wangen, Germany operations which were
acquired in November 1998.
Interest
(in thousands) 2000 Change 1999 Change 1998
- ----------------------------------------------------------------------------------------------------------------------------
Interest income $471 (36.4%) $741 (51.0%) $1,513
Interest expense ($25) (32.4%) ($37) (73.2%) ($138)
- ----------------------------------------------------------------------------------------------------------------------------
2000 vs. 1999
The decrease in interest income for 2000 as compared to 1999 is due to the
decrease in cash, cash equivalents and marketable securities, which were used to
fund operating losses during the year.
1999 vs. 1998
The decrease in interest income for 1999 as compared to 1998 is due to the
decrease in cash, cash equivalents and marketable securities, used to the fund
operating losses and the purchase of SMS in the fourth quarter of 1998. The
decrease in interest expense for 1999 as compared to 1998 is due primarily to
the retirement of debt in 1998 and the repayment of the Company's Japan debt in
February 1999.
Page 19
Income Taxes
(in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Income tax expense $36 $55 $58
Effective tax rate 1.8% 4.9% 0.3%
- ----------------------------------------------------------------------------------------------------------------------------
2000 vs. 1999
Income tax expense in 2000 relates entirely to foreign income taxes. For
financial reporting purposes the Company has established tax valuation reserves
against its deferred tax assets because of the uncertainty relating to the
realization of such asset values. The Company had valuation allowances of $7.0
million at December 28, 2000 compared to $6.9 million at December 30, 1999.
1999 vs. 1998
Income tax expense in 1999 and 1998 relates primarily to foreign income taxes.
The effective income tax rate for 1999 differed from the expected provision at
the statutory 34% tax rate primarily due to the addition of tax valuation
reserves. The increase in valuation reserves was due to an inability to record a
benefit for deferred tax assets from temporary differences due to uncertainty
regarding the Company's ability to utilize such assets(see Note 15 of "Notes to
Consolidated Financial Statements"). The Company had valuation allowances of
$6.9 million at December 30, 1999 compared to $5.9 million at December 31, 1998.
Sale Of Headquarters Property
In May 1997 the Company completed the sale of the land and building comprising
its Redmond, Washington corporate headquarters and excess land that had been
held for resale for approximately $13.8 million, less net transaction related
expenses and reimbursements of approximately $400,000. The sale includes a
10-year leaseback of the building to the Company, with an option to renew the
lease for an additional 10 years. The Company realized approximately $12 million
in cash after payment of transaction fees and taxes. The sale resulted in an
overall pre-tax gain of approximately $5.6 million, of which approximately $2.3
million related to the excess land was recognized in the second quarter of 1997.
The remaining gain has been deferred and will be amortized over the life of the
lease.
Discontinued Operations
Semiconductor Equipment Division
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech-TM- Inc., to General Scanning Inc., for $15.5 million,
consisting of $12 million in cash, $2 million in common stock of General
Scanning Inc. and $1.5 million in assumed liabilities. Operating results of the
Semiconductor Equipment Division and the gain in 1997 and subsequent loss
adjustment incurred in 1998 on the sale of this segment are as follows:
(in thousands) 2000 1999 1998 1997
----------- ----------- ---------- -------------
Net sales $ 0 $ 0 $ 0 $7,640
=========== =========== ========== =============
$ 0 $ 0 $ 0 $ 0
Income from operations, net of income tax 926
Gain (loss) on disposal, net of income tax 0 0 (265) 8,329
-------------
----------- ----------- ----------
Total income (loss) on discontinued segment $ 0 $ 0 ($265) $9,255
=========== =========== ========== =============
Page 20
Synario-Registered Trademark- Design Automation Division
Also in November 1997, the Company entered into a licensing agreement and an
agreement to sell certain assets of its Synario-Registered Trademark- Design
Automation Division. Under this licensing agreement, the Company's Electronic
Design Automation (EDA) products were to be integrated and sold with the EDA
product line of MINC Incorporated. This transaction discontinued the Synario
Design Automation Division operations of the Company. Although the Company was
entitled to receive certain licensing, source code and training and support
services revenues related to certain of its former SDAD products through
December 31,1999, during the second quarter 1999 the Company closed final
settlements and transfer of its retained licensing rights. In the fourth quarter
of 2000, $90,000 was reversed from a previously established accrual to reflect
that the amount established in 1997 related to royalties would not be fully
utilized. Operating results and the loss on the disposal of this segment are as
follows:
(in thousands) 2000 1999 1998 1997
----------- ----------- ---------- -------------
Net sales (1) $ 0 $944 $1,381 $7,172
=========== =========== ========== =============
Gain (loss) from operations, net of income tax $90 $831 $1,344 ($1,358)
Gain (loss) on disposal, net of income tax 0 (185) (783)
----------- ----------- ---------- -------------
Total income (loss) on discontinued segment $90 $831 $1,159 ($2,141)
=========== =========== ========== =============
(1) All 1999 and 1998 net sales are for retained licensing rights. 1997
net sales includes $851,000 retained licensing rights recognized after
the disposition in 1997.
Inflation and changes in Foreign currency exchange rates
Sales and expenses incurred by foreign subsidiaries are denominated in the
subsidiary's local currency and translated into U.S. Dollar amounts at average
rates of exchange during the year. The Company recognized $430,000 in foreign
currency transaction gains and $28,000 in foreign currency translation gains in
2000. The transaction gains result primarily from sales by the German subsidiary
to its main customer which were invoiced in US dollars. The Company hedges its
foreign currency exposure on sales of inventory and certain loans to its foreign
subsidiaries through the use of foreign exchange contracts. See Note 1 of "Notes
to Consolidated Financial Statements."
Financial Condition
Liquidity and Capital Resources
(in thousands) 2000 Change 1999 Change 1998
- ----------------------------------------------------------------------------------------------------------------------------
Working capital $16,792 $613 $16,179 $1,095 $15,084
Total debt 0 0 0 ($564) $564
- ----------------------------------------------------------------------------------------------------------------------------
Page 21
In 2000, net cash used by operating activities was $7.5 million. Inventories
increased by $2.9 million primarily due to the ramp up in the production of the
ProLINE-RoadRunner automated programming system. Accounts Receivable increased
by $5.1 million, due both to increased sales volume and slower payment trends by
customers, primarily in Europe.
The Company experienced foreign currency transaction gains of $430,000 during
2000 versus a $1,000 gain in 1999. The substantial change was due to
fluctuations in the German Mark during 2000.
The Company estimates that capital expenditures for property, plant and
equipment during 2001 will be between $1.0 million and $2.0 million. Although
the Company fully expects that such expenditures will be made, it had
commitments for only $238,000 at December 28, 2000. Such expenditures are
expected to be funded from existing and internally generated funds. The
Company's U.S. secured line of credit matured in May 2000 and was not renewed.
The Company's foreign line of credit for 600,000 Deutsche Marks was renewed in
2000 and expires in December 2002.
As a result of its significant product development, customer support, and
selling and marketing efforts, the Company has required substantial working
capital to fund its operations. Management believes that the Company has
sufficient working capital available under its operating plan to fund its
operations and capital requirements through at least December 31, 2001. Any
substantial inability to achieve the current business plan could have a material
adverse impact on the Company's financial position, liquidity, or results of
operations and may require the Company to reduce expenditures and/or seek
additional financing to enable it to continue operations through December 31,
2001.
Share repurchase program
Under a previously announced share repurchase program, the Company is authorized
to repurchase up to 1,123,800 shares (approximately 15.6%) of its outstanding
common stock. These purchases may be executed through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and may commence or be discontinued at any time. As of December
28, 2000, the Company has repurchased 1,016,200 shares under this repurchase
program at a total cost of approximately $7.1 million. The Company has not
repurchased shares under this plan since the second quarter of 1997 although it
still has the authority to do so.
General
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems. The Company
continued to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000. No problems relating to Year
2000 issues were found during the year by the Company, and the Company
experienced no difficulty with customers or vendors related to Year 2000 issues.
European monetary conversion
On January 1, 1999, the European Economic and Monetary Union (the "EMU")
introduced the Euro, which became a functional legal currency of the EMU
countries. From 1999 to 2001 businesses in the EMU member states will conduct
transactions in both the existing national currency, such as the Franc or
Deutsche Mark, and the Euro. As a result, companies operating in or conducting
business in the EMU member states will need to ensure that their financial and
other software systems are capable of processing transactions and properly
handling these currencies, including the Euro.
Page 22
The Company has taken certain steps to address this issue but continues to
assess what further impact the EMU formation will have on both its internal
systems and its products sold. The Company plans to take appropriate corrective
actions based on the results of its continued assessment. The costs related to
addressing this issue have not been determined, and management believes that
this issue and its related costs will not have a material adverse effect on the
Company's business, financial condition and operating results.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company currently uses only foreign currency hedge derivative instruments,
which, at a given date, are not material. However, the Company is exposed to
interest rate risks. The Company generally invests in high-grade commercial
paper with original maturity dates of twelve months or less and conservative
money market funds to minimize its exposure to interest rate risk on its
marketable securities, which are classified as available-for-sale as of December
28, 2000 and December 30, 1999. The Company believes that the market risk
arising from holdings of its financial instruments is not material.
The table below provides information about the Company's marketable securities,
including principal cash flows for 2001 and the related weighted average
interest rates (in thousands):
Estimated Fair Estimated Fair
Principal Value at Principal Value at
Cash Flows December 28, Cash Flows December 30,
For 2001 2000 For 2000 1999
-------------- ------------------ ------------- -----------------
Corporate bonds $415 $415 $3,524 $3,536
6.410% 5.73%
Medium- and short-term notes 340 340 2,569 2,576
6.442% 5.62%
Euro-dollar bonds 1,189 1,189 3,012 3,018
6.565% 5.50%
Zero coupon notes 0 0 476 484
4.85%
-------------- ------------------ ------------- -----------------
Total portfolio value $1,944 $1,944 $9,581 $9,614
In June 1998, the Company adopted SFAS No. 133, Accounting for Derivatives and
Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments and requires recognition of derivatives as
assets or liabilities in the statement of financial position and measurement of
those instruments at fair value. The adoption of this standard by the Company
did not materially impact its consolidated financial statements.
The Company utilizes forward foreign exchange contracts to reduce the impact of
foreign currency exchange rate risks where natural hedging strategies cannot be
effectively employed. The majority of these contracts hedge the foreign currency
risk related to net asset or liability positions denominated in German
Deutschmarks. Generally, these contracts have maturities less than one year and
require the Company to exchange foreign currencies for U.S. dollars at maturity.
The Company does not hold or issue derivative financial instruments for trading
purposes. The purpose of the Company's hedging activities is to reduce the risk
that the eventual cash flows of the underlying assets, liabilities and firm
commitments will be adversely affected by changes in exchange rates. The
Company's derivative activities do not create foreign currency exchange rate
risk because fluctuations in the value of the instruments used for hedging
purposes are offset by fluctuations in the value of the underlying exposures
being hedged. The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments. However, the Company
has entered into these instruments with creditworthy financial institutions and
considers the risk of nonperformance to be remote.
Page 23
Item 8. Financial Statements and Supplementary Data
See pages 24 through 42.
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Data I/O Corporation
We have audited the accompanying consolidated balance sheets of Data I/O
Corporation as of December 28, 2000 and December 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 28, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
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 consolidated financial position of Data I/O
Corporation at December 28, 2000 and December 30, 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 28, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the financial statements, in 2000 the Company changed
its method of accounting for revenue recognition.
//S//Ernst & Young
Ernst & young LLP
Seattle, Washington
February 7, 2001
Page 24
-------------------------------------------------------------------------------
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
The Management of Data I/O Corporation is responsible for the preparation and
integrity of the Company's consolidated financial statements and related
information that appears in this Annual Report on Form 10-K. Management believes
that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of its operations, in conformity with accounting principles generally
accepted in the United States. Management has included in the Company's
financial statements amounts that are based on estimates and judgments, which it
believes are reasonable under the circumstances.
The Company maintains a system of internal control, which is designed to
safeguard the Company's assets and ensure that transactions are recorded in
accordance with Company policies.
The Board of Directors of the Company has an Audit Committee composed of
non-management Directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing and financial reporting matters.
//S//Frederick R. Hume //S//Joel S. Hatlen
FREDERICK R. HUME Joel S. Hatlen
President and Chief Executive Officer Vice President Finance
Chief Financial Officer
Secretary and Treasurer
Page 25
DATAI/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------
Dec. 28, Dec. 30,
2000 1999
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,133 $ 3,597
Marketable securities 1,944 9,614
Trade accounts receivable, net of allowance for
doubtful accounts of $350 and $464 10,627 5,548
Inventories 9,166 6,237
Recoverable income taxes 91 205
Other current assets 444 545
------------- -------------
TOTAL CURRENT ASSETS 25,405 25,746
Property, plant and equipment - net 2,190 2,180
Other assets 1,151 2,124
-------------
-------------
TOTAL ASSETS $28,746 $30,050
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,674 $ 1,592
Accrued compensation 2,073 2,080
Deferred revenue 2,637 2,626
Other accrued liabilities 1,623 2,204
Accrued costs of business restructuring 117 493
Income taxes payable 489 572
------------- -------------
TOTAL CURRENT LIABILITIES 8,613 9,567
Deferred gain on sale of property 2,094 2,425
------------- -------------
10,707 11,992
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none 0 0
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 7,494,542
and 7,290,165 shares 18,292 17,813
Retained earnings (deficit) (163) 366
Accumulated other comprehensive loss (90) (121)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 18,039 18,058
-------------
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,746 $30,050
============= =============
See notes to consolidated financial statements.
Page 26
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------------
Dec. 28, Dec. 30, Dec. 31,
For the years ended 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $42,909 $34,113 $35,338
Cost of goods sold 22,759 17,948 24,933
----------- ------------ ------------
Gross margin 20,149 16,165 10,405
----------- ------------ ------------
Operating expenses:
Research and development 8,716 8,403 9,109
Selling, general and administrative 10,616 11,022 14,385
Acquired inprocess research and development 0 0 1,959
Net provision (reversal) for business restructuring (255) (215) 4,370
----------- ------------ ------------
Total operating expenses 19,077 19,210 29,823
----------- ------------ ------------
Operating income (loss) 1,072 (3,045) (19,418)
Non-operating income (expense):
Interest income 471 741 1,513
Interest expense (25) (37) (138)
Foreign currency exchange 430 0 (3)
Gain (loss) on dispositions and other 0 1,216 (420)
----------- ------------ ------------
Total non-operating income 876 1,920 952
----------- ------------ ------------
Income (loss) from continuing operations before income taxes and
cumulative effect of accounting change 1,948 (1,125) (18,466)
Income tax expense (36) (55) (58)
----------- ------------ ------------
Income (loss) from continuing operations before cumulative
effect of accounting change 1,912 (1,180) (18,524)
Discontinued operations, net of income taxes:
Income from operations, net of income tax 90 831 1,344
Loss on disposals, net of income tax 0 0 (450)
----------- ------------ ------------
Income from discontinued operations 90 831 894
Cumulative effect of accounting change, net of income tax (2,531) 0 0
----------- ------------ ------------
Net loss ($529) ($349) ($17,630)
===========
============ ============
Basic and diluted earnings (loss) per share:
From continuing operations $0.26 ($0.16) ($2.59)
From discontinued operations 0.01 0.11 0.13
From cumulative effect of accounting change (0.34) 0 0
----------- ------------ ------------
Basic and diluted loss per share ($0.07) ($0.05) ($2.46)
=========== ============ ============
Weighted-average basic and diluted shares outstanding 7,405 7,254 7,154
Pro forma amounts assuming the accounting change is applied retroactively
Net loss ($2,880) ($17,630)
Net loss per share ($0.40) ($2.46)
Page 27
DATA I/O
CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Dec. 28, Dec. 30, Dec. 31,
For the years ended 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Income (loss) from continuing operations $1,912 ($1,180) ($18,524)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 2,074 2,145 2,077
Write-off of acquired inprocess research and development 0 0 1,959
Net (gain) loss on dispositions 0 (1,113) 355
Equity income from and gain on sale of equity interest 0 (102) 64
Deferred income taxes 0 391 2,710
Amortization of deferred gain on sale (331) (329) (329)
Non-cash stock-based compensation expense 0 0 583
Inventory write-downs due to business restructure 0 0 4,557
Net change in:
Trade accounts receivable (5,079) (546) 315
Inventories (2,929) (1,969) (841)
Recoverable income taxes 114 3,161 (3,366)
Other current assets 101 532 2,793
Accrued cost of business restructuring (376) (1,846) 2,339
Accounts payable and accrued liabilities (589) (4,838) (1,632)
Deferred revenue 11 (786) (900)
---------------- -------------- -------------
Cash used in operating activities of continuing operations (5,092) (6,480) (7,840)
Cash provided by operating activities of discontinued operations 90 831 894
Cash used in cumulative effect of change in accounting principle 0 0
---------------- -------------- -------------
Net cash used in operating activities (7,533) (5,649) (6,946)
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,111) (1,245) (482)
Net proceeds on sale of subsidiary 0 72 0
Acquisition of SMS GmbH and technology 0 0 (5,224)
Investment in JTAG Technologies 0 1,067 (979)
Purchases of available-for-sale securities (2,346) (8,610) (20,717)
Proceeds from sales of available-for-sale securities 10,019 13,890 31,055
---------------- -------------- -------------
Cash provided by investing activities 6,562 5,174 3,653
Repayment of notes payable 0 0 (1,442)
Sale of common stock 171 166 259
Proceeds from exercise of stock options 308 10 383
---------------- -------------- -------------
Cash provided by (used in) financing activities 479 176 (800)
---------------- -------------- -------------
Decrease in cash and cash equivalents (492) (299) (4,093)
Effects of exchange rate changes on cash 28 (112) (12)
Cash and cash equivalents at beginning of year 3,597 4,008 8,113
---------------- -------------- -------------
Cash and cash equivalents at end of year $3,133 $ 3,597 $ 4,008
================ ============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $25 $ 116 $ 88
Income taxes $41 $ 71 $ 2,145
See notes to consolidated financial statements.
Page 28
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
------------------------
Shares Amount Earnings Income (Loss) Equity
----------- ---------- ----------- ------------------ -----------------
(in thousands, except share data)
Balance at December 26, 1997 7,038,786 $16,412 $18,345 ($143) $34,614
Stock options exercised 55,000 276 0 0 276
Issuance of stock through
Director Fee Plan 20,932 107 0 0 107
Issuance of stock through
Employee Stock Purchase Plan 72,133 259 0 0 259
Stock-based compensation 0 583 0 0 583
Comprehensive loss:
Net loss 0 0 (17,630) 0 (17,630)
Translation adjustment 0 0 (32)
0 (32)
Unrealized gain on
marketable securities 0 0 0 732 732
-----------------
Total comprehensive loss (16,930)
----------- ---------- ----------- ------------------ -----------------
Balance at December 31, 1998 7,186,851 17,637 715 557 18,909
Stock options exercised 4,375 10 0 0 10
Issuance of stock through
Employee Stock Purchase Plan 98,939 166 0 0 166
Comprehensive loss:
Net loss 0 0 (349) 0 (349)
Translation Adjustment 0 0 0 (35) (35)
Cumulative translation gain
realized on sale of foreign subsidiary 0 0 0 (643) (643)
-----------------
Total comprehensive loss (1,027)
----------- ---------- ----------- ------------------ -----------------
Balance at December 30, 1999 7,290,165 17,813 366 (121) 18,058
Stock options exercised 93,612 288 0 0 288
Issue of stock through
Director Fee Plan 14,228 20 0 0 20
Issuance of stock through
Employee Stock Purchase Plan 96,537 171 0 0 171
Comprehensive loss:
Net loss 0 0 (529) 0 (529)
Translation adjustment 0 0 0 28 28
Unrealized gains on marketable 0 0 0 3 3
security
-----------------
Total comprehensive loss (498)
------------ ---------- ----------- ----------------- -----------------
Balance at December 28, 2000 7,494,542 $18,292 ($163) ($90) $18,039
============ ========== =========== ================= =================
See notes to consolidated financial statements.
Page 29
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Data I/O-Registered Trademark- Corporation ("Data I/O" or the "Company") is
engaged in the design, manufacture, and sale of programming systems that are
used by designers and manufacturers of electronic products. The Company's
programming system products are used to program integrated circuits ("ICs" or
"devices" or "semiconductors") with the specific unique data for the product
within which the ICs will be used. Customers for the Company's programming
system products are located around the world, primarily in the United States,
Europe and the Far East. The Company's manufacturing operations are currently
located in the United States and Germany. Manufacturing of the Company's Sprint
non-automated programming systems is provided by an outside supplier located in
Germany.
During 1997, the Company disposed of its Semiconductor Equipment and Synario
Design Automation Divisions, which removed Electronic Design Software (EDA)
software products and semiconductor equipment products from the Company's
product offerings. See Note 4 - Discontinued Operations.
As a result of its significant product development, customer support, and
selling and marketing efforts, the Company has required substantial working
capital to fund its operations. Management believes that the Company has
sufficient working capital available under its operating plan to fund its
operations and capital requirements through at least December 31, 2001. Any
substantial inability to achieve the current business plan could have a material
adverse impact on the Company's financial position, liquidity, or result of
operations and may require the Company to reduce expenditures and/or seek
additional financing to enable it to continue operations through December 31,
2001.
Principles of Consolidation
The consolidated financial statements include the accounts of Data I/O
Corporation and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reporting Period
The Company reports on a fifty-two, fifty-three week basis. Results of
operations for 2000 and 1999 are for a fifty-two week period, whereas results
for 1998 are for a fifty-three week period.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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.
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of the Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation. Accordingly, the Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation cost for stock options is measured as the excess,
if any, of the fair value of the Company's Common Stock at the date of the grant
over the stock option price.
Page 30
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the exchange
rate on the balance sheet date. Revenues, costs and expenses of foreign
subsidiaries are translated at average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are charged or
credited to stockholders' equity, net of taxes. Realized and unrealized gains
and losses resulting from the effects of changes in exchange rates on assets and
liabilities denominated in foreign currencies are included in non-operating
expense as foreign currency transaction gains and losses.
In an effort to minimize the effect of exchange rate fluctuations on the results
of its operations, the Company hedges portions of its foreign currency exposure
through the use of forward exchange contracts, none of which are speculative. At
December 28, 2000, the Company had approximately $3,335,000 in six foreign
exchange contracts outstanding, the fair value of which was a loss of $186,000.
The contract terms are 60-167 days. The hedges are perfectly effective, as
currency, settlement date and amount of the underlying receivables and of the
forward contracts coincide, and as spot rates are the same for both the hedge
and the hedged item.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with maturities of three
months or less at date of purchase.
Marketable Securities
The Company generally invests in high-grade commercial paper with original
maturities of twelve months or less and conservative money market funds, all of
which are classified as available-for-sale and recorded at fair value, as
defined below. Unrealized holding gains and losses are recorded, net of any tax
effect, as a component of accumulated other comprehensive income (loss) within
stockholders' equity. Interest earned is reported in non-operating income as
interest income. Marketable securities are classified in the balance sheet as
current and noncurrent based on maturity dates and the Company's expectation of
sales and redemptions in the following year.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, marketable securities and forward
exchange contracts approximates fair value. The fair value of the Company's
marketable securities is based upon the quoted market price on the last business
day of the fiscal year plus accrued interest, if any.
Inventories
Inventories are stated at the lower of cost or market with cost being the
currently adjusted standard cost, which approximates cost on a first-in,
first-out basis.
Property, Plant and Equipment
Property, plant and equipment, including leasehold improvements, are stated at
cost and depreciation is calculated over the estimated useful lives of the
related assets or lease terms on the straight-line basis. Substantially all
manufacturing and office equipment is depreciated over periods of three to seven
years.
Revenue Recognition
Sales of the Company's semiconductor programming equipment products requiring
installation by the Company that is other than perfunctory are recorded when
installation is complete, or at the later of customer acceptance or
installation, if an acceptance clause is specified in the sales terms. Revenue
from other product sales is recognized at the time of shipment. Revenue from the
sale of service and update contracts is recorded as deferred revenue and
recognized on a straight-line basis over the contractual period.
Page 31
The Company previously recognized revenue from product sales at the time of
shipment, or at customer acceptance, if an acceptance clause was specified in
the sales terms. Effective December 31, 1999, the Company changed its method of
accounting for product sales requiring Company installation, when installation
is other than perfunctory, to recognize such revenues when installation is
complete, or at the later of customer acceptance or installation, if an
acceptance clause is specified in the sales terms. The Company believes the
change in accounting principle is preferable based on guidance provided in SEC
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The cumulative effect on prior years resulted in a charge to income
of $2,531,000 (or $0.34 per share, basic and diluted). The effect of the change
on the year ended December 28, 2000 was to increase income before the cumulative
effect of the accounting change by $2.3 million ($0.31 per share, basic and
diluted) in 2000, and to decrease income by $2.5 million ($0.35 per share, basic
and diluted) in 1999. There was no tax impact as of a result of the change in
accounting principle, as all affected jurisdictions have net operating loss
carryforwards.
The Company recognized $58,000 in revenue in the quarter ended March 30, 2000,
$2,936,000 in revenue in the quarter ended June 29, 2000 and $1,643,000 in
revenue in the quarter ended September 28, 2000, that was included in the
cumulative effect adjustment as of December 31, 1999. The effect of that revenue
was to increase income by $34,000 in the first quarter, by $1,736,000 in the
second quarter and by $761,000 in the third quarter of 2000.
Research and Development
Research and development costs are expensed as incurred.
Advertising Expense
The Company expenses advertising costs as incurred. Total advertising expenses
related to continuing operations were $904,000, $1,212,000 and $1,121,000 in
2000, 1999, and 1998, respectively.
Warranty Expense
The Company warrants its products against defects for periods ranging from
ninety days to one year. The Company provides currently for the estimated cost
that may be incurred under its product warranties.
Earnings (Loss) Per Share
Basic earnings per share exclude any dilutive effects of stock options. Basic
earnings per share are computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per share are computed
using the weighted-average number of common shares and common stock equivalent
shares outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is antidilutive.
Diversification of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of trade receivables. The Company's cash, cash
equivalents and marketable securities consist of high quality financial
instruments. The Company's trade receivables are geographically dispersed and
include customers in many different industries. Management believes that any
risk of loss is significantly reduced due to the diversity of its end-customers
and geographic sales areas; however, of the trade accounts receivable at
December 28, 2000, 24% are due from a single customer. The Company performs
on-going credit evaluations of its customers' financial condition and requires
collateral, such as letters of credit and bank guarantees, whenever deemed
necessary.
Page 32
Derivatives
In June 1998, the Company adopted SFAS No. 133, Accounting for Derivatives and
Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments and requires recognition of derivatives as
assets or liabilities in the statement of financial position and measurement of
those instruments at fair value. The adoption of this standard by the Company
did not materially impact its consolidated financial statements.
The Company utilizes forward foreign exchange contracts to reduce the impact of
foreign currency exchange rate risks where natural hedging strategies cannot be
effectively employed. All hedging instruments held by the Company are fair value
hedges. Generally, these contracts have maturities less than one year and
require the Company to exchange foreign currencies for U.S. dollars at maturity.
The fair value of open hedge contracts as of December 28, 2000 is a loss of
$186,000 and is included in accounts payable on the balance sheet.
The Company does not hold or issue derivative financial instruments for trading
purposes. The purpose of the Company's hedging activities is to reduce the risk
that the eventual cash flows of the underlying assets, liabilities and firm
commitments will be adversely affected by changes in exchange rates. The
Company's derivative activities do not create foreign currency exchange rate
risk because fluctuations in the value of the instruments used for hedging
purposes are offset by fluctuations in the value of the underlying exposures
being hedged. The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to forward exchange contracts. However, the
Company has entered into these instruments with creditworthy financial
institutions and considers the risk of nonperformance to be remote.
NOTE 2 PROVISION FOR BUSINESS RESTRUCTURING
During the third quarter of 1998, the Company recorded a restructuring charge of
$2.0 million as the Company began the implementation of a plan to restructure
its Redmond and foreign subsidiary operations to a level more in line with the
lower sales it was experiencing. During the fourth quarter of 1998, the Company
recorded further restructuring charges of $2.4 million related to the continuing
restructure of the Company's Redmond operations and foreign subsidiaries and
related to activities directly associated with the fourth quarter 1998
acquisition of SMS Holding GmbH ("SMS," see Note 3 - Acquisition of SMS Holding
GmbH). The acquisition of SMS created certain redundancies in product offerings
and in the operations of the combined company. A restructuring plan was
implemented after the acquisition was completed to eliminate such redundant
operations and to phase out overlapping products.
An analysis of the restructuring is as follows (in thousands):
Reserve Reserve Reserve
Balance at 1999 Balance at 2000 Balance at
Description 12/31/98 Activity 12/30/99 Activity 12/28/00
---------------- ----------------- ---------- ------------- ----------- --------------
Downsizing U.S. Operations:
Employee severance $1,050 $1,024 $ 26 $26 $ 0
Fixed asset write-offs 269 218 51 51 0
Redmond facility consolidation and abandonment 256 108 148 41 107
Supplier-related settlements 249 249 0 0 0
Consulting and legal expenses 22 22 0 0 0
Other 14 14 0 0 0
Downsizing foreign subsidiaries 479 211 268 258 10
----------------- ---------- ------------- ----------- --------------
Total $2,339 $1,846 $493 $376 $117
================= ========== ============= =========== ==============
Page 33
Many of the costs associated with the reduction of work force were paid during
the fourth quarter 1998 and first quarter 1999. The total number of employees
terminated due to the restructure was 133 (approximately 39% of the total
workforce), which was lower than originally planned in 1998 due to the reduction
in the scale of the Company's manufacturing outsourcing plans. Employees were
terminated from almost all areas of the Company.
In the table above, the 1999 activity primarily represents actual amounts paid
out. However, because certain categories of the original reserve established in
1998 have proven to cost more than the original estimate, such as the facility
abandonment related to the Company's leased Redmond facility, and certain
categories have proven to cost less than the original estimate, such as the
fixed asset write-offs related to the manufacturing outsourcing program,
portions of the reserve have also been reclassified between categories.
Furthermore, during the first quarter of 1999, due in large part to the
Company's settlement of certain supplier related claims for less than had been
anticipated, reserves of approximately $215,000 were reversed. The remaining
reserves outstanding at December 28, 2000 relate primarily to facility
abandonment.
The amounts shown for 2000 activity were paid out in 2000 with the exception of
$255,000 for the downsizing of foreign subsidiaries. This amount was released
into income in 2000, primarily because costs accrued to abandon leased property
and return leased property to its original condition were not required.
Related primarily to its restructuring plan, the Company recorded inventory
reserves during the third and fourth quarters of 1998 of approximately $4.6
million on products that were discontinued as a result of the business
restructuring. The related charges were included in cost of goods sold.
NOTE 3 - ACQUISITION of SMS Holding GMBH
In November 1998, the Company acquired SMS Holding GmbH ("SMS"), a privately
held programming equipment company located in Wangen, Germany. The acquisition
was accounted for using the purchase method of accounting with the Company
paying $5,224,000 in cash, including $456,000 of direct acquisition costs. Net
assets acquired included working capital and other assets of $294,000 and
capitalized technology and other intangible assets of $2,971,000 which are being
amortized over their estimated useful lives of 3 to 5 years on a straight-line
basis. The Company recorded a charge in the fourth quarter 1998 of approximately
$1,959,000 for in-process research and development relating to the acquisition.
NOTE 4 - DISCONTINUED OPERATIONS
In November 1997, the Company sold the assets of its Semiconductor Manufacturing
Equipment Division, Reel-Tech-Registered Trademark- Inc., to General Scanning
Inc., for $15.5 million, consisting of $12 million in cash, $2 million in stock
and $1.5 million in assumed liabilities. The consolidated financial statements
include the results of operations of Reel-Tech, Inc. since the acquisition of
this business on August 31, 1995. Also in November 1997, the Company entered
into a licensing agreement and an agreement to sell certain assets of its
Synario-Registered Trademark- Design Automation Division. Under this licensing
agreement, the Company's Electronic Design Automation (EDA) products were to be
integrated and sold with the EDA product line of MINC Incorporated. This
transaction discontinued the Synario Design Automation Division operations of
the Company. Although the Company was entitled to receive certain licensing,
source code and training and support services revenues related to certain of its
former SDAD products through December 31, 1999, during the second quarter 1999
the Company closed final settlements and transfer of its retained licensing
rights. In the fourth quarter of 2000, $90,000 was reversed from a previously
established accrual to reflect that the amount established in 1997 related to
royalties would not be fully utilized.
The income from operations of these discontinued segments has been accounted for
as discontinued operations, and accordingly, their operations are segregated in
the accompanying statements of operations. Operating results of the discontinued
segments and the gain (loss) on the sale of these segments are as follows:
Page 34
Semiconductor Equipment Division
Year Ended December
------------------------------------------------------------
(in thousands) 2000 1999 1998 1997
----------- ----------- ----------- -----------
Net sales (as previously reported) $ 0 $ 0 $ 0 $7,640
=========== =========== =========== ===========
Income from operations before income taxes 0 0 0 926
Income tax expense 0 0 0 0
----------- ----------- ----------- -----------
Income from operations 0 0 0 926
----------- ----------- ----------- -----------
Gain (loss) on disposal before income taxes 0 0 (25) 10,422
Income tax expense 0 0 (2,093)
(240)
----------- ---------- ----------- -----------
Gain (loss) on disposal 0 0 (265) 8,329
----------- ---------- ----------- -----------
Total income (loss) from discontinued segment $ 0 $ 0 ($265) $9,255
=========== ========== =========== ===========
Synario Design Automation Division Year Ended December
---------------------------------------- ------------------------------------------------------------
(in thousands) 2000 1999 1998 1997
----------- --------- ----------- -----------
Net sales (1) (as previously reported) $ 0 $944 $1,381 $7,172
=========== ========== =========== ===========
Income (loss) from operations before income taxes 90 831 1,344 (2,088)
Income tax benefit 0 0 0 730
----------- ---------- ----------- -----------
Income (loss) from operations $ 90 $831 $1,344 (1,358)
----------- ---------- ----------- -----------
Gain/(loss) on disposal before income taxes 0 0 (185) (1,205)
Income tax benefit 0 0 0 422
----------- ---------- ----------- -----------
Gain/(loss) on disposal 0 0 (185) (783)
----------- ---------- ----------- -----------
Total income (loss) from discontinued segment $ 90 $831 $1,159 ($2,141)
=========== ========== =========== ===========
(1) All 1999 and 1998 net sales are for retained licensing rights.
1997 net sales includes $851,000 retained licensing rights
recognized after the disposition in 1997.
NOTE 5 - MARKETABLE SECURITIES
The estimated fair value of marketable securities consisted of the following
(in thousands):
Dec. 28, Dec. 30,
2000 1999
------------- -------------
Corporate bonds $ 415 $3,536
Medium- and short-term notes 340 2,576
Euro-dollar bonds 1,189 3,018
Zero coupon bonds 0 484
------------- -------------
$1,944 $9,614
============= =============
Page 35
At December 28, 2000, cost approximated market value for the Company's portfolio
of marketable securities and there were no significant unrealized gains or
losses. Market value as of the balance sheet date is estimated based on the
interest rate carried on the investment instrument and the current interest
rate. The cost of securities sold is determined by the specific identification
method.
NOTE 6 - INVENTORIES
Net inventories consisted of the following components (in thousands):
Dec. 28, Dec. 30,
2000 1999
-------------- --------------
Raw material $4,526 $2,567
Work-in-process 2,756 1,665
Finished goods 1,884 2,005
-------------- --------------
$9,166 $6,237
============== ==============
Reserves for excess and obsolete inventory are $2,587,000 and $4,569,000 at
December 28, 2000 and December 30, 1999, respectively. Freight expense for
incoming raw materials and freight out for product shipments is charged to cost
of goods sold.
Certain parts used in our products are currently available from either a single
supplier or from a limited number of suppliers. If we cannot develop alternative
sources for these components, or if we experience deterioration in our
relationship with these suppliers, there may be delays or reductions in product
introductions or shipments, which may materially adversely affect our operating
results.
Because we rely on a small number of suppliers for certain parts, we are subject
to possible price increases by these suppliers. Also, we may be unable to
accurately forecast our production schedule. If we underestimate our production
schedule, suppliers may be unable to meet our demand for components. This delay
in the supply of key components may materially adversely affect our business.
The non-automated programming system products we acquired when we acquired SMS
in November 1998 are currently manufactured to our specifications by a
third-party contract manufacturer. We may not be able to obtain a sufficient
quantity of these products if and when needed, which may result in lost sales.
NOTE 7 - SALE OF LAND
In May 1997, the Company completed the sale of the land and building comprising
its Redmond, Washington, corporate headquarters for $13.8 million, less net
transaction-related expenses and reimbursements of approximately $400,000. The
sale includes a 10-year leaseback of the building to the Company, with an option
to renew the lease for an additional 10 years. The Company realized $12 million
in cash after payment of transaction fees and taxes. The sale represented an
overall pre-tax gain to the Company of $5.6 million. Of this amount, $2.3
million was recognized in 1997, with the remainder to be amortized over the life
of the lease.
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Dec. 28, Dec. 30,
2000 1999
-------------- --------------
Building and improvements $ 205 $ 179
Equipment 12,703 12,030
-------------- --------------
12,908 12,209
Less accumulated depreciation 10,718 10,029
-------------- --------------
Property, plant and equipment - net $ 2,190 $2,180
============== ==============
Page 36
Total depreciation recorded for 2000, 1999 and 1998 was $1,036,000, $1,084,000,
and $1,678,000 respectively.
NOTE 9 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
Dec. 28, Dec. 30,
2000 1999
-------------- --------------
Long-term lease $ 66 $ 0
Investment in product lines: SMS 3,272 3,272
3,338 3,272
Less accumulated a 2,187 1,148
-------------- --------------
Other assets $ 1,151 $2,124
============== ==============
Total amortization recorded for 2000, 1999 and 1998 was $1,038,000, $1,061,000,
and $399,000 respectively.
Investment in Product Lines: SMS
In November 1998, the Company acquired SMS Holding GmbH (see Note 3 -
Acquisition of SMS Holding GmbH). In related transactions, the Company acquired
a license to the technology, manufacturing and worldwide distribution rights to
Unmanned Solutions' AH 400 robotic handler, which is used in the SMS fine pitch
automated programming system. Of the total acquisition costs of these
transactions, approximately $3.3 million of developed technology and other
various intangible assets are reported as Other Assets in the accompanying
balance sheets and are being amortized ratably over the economic life of the
specific assets acquired (three to five years). The net book value of the assets
capitalized in Other Assets related to this acquisition is $1.2 million and $2.1
million at December 28, 2000 and December 30, 1999, respectively.
Investment in JTAG Technologies
In April 1998, the Company signed an agreement for a strategic alliance with
JTAG Technologies; a Netherlands-based manufacturer and developer of boundary
scan test and programming solutions. Under the terms of the agreement, the
Company purchased a one-third interest in JTAG Technologies for approximately
$979,000, and began selling in-system programming products under the Data I/O
name. During the second quarter of 1999 the Company sold its minority interest
in JTAG Technologies back to JTAG Holdings BV for $1,067,000 and recognized a
gain on disposal of $85,000. At that time the Company also terminated its
distribution agreement with JTAG due to the Company's low sales volume of JTAG
products.
NOTE 10 - COMMITMENTS
The Company has commitments under non-cancelable operating leases and other
agreements, primarily for factory and office space, with initial or remaining
terms of one year or more are as follows (in thousands):
2001 $1,263
2002 1,321
2003 1,318
2004 1,284
2005 1,277
Thereafter 1,570
-------------
Total $8,033
=============
Lease and rental expense was $1,348,000, $1,383,000, and $1,335,000 in 2000,
1999 and 1998, respectively. The Company has renewal options on substantially
all of its major leases. The initial lease on the Redmond facility expires on
December 31, 2006. So long as the Company is not in material default of the
terms of the lease nor has there been a material adverse change in the financial
condition of the Company, then the Company has the option to extend the lease
for an additional five years on the same terms as the balance of the lease,
Page 37
except the rent shall be at the then prevailing fair market rental rate. The
Company will also have the right for a second five-year extension by giving
written notice at least six months prior to the end of the first extension.
As part of its restructuring plan implementation, the Company vacated one floor
of its leased Redmond facility (approximately 25,000 square feet) and has sublet
the majority of this space for a period of 28 months beginning January 1, 2000.
This sublease income of approximately $33,000 per month is not reflected in the
table above.
NOTE 11 - STOCK AND RETIREMENT PLANS
Stock Option Plans
At December 28, 2000, there were 1,419,623 shares of common stock reserved for
issuance of which 290,873 shares are available for future grant under the
Company's employee stock option plans. Pursuant to these plans, options are
granted to officers and key employees of the Company with exercise prices equal
to the fair market value of the common stock at the date of grant and generally
vest over four years. Certain options granted during 1998 and 1999 vest over two
years. Options granted under the plans generally have a maximum term of six
years from the date of grant except for certain options granted in January 1999
that have a maximum term of ten years.
On May 19, 2000, the shareholders of the Company approved the 2000 Stock
Incentive Compensation Plan which provides for the issuance of up to an
additional 300,000 shares of common stock pursuant to incentive stock options,
nonqualified stock options, stock appreciation rights, stock awards, or other
stock-based awards.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, eligible employees may purchase shares
of the Company's common stock at six-month intervals at 85% of the lower of the
fair market value on the first or the last day of each six-month period.
Employees may purchase shares having a value not exceeding 10% of their gross
compensation during an offering period. During 2000, 1999 and 1998 a total of
96,537, 98,939 and 72,133 shares, respectively, were purchased under the plan at
average prices of $1.78, $1.69 and $3.58 per share, respectively. At December
28, 2000, a total of 137,203 shares were reserved for future issuance.
Stock Appreciation Rights Plan
The Company has a Stock Appreciation Rights Plan ("SAR") under which each
director, executive officer or holder of 10% or more of the Company's common
stock has a SAR with respect to each exercisable stock option. The SAR entitles
the SAR holder to receive cash from the Company for the difference between the
market value of the stock and the exercise price of the option in lieu of
exercising the related option. SARs are only exercisable following a tender
offer or exchange offer for the Company's stock, or following approval by
stockholders of the Company of any merger, consolidation, reorganization or
other transaction providing for the conversion or exchange of more than 50% of
the common shares outstanding. As no event has occurred which would make the
SARs exercisable, and no such event is deemed probable, no compensation expense
has been recorded under this plan.
Director Fee Plan
The Company has a Director Fee Plan, which provides for payment to directors who
are not employees of Data I/O Corporation by delivery of shares of the Company's
common stock. For directors' service for 1999, a total of 14,228 shares were
issued under the plan at a weighted average price of $1.41. Such shares were
issued in the year following the year of service. No shares were issued from the
plan to directors for 2000 or 1998 board service. Compensation expense recorded
in 1999 related to the share issues was $20,000.
Retirement Savings Plan
The Company has a savings plan that qualifies as a cash or deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the plan,
participating U.S. employees may defer up to 17% of their pre-tax salary,
subject to IRS limitations. In fiscal years 2000, 1999 and 1998, the Company
contributed one dollar for each dollar contributed by a participant, with a
maximum contribution of 4% of a participant's earnings. The Company's matching
contribution expense for the savings plan was approximately $275,000, $262,000
and $315,000 in 2000, 1999 and 1998, respectively.
Page 38
Share Repurchase Program
Under a previously announced share repurchase program, the Company is authorized
to repurchase up to 1,123,800 shares (approximately 15.5%) of its outstanding
common stock. These purchases may be executed through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and may commence or be discontinued at any time. As of December
28, 2000, the Company has repurchased 1,016,200 shares under this repurchase
program at a total cost of approximately $7.1 million. The Company has not
repurchased shares under this plan since the second quarter of 1997, although it
still has the authority to do so.
NOTE 12 - STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options, employee stock purchase plan options and directors' fee
shares under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option-pricing
model with the following weighted-average assumptions:
Employee Stock Employee Stock Director
Options Purchase Plan Fee Plan
------------------------------- -------------------------------- -------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
--------- --------- --------- --------- --------- ---------- --------- --------- ---------
Risk-free interest rates 5.65% 5.66% 4.90% 5.94% 5.19% 5.48% 5.65% 5.66% 5.52%
Volatility factors 0.63 0.54 1.86 0.63 0.54 1.86 0.63 0.54 1.86
Expected life of the option
in years 4.31 5.48 5.02 0.5 0.50 0.50 1.00 1.00 5.13
Expected dividend yield None None None None None None None None None
For purposes of pro forma disclosures, the estimated fair value of the options
granted, which is estimated to be $2.05, $1.19 and $1.86 per share for 2000,
1999 and 1998, respectively, is amortized to expense over the options' vesting
period. During the phase in period of Statement 123, which has been applied only
for options granted after 1994, the effects of applying the Statement for
providing pro forma disclosure are not indicative of future amounts until the
new rules are applied to all outstanding nonvested awards.
The Company's pro forma information follows (in thousands, except per share
data):
Year Ended December
-------------------------------------------------
2000 1999 1998
--------------- ---------------- --------------
Net loss - as reported ($529) ($ 349) ($17,630)
Net loss - pro forma ($1,202) ($1,009) ($18,856)
Diluted loss per share - as reported ($0.07) ($0.05) ($2.46)
Diluted loss per share - pro forma ($0.16) ($0.14) ($2.64)
A summary of the Company's stock option activity, and related information
follows:
Page 39
December 28, 2000 December 30, 1999 December 31, 1998
--------------------------- -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------- -------------- -------------- -------------- -------------- --------------
Outstanding - beginning of year 946,325 $2.57 1,249,750 $3.51 917,000 $4.82
Granted 327,500 4.00 521,750 2.15 1,307,975 3.90
Exercised (99,877) 2.41 (4,375) 2.09 (55,000) 4.41
Expired or forfeited (45,198) 3.06 (820,800) 3.74 (920,225) 5.31
-------------- -------------- ------------
Outstanding - end of year 1,128,750 2.98 946,325 2.57 1,249,750 3.51
============== ============== ============
Exercisable at end of year 500,876 2.90 299,608 3.03 420,938 3.86
Options granted and expired include options that were repriced during 1998. In
August 1998, the Company canceled and regranted at a lower exercise price
469,125 options, which included most options that had an exercise price greater
than $3.60 at that time. The exercise price of those options regranted was
$3.48. In addition, in May 1998, the Company canceled and regranted 214,000
options granted to the CEO at the time of his hiring.
The following table summarizes information about stock options outstanding at
December 28, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices 12/28/00 Life in Years Price 12/28/00 Price
----------------- ------------------ ------------------- ---------------- ------------------
$1.33 - $1.75 225,000 4.15 $1.72 68,750 $1.70
$2.38 - $2.45 330,000 5.35 $2.42 201,250 $2.40
$2.63 - $3.47 185,750 5.92 $3.45 1,188 $3.00
$3.48 - $6.22 388,000 3.87 $3.97 231,688 $3.67
----------------- ----------------
$1.33 - $6.22 1,128,750 4.70 $2.98 500,876 $2.90
================= ================
During the first quarter of 1998, the Company recorded a stock-based
compensation charge of $540,000 related to the modification of stock options of
a former CEO of the Company. Additionally, during the second quarter of 1998,
the Company recorded an additional charge of $43,000 related to stock option
modifications.
NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Ending accumulated balances for each item in accumulated other comprehensive
loss are as follows:
(in thousands) December 28, December 30,
2000 1999
------------------- -----------------
Unrealized currency loss ($93) ($ 121)
Unrealized gain on marketable securities 3 0
------------------- -----------------
Total accumulated other comprehensive loss ($90) ($ 121)
Page 40
NOTE 14 - EARNINGS PER SHARE Earnings per share as presented on the statement of
operations exclude employee stock options that were antidilutive of 251,498,
20,516 and 70,489 in 2000, 1999 and 1998 respectively.
NOTE 15 - INCOME TAXES
Components of income (loss) from continuing operations before taxes:
Year Ended December
---------------------------------------------------
(in thousands) 2000 1999 1998
--------------- --------------- ----------------
U.S. operations $1,615 ($1,194) ($16,750)
Foreign operations 333 69 (1,716)
--------------- --------------- ----------------
$1,948 ($1,125) ($18,466)
=============== =============== ================
Income tax expense (benefit) consists of:
Current tax expense (benefit):
U.S. federal $ 0 ($ 398) ($ 2,719)
State 0 7 28
Foreign 36 55 58
--------------- --------------- ----------------
36 (336) (2,633)
Deferred tax expense (benefit) - U.S. federal 0 391 2,691
--------------- --------------- ----------------
Total income tax expense $ 36 $ 55 $ 58
=============== =============== ================
For federal income tax purposes, a deduction is received for stock option
compensation gains. The benefit of this deduction, which is recorded in common
stock, was $78,000, $1,000, and $35,000 in 2000, 1999 and 1998, respectively.
A reconciliation of the Company's effective income tax rate and the U.S.federal
tax rate is as follows:
Year Ended December
----------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Statutory rate 34.0% (34.0%) (34.0%)
Foreign Sales Corporation tax benefit (5.3) (3.1) (0.7)
State and foreign income tax, net of
federal income tax benefit 0.3 (9.3) 2.0
Valuation allowance for deferred tax assets (27.9) 32.2 32.9
Stock based compensation expense 0 17.6 0
Other 0.7 1.5 0.1
--------------- --------------- ---------------
1.8% 4.9% 0.3%
=============== =============== ===============
Page 41
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
Dec. 28, Dec. 30,
2000 1999
--------------- ----------------
Deferred income tax assets:
Allowance for doubtful accounts $ 95 $ 95
Inventory and product return reserves 1,610 2,346
Compensation accruals 195 171
Accrued liabilities 1,217 1,245
Book-over-tax depreciation and amortization 815 753
Foreign net operating loss carryforwards 0 1,171
US net operating loss carryforwards and credit carryforwards 2,702 989
Other, net 348 146
--------------- ----------------
6,982 6,916
Valuation allowance (6,982) (6,916)
--------------- ----------------
Total deferred income tax assets $ 0 $ 0
=============== ================
The valuation allowance for deferred tax assets increased $66,000 and $971,000
during the years ended December 28, 2000 and December 30, 1999 respectively, due
primarily to the taxable losses and to credit carryforwards generated in those
years. The net operating loss carryforwards include $230,000 of stock option
deductions. The net deferred tax assets have a full valuation allowance provided
due to uncertainty regarding the Company's ability to utilize such assets in
future years. Credit carryforwards consist primarily of research and development
and alternative minimum tax credits. Net operating loss carryforwards expire in
2020.
NOTE 16 - SEGMENT AND GEOGRAPHIC INFORMATION
Prior to 1998, Data I/O Corporation and its subsidiaries operated within three
major divisions: (1) electronic programming systems used by customers to handle,
program, test and mark programmable ICs (Programming Systems); (2) semiconductor
equipment used to handle, transport and mark integrated circuits (Reel-Tech);
and (3) electronic design automation software used to create designs for
programmable ICs (Synario Design Automation). The Reel-Tech and Synario Design
Automation Divisions were discontinued during 1997. See Note 4 - Discontinued
Operations for further discussion of these discontinued operations including
results of these operations.
In 2000 one customer accounted for 23% of the Compan's consolidated revenues. No
one customer accounted for more than 10% of the Company's revenues in 1999 and
1998. Major operations outside the U.S. include sales and service support
subsidiaries in Germany, and in Japan through February 1999. Sales and support
offices in China were established in the third quarter of 2000. The Company sold
its Japan sales and service subsidiary in February 1999 for a gain of $1,113,000
which was primarily non-cash.
Geographic information of the continuing operations for the three years ended
December 28, 2000 is presented in the table that follows. Net sales, as shown in
the table below, are based upon the geographic area into which the products were
sold and delivered. Export sales are subject to U.S. Department of Commerce
regulations, and to the market conditions in the countries in which the products
are sold. For purposes of the table below, the profit on the transfers between
geographic areas has been shown in operating income in the geographic area where
the final sale to non-affiliated customers took place. Certain general corporate
expenses are charged to the U.S. segment. Identifiable assets are those assets
that can be directly associated with a particular geographic area.
Page 42
Year Ended December
------------------------------------------------------------------
(in thousands) 2000 1999 1998
--------------- -------------- ----------------
Net sales:
U.S. $15,588 $14,330 $16,900
Europe 19,678 12,598 9,533
Rest of World 7,643 7,185 8,905
--------------- -------------- ----------------
$42,909 $34,113 $35,338
=============== ============== ================
Operating income (loss) from continuing operations:
U.S. ($3,070) ($2,637) ($14,839)
Europe 3,968 ( 68) ( 2,838)
Rest of World 174 ( 340) ( 1,741)
--------------- -------------- ----------------
$1,072 ($3,045) ($19,418)
=============== ============== ================
Identifiable assets of the continuing operations:
U.S. $17,808 $24,077 $31,097
Europe 7,692 4,232 5,702
Rest of World 3,246 1,741 3,290
--------------- -------------- ----------------
$28,746 $30,050 $40,089
=============== ============== ================
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth unaudited selected quarterly financial data for
the Company for 2000 and 1999. Although the Company's business is not seasonal,
growth rates of sales and earnings have varied from quarter to quarter as a
result of factors such as stocking orders from international distributors, the
timing of new product introductions, business acquisitions and dispositions,
business restructuring, and short-term industry and general U.S. and
international economic conditions. Information as to any one or more quarters
is, therefore, not necessarily indicative of trends in the Company's business or
profitability.
(in thousands except per share data) Year Ended December 1999
-----------------------------------------------------------------
For the quarters ended Apr. 1(1) July 1(2) Sept. 30 Dec. 30
(2)
------------- ------------- ------------- -------------
Net sales $7,758 $8,939 $9,439 $7,977
Gross margin 3,657 4,463 4,035 4,010
Income (loss) from continuing operations 38 (104) (540) (574)
Income from discontinued operations 326 505 0 0
Net income (loss) 364 401 (540) (574)
Diluted earnings (loss) per share from continuing
operations (3) ($ 0.01) ($ 0.01) ($ 0.07) ($ 0.08)
Diluted earnings (loss) per share (3) $ 0.05 $ 0.06 ($ 0.07) ($ 0.08)
Page 43
(in thousands except per share data) Year Ended December 2000
-----------------------------------------------------------------
For the quarters ended: Mar. 30 Mar. 30 June 28 June 28
------------- ------------- ------------- -------------
As As As As
previously Restated (4) previously Restated (4)
reported reported
------------- ------------- ------------- -------------
Net sales $6,602 $5,630 $10,128 $14,094
Gross margin 2,658 2,248 4,593 6,774
Income from continuing operations before cumu-
lative effect of change in accounting principle (2,127) (2,536) (214) 1,966
Income from discontinued operations 0 0 0 0
Cumulative effect of change in accounting
principle 0 (2,531) 0 0
Net income (loss) (2,140) (5,080) (231) 1,949
Diluted loss per share from continuing
operations (3) ($0.29) ($0.35) ($0.03) $0.27
Diluted loss per share (3) ($0.09) ($0.70) ($0.03) $0.26
(in thousands except per share data) Year Ended December 2000
-----------------------------------------------------------------
For the quarters ended: Sept. 28 Sept. 28 Dec. 28
------------- ------------- -------------
As As As
previously Restated (4) Reported
reported
------------- ------------- -------------
Net sales $11,338 $12,981 $10,204
Gross margin 5,375 6,136 4,991
Income from continuing operations before cumu- 735 1,495 1,023
lative effect of change in accounting
principle
Income from discontinued operations 0 0 90
Cumulative effect of change in accounting
principle 0 0 0
Net income (loss) 731 1,491 1,111
Diluted earnings per share from continuing
operations (3) $0.10 $0.20 $0.20
Diluted earnings per share (3) $0.10 $0.20 $0.20
(1) During the first quarter of 1999, the Company sold its Japan sales
subsidiary to Synchro-Work Corporation, one of its sub-distributors in
Japan, for total consideration of approximately $100,000. The sale
resulted in a gain before taxes of approximately $1.1 million primarily
due to previously unrecognized accumulated currency translation.
(2) During the first and second quarters of 1999, the Company realized
licensing revenues related to its Synario Design Automation Division. This
Division was disposed of during 1997, however certain licensing rights
were retained. Related to these licensing revenues the Company recognized
net earnings of $326,000 and $505,000 in the first and second quarters,
respectively.
(3) The sum of quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted-average shares outstanding and the effects of rounding for each
period.
(4) The restatement is due to the Company's adoption of SAB 101.
Page 44
NOTE 18 - LONG-TERM DEBT
The Company has a 600,000 German Mark line of credit maturing in December 2002
with a rate of 8.5%. Nothing was borrowed against the line of credit as of
December 28, 2000 and the Company has no long-term debt outstanding.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the Registrant's directors is set forth under "Election of
Directors" in the Company's Proxy Statement relating to the Company's annual
meeting of shareholders to be held on May 16, 2001 and is incorporated herein by
reference. Such Proxy Statement will be filed within 120 days of the Company's
year-end. Information regarding the Registrant's executive officers is set forth
in Item 1 of Part I herein under the caption "Executive Officers of the
Registrant."
Item 11. Executive Compensation
Information called for by Part III, Item 11, is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
May 16, 2001 and is incorporated herein by reference. The information appears in
the Proxy Statement under the caption "Executive Compensation." Such Proxy
Statement will be filed within 120 days of the Company's year-end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by Part III, Item 12, is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
May 16, 2001 and is incorporated herein by reference. The information appears in
the Proxy Statement under the caption "Voting Securities and Principal Holders."
Such Proxy Statement will be filed within 120 days of the Company's year-end.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Executive Compensation Plans and Arrangements
The following list is a subset of the list of exhibits described below and
contains all compensatory plans, contracts or arrangements in which any director
or executive officer of the Company is a participant, unless the method of
allocation of benefits thereunder is the same for management and non-management
participants:
(1) Amended and Restated 1982 Employee Stock Purchase Plan. See Exhibit 10.7.
(2) Retirement Plan and Trust Agreement. See Exhibit 10.2, 10.3, 10.4, 10.12,
10.15, 10.16, and 10.17.
(3) Summary of Management Incentive Compensation Plan. See Exhibit 10.13.
(4) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1.
(5) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.18 and 10.27.
(6) Form of Change in Control Agreements. See Exhibit 10.5.
(7) 1996 Director Fee Plan. See Exhibit 10.6 and 10.20.
(8) Separation Agreement with William C. Erxleben. See Exhibit 10.21.
(9) Consulting Agreement with William C. Erxleben. See Exhibit 10.22.
(10) Service Agreement with Helmut Adamski. See Exhibit 10.28.
Page 45
(11) Employment Agreement with Helmut Adamski. See Exhibit 10.29.
(12) Letter Agreement with Jim Rounds. See exhibit 10.31.
(13) Letter Agreement with David C. Bullis as amended and supplemented.
See exhibit 10.32.
(14) Letter Agreement with Frederick R. Hume. See exhibit 10.35.
(a) List of Documents Filed as a Part of This Report: Page
(1) Index to Financial Statements:
Report of Ernst & Young LLP, Independent Auditors 24
Report of Management 24
Consolidated Balance Sheets as of December 28, 2000 25
and December 30, 1999
Consolidated Statements of Operations for each of 26
the three years ended December 28, 2000
Consolidated Statements of Cash Flows for each of 28
the three years ended December 28, 2000
Consolidated Statements of Stockholders' Equity for 28
each of the three years ended December 28, 2000
Notes to Consolidated Financial Statements 29
(2) Index to Financial Statement Schedules:
Schedule II - Consolidated Valuation and Qualifying Accounts 51
All other schedules not listed above have been omitted
because the required information is included in the
consolidated financial statements or the notes thereto,
or is not applicable or required.
(3) Index to Exhibits:
Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession:
2.1 Subsidiary Technology Purchase Agreement dated as
of November 19, 1998 between SMS-Mikrocomputer-Systeme
GmbH and Data I/O Corporation (Incorporated by reference
to Exhibit 2.1 of the Company's 1998 Annual Report on
Form 10-K (File No. 0-10394)). N/A
2.2 Excalibur Technology Purchase Agreement dated as
of November 19, 1998 between SMS Holding GmbH and
Data I/O Corporation (Incorporated by reference to
Exhibit 2.2 of the Company"s 1998 Annual Report on
Form 10-K (File No. 0-10394)). N/A
2.3 Agreement Of Purchase And Transfer Of GmbH Shares
dated as of November 19, 1998 among Data I/O Corporation,
Data I/O European Operations GmbH and Shareholders of SMS
Holding GmbH (Incorporated by reference to Exhibit 2.3
of the Company's 1998 Annual Report on Form 10-K
(File No. 0-10394)). N/A
2.4 Amended and restated OEM Agreement dated December 16, 1998
between Data I/O Corporation and Unmanned Solutions, Inc.
(Incorporated by reference to Exhibit 2.4 of the Company's
1998 Annual Report on Form 10-K (File No. 0-10394)). N/A
2.5 Support Agreement dated December 16, 1998 between
Data I/O Corporation and Unmanned Solutions, Inc.
(Incorporated by reference to Exhibit 2.5 of the
Company's 1998 Annual Report on Form 10-K
(File No. 0-10394)). N/A
Page 46
3 Articles of Incorporation:
3.1 The Company's restated Articles of Incorporation
filed November 2, 1987 (Incorporated by reference to
Exhibit 3.1 of the Company's 1987 Annual Report on
Form 10-K (File No. 0-10394)). N/A
3.2 The Company's Bylaws as amended and restated as
of February 7, 1999. N/A
3.3 Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 1 of the
Company's Registration Statement on Form
8-A filed March 13, 1998 (File No. 0-10394)). N/A
4 Instruments Defining the Rights of Security Holders,
Including Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between
Data I/O Corporation and ChaseMellon Shareholder
Services, L.L.C. as Rights Agent, which includes:
as Exhibit A thereto, the Form of Right Certificate;
and, as Exhibit B thereto, the Summary of Rights to
Purchase Series A Junior Participating Preferred Stock
(Incorporated by reference to the Company's Current
Report on Form 8-K filed on March 13, 1998). N/A
4.2 Rights Agreement, dated as of March 31, 1988,
between Data I/O Corporation and First Jersey
National Bank, as Rights Agent, as amended by
Amendment No. 1 thereto, dated as of May 28, 1992
and Amendment No. 2 thereto, dated as of July 16, 1997
(Incorporated by reference to the Company's current
Report on Form 8-K filed on March 13, 1998). N/A
4.3 Amendment No. 1, dated as of February 10, 1999, to
Rights Agreement, dated as of April 4, 1998, between
Data I/O Corporation and ChaseMellon Shareholder
Services, L.L.C. as Rights Agent (Incorporated by
reference to Exhibit 4.1 of the Company's Form 8-A/A
dated February 10, 1999). N/A
10 Material Contracts:
10.1 Amended and Restated 1983 Stock Appreciation
Rights Plan dated February 3, 1993 (Incorporated
by reference to Exhibit 10.23 of the Company's
1992 Annual Report on Form 10-K (File No.
0-10394)). N/A
10.2 Amended and Restated Retirement Plan and Trust
Agreement. (Incorporated by reference to Exhibit
10.26 of the Company's 1993 Annual Report on
Form 10K (File No. O-10394)). N/A
10.3 First Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.21 of the Company's 1994 Annual Report
on Form 10K (File No.0-10394)). N/A
10.4 Second Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.26 of the Company's 1995 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.5 Form of Change in Control Agreements (Incorporated
by reference to Exhibit 10.20 of the Company's 1994
Annual Report on Form 10K (File No. 0-10394)). N/A
10.6 Data I/O Corporation 1996 Director Fee Plan
(Incorporated by reference to Exhibit 10.27 of
the Company's 1995 Annual Report on Form 10K
(File No. 0-10394)). N/A
Page 47
10.7 Data I/O Corporation 1982 Employee Stock Purchase
Plan Amended and Restated December 11, 1996
(Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement of Form S-8
(File No. 333-20657, filed January 29, 1997)). N/A
10.8 Business Loan Agreement dated April 24, 1996,
with Seattle First National Bank for $8.0 million
(Incorporated by reference to Exhibit 10.30 of the
Company's 1996 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.9 Purchase and Sale Agreement dated as of July 9, 1996
(Relating to the sale of Data I/O Corporation's
headquarters property in Redmond, Washington
consisting of approximately 79 acres of land and an
approximately 96,000 square foot building. (Portions
of this exhibit have been omitted pursuant to an
application for an order granting confidential
treatment. The omitted portions have been separately
filed with the Commission) (Incorporated by reference
to Exhibit 10.32 of the Company's 1996 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.10 Letter dated as of December 20, 1996, First Amendment
and extension of the Closing Date under that certain
Purchase and Sale Agreement dated as of July 9, 1996.
(Portions of this exhibit have been omitted pursuant
to an application for an order granting confidential
treatment. The omitted portions have been separately
filed with the Commission) (Incorporated by reference
to Exhibit 10.33 of the Company's 1996 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.11 Letter dated as of February 17, 1997, Second
Amendment and extension of the Closing Date under
that certain Purchase and Sale Agreement dated as
of July 9, 1996.(Portions of this exhibit have been
omitted pursuant to an application for an order
granting confidential treatment. The omitted portions
have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.34 of the
Company's 1996 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.12 Third Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.35 of the Company's 1996 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.13 Amended and Restated Management Incentive
Compensation Plan dated January 1, 1997
(Incorporated by reference to Exhibit 10.25
of the Company's 1997 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.14 Amended and Restated Performance Bonus Plan dated
January 1, 1997 (Incorporated by reference to
Exhibit 10.26 of the Company's 1997 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.15 Fourth Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.27 of the Company's 1997 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.16 Fifth Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.28 of the Company's 1997 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.17 Sixth Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.29 of the Company's 1997 Annual Report
on Form 10K (File No. 0-10394)). N/A
Page 48
10.18 Amended and Restated 1986 Stock Option Plan
dated May 13, 1997 (Incorporated by reference
to Exhibit 10.30 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.19 Amendment, dated May 13, 1997, to the business
loan agreement dated April 24, 1996, with
Seattle First National Bank (Incorporated by
reference to Exhibit 10.31 of the Company's 1997
Annual Report on Form 10K (File No. 0-10394)). N/A
10.20 Amended and Restated Data I/O Corporation 1996
Director Fee Plan (Incorporated by reference to
Exhibit 10.32 of the Company's 1997 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.21 Separation Agreement with William C. Erxleben
(Incorporated by reference to Exhibit 10.33 of
the Company's 1997 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.22 Consulting Agreement with William C. Erxleben
(Incorporated by reference to Exhibit 10.35 of
the Company's 1997 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.23 Standstill Agreement, dated as of February 10, 1999,
among Data I/O Corporation, Bisco Industries, Inc.,
Bisco Industries, Inc. Profit Sharing and Savings
Plan, and Glen F. Ceiley (Incorporated by reference
to Exhibit 10.1 of the Company's Current Report on
Form 8-K dated February 12, 1999). N/A
10.24 Shareholders Agreement dated April 15, 1998 among
JTAG Technologies B.V., Data I/O Corporation,
Harry Bleeker and Peter Van Den Eijnden
(Incorporated by reference to Exhibit 2.1 of the
Company's quarterly report on Form 10Q/A dated
February 16, 1999). N/A
10.25 Amendment, dated December 31, 1998, to the business
loan agreement dated April 24, 1996, with Seattle
First National Bank, including promissory note
(Incorporated by reference to Exhibit 10.35 of the
Company's 1998 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.26 Security Agreement dated December 31, 1998, related
to the business loan agreement dated April 24, 1996
and amended December 31, 1998, with Seattle First
National Bank (Incorporated by reference to
Exhibit 10.36 of the Company's 1998 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.27 Amended and Restated 1986 Stock Option Plan dated
May 12, 1998 (Incorporated by reference to Exhibit
10.37 of the Company's 1998 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.28 Service Agreement dated November 19, 1998 between
SMS Holding GmbH and Helmut Adamski (Incorporated
by reference to Exhibit 10.38 of the Company's 1998
Annual Report on Form 10K (File No. 0-10394)). N/A
10.29 Employment Agreement dated November 19, 1998
between SMS Holding GmbH and Helmut Adamski
(Incorporated by reference to Exhibit 10.39
of the Company's 1998 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.30 Lease Agreement between Dipl. Ing. Hans Walter Ott
GmbH and SMS Holding GmbH (Incorporated by reference
to Exhibit 10.40 of the Company's 1998 Annual Report
on Form 10K (File No. 0-10394)). N/A
Page 49
10.31 Letter Agreement with Jim Rounds dated August 7, 1998
(Incorporated by reference to Exhibit 10.41 of the
Company's 1998 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.32 Letter Agreement with David C. Bullis dated
March 25, 1998 amended and supplemented by the
letter agreement dated August 19, 1998 (Incorporated
by reference to Exhibit 10.42 of the Company's 1998
Annual Report on Form 10K (File No. 0-10394)). N/A
10.33 Stock Purchase Agreement dated February 12, 1999
between Data I/O Corporation and Synchro-Work
Corporation. N/A
10.34 Sublease dated December 22, 1999 between Data I/O
Corporation and Imandi.com, Inc. N/A
10.35 Letter Agreement with Fred R. Hume dated
January 29, 1999. N/A
10.36 Letter Agreement dated May 28, 1999, among
Data I/O Corporation, JTAG Technologies B.V.,
and JTAG Holding B.V. N/A
10.37 Amendment, dated May 28, 1999, to the business
loan agreement dated April 24, 1996,
with Seattle First National Bank, and
Loan Modification Agreement, dated May 11, 1999,
to the Promissory Note dated December 22, 1998. N/A
21 Subsidiaries of the Registrant 52
23 Consent of Ernst & Young LLP, Independent Auditors 53
(b) Form 8-K:
None
DATA I/O CORPORATION
SCHEDULE II CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Charged/
(Credited)
Balance at to Costs Balance at
Beginning and Deductions- End of
of Period Expenses Describe Period
---------------- ---------------- --------------- --------------------
(in thousands)
Year Ended December 31, 1998:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $ 394 $ 94 ($ 43) (1) $ 445
Inventory reserves $1,648 4,529 (3) ($ 209) (2) $5,968
Year Ended December 30, 1999:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $ 445 $ 44 ($ 25) (1) $ 464
Inventory reserves $5,968 $ 502 (3) ( $1,901) (2) $4,569
Year Ended December 28, 2000:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $ 464 $ 24 ($ 138) (1) $ 350
Inventory reserves $4,569 $ 438 (3) ($ 2,420) (2) $2,587
(1) Uncollectable accounts written off, net of recoveries.
(2) Obsolete inventories disposed of.
(3) Primarily related to products that have been discontinued as a result of the
business restructuring implemented in 1998.
Page 50
EXHIBIT 21
DATA I/O CORPORATION
SUBSIDIARIES OF THE REGISTRANT
The following table indicates the name, jurisdiction of incorporation and basis
of ownership of each of the Company's subsidiaries:
State or Percentage
Jurisdiction of Voting
of Securities
Name of Subsidiary Organization Owned
Data I/O International, Inc. Washington 100%
Data I/O FSC International, Inc. Territory of Guam 100%
Data I/O Canada Corporation Canada 100%
Data I/O China, Ltd China 100%
Data I/O GmbH Germany 100%
RTD, Inc. (formerly Reel-Tech, Inc.) Washington 100%
SMS Mikrokomputer-Systeme GmbH Germany 100%
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Data I/O Corporation
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-20657 and No. No. 33-66824) pertaining to the Company's 1982
Employee Stock Purchase Plan and Director Fee Plan, and Registration
Statements Form S-8 No. 33-95608, No. 33-54422, No. 333-55911, No.33-02254,
No. 33-03958 and No. 333-48595) pertaining to the Company's 1986 Stock
Option Plan, of our report dated February 7, 2001, with respect to the
consolidated financial statements and schedule of Data I/O Corporation
included in its Annual Report (Form 10-K) for the year ended December 28, 2000.
//s//Ernst & Young LLP
Ernst & Young LLP
Seattle, Washington
March 27, 2001
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.
Page 51
DATA I/O CORPORATION
(REGISTRANT)
DATED: March 27, 2001 By: //S//Frederick R. Hume
Frederick R. Hume
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 27, 2000 by thefollowing persons on behalf of the
Registrant and in the capacities indicated.
NAME TITLE
By: //S//Frederick R. Hume President and Chief Executive Officer
Frederick R. Hume (Principal Executive Officer)
By: //S//Joel S. Hatlen Chief Financial Officer
Joel S. Hatlen Vice President of Finance
Secretary, Treasurer
Principal Financial and Accounting Officer)
By: //S//Keith L. Barnes Director
Keith L. Barnes
By: //S//Glen F. Ceiley Director
Glen F. Ceiley
By: //S//Paul A. Gary Director
Paul A. Gary
By: //S//Edward D. Lazowska Director
Edward D. Lazowska
Page 52