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 29, 1994 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, 98073-9746
(address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (206) 881-6444
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
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 1, 1995
$36,523,705
7,492,042 shares of no par value Common Stock outstanding as of March 1, 1995
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Proxy Statement relating to its May 16, 1995,
Annual Meeting of Stockholders are incorporated into Part III of this
annual report on Form 10-K.
Page 1 of 69
Exhibit Index on Page 43
DATA I/O CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1994
INDEX
Part I Page
- ------ ----
Item 1. Business 3
Item 2. Properties 14
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 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures 40
Part III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management 41
Item 13. Certain Relationships and Related Transactions 41
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 42
Signatures 50
Page 2
PART I
ITEM 1. BUSINESS
GENERAL
Data I/O [Registered Trademark] Corporation ("Data I/O" or the "Company") was
incorporated in the State of Washington in 1969. The Company manufactures
hardware and software products for users of programmable integrated circuits
("IC" or "ICs"). Within this one predominant business segment, the Company
offers two major product groups: (1) electronic programming systems
("Programming Systems") used by customers to handle, program, test and label
programmable ICs; and (2) Electronic Design Automation ("EDA") software
("Software") used to create designs for programmable ICs.
The Company is the world's leading provider of electronic programming systems
for programmable ICs. It markets products to more than 12,000 customers
worldwide in a broad range of industries including computers, communications,
test and measurement, medical, consumer electronics, military, transportation
and aerospace. All of these customers design or manufacture products which
incorporate programmable ICs.
INDUSTRY OVERVIEW
PROGRAMMABLE INTEGRATED CIRCUIT
GLOSSARY OF TERMS
- -----------------
IC INTEGRATED CIRCUIT which when used here refers only to the
programmable types of integrated circuits made by
semiconductor manufacturers.
PLD PROGRAMMABLE LOGIC DEVICE is a logic IC that can be
configured or programmed by a system designer.
CPLD COMPLEX PROGRAMMABLE LOGIC DEVICE is a logic IC that
contains multiple programmable logic cells and a
programmable interconnect structure between the cells.
FPGA FIELD PROGRAMMABLE GATE ARRAY is a sophisticated high-
capacity PLD.
PROM PROGRAMMABLE READ ONLY MEMORY is a memory IC that is a non-
volatile data storage IC meaning it can retain data when the
power is shut off.
EPROM ERASABLE PROM is a memory IC, which can be erased and
reused.
EEPROM ELECTRICALLY ERASABLE PROM is a memory IC that can be
electronically erased and reused.
Microcontroller An IC that is a processor containing programmable memory
within the IC.
Package Package refers to the physical shape, size and number and
arrangement of pins of an IC.
Pins Pins are the leads from the IC that connects the IC to the
circuitry on the printed circuit board.
Conventional
Through Hole IC An IC package where the pins are inserted through holes
drilled in the printed circuit board. An example is a DIP
(dual in line pin) package.
Surface-Mount IC An IC package where the leads from the IC connect to the
surface of the printed circuit board. Examples include PLCC
(plastic leaded chip carrier), SOIC (small outline IC) and
TSOP (thin small outline package).
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During the last 20 years, the semiconductor industry developed processes which
continually increased the number of functions and memory on a single chip of
silicon. These chips, called integrated circuits, are a tiny complex of
electronic components and their connections which come in two types: fixed or
programmable. The fixed type have a specific design incorporated during the
manufacture of the circuit that cannot be changed. This type can only perform
its specific predetermined fixed function.
A programmable IC is manufactured without a specific function incorporated in it
and allows the electronics design engineer to specify how he wants it to
perform. Programmable ICs are analogous to a blank cassette tape in that the
programmable IC can record and store a set of instructions the same way a blank
cassette tape can record and store music. Programmable ICs consist of either
memory or logic circuits. Programmable memory ICs are for non-volatile data
storage, meaning they retain data when the power supply to the circuit is off.
Memory ICs include PROMs, EPROMs and EEPROMs. Programmable logic ICs contain
logic elements by which the entire function of the IC can be changed by
programming changes to these elements. This means a given logic IC can perform
a variety of functions in an electronic device. The small size of programmable
logic elements allows design engineers to incorporate significantly more logic
and functionality into logic ICs. Types of logic ICs include PLDs, CPLDs and
FPGAs.
Today, some combination of programmable memory and logic ICs are found in
virtually all electronic equipment. Programmable memory ICs are used most
extensively for the permanent storage of software programs in instruments,
control systems, consumer electronic equipment, computers and computer
peripherals. Most microprocessor and microcomputer-based systems use some form
of programmable memory IC. These systems are increasingly using programmable
logic ICs as well. Programmable logic ICs and, specifically FPGAs, are one of
the fastest growing categories of ICs in the semiconductor industry, according
to industry sources.
Programmable memory and logic ICs are housed in several different types of
packages with a wide variety of sizes, shapes and number and arrangement of pins
to connect the IC to the circuit board. These numerous packages are combined
into two distinct groups: Conventional Through Hole ICs and Surface-Mount ICs.
Conventional Through Hole ICs have pins which are inserted through holes in a
circuit board and are soldered to the bottom of the board. Surface-Mount ICs
are very small and delicate packages that can be mounted onto the surface of a
circuit board without drilling holes through the circuit board for the IC pins.
This allows ICs to be mounted to both sides of the board, doubling the board's
"real estate" for ICs and circuitry.
The development of programmable ICs created the need for programming equipment
to load the instructions into the physical IC. To accommodate the expanding
variety of programmable ICs, programming equipment must have the capability to
program the TYPE of IC technology (how it physically accepts the information),
the specific IC's set of features and functions, while also accommodating the
IC's package type, including its specific size, pin arrangement and number of
pins. Data I/O's programming equipment supports the vast majority of the
thousands of different ICs presently on the market. Additionally, as the number
of programmable IC types and their applications expanded, and the ICs became
increasingly miniaturized, the demand for automated methods of handling,
programming, and labeling of ICs mushroomed. These ICs are increasingly being
used in high volume manufacturing situations as the cost of programmable ICs has
declined relative to fixed ICs and the competitive environment has caused the
time to market to be increasingly critical. Manufacturers' ability to get their
product's time-to-market shortened is improved with programmable ICs, as once
the design for the IC is finished it can be programmed immediately into the
programmable IC and changes can be readily made. This avoids the expensive and
time consuming process of setting up and fabricating the fixed type of ICs with
any changes requiring the process to start over again. Data I/O's automated
handling systems allow manufacturers to program in very high volumes numerous
types of ICs in a variety of packages.
ELECTRONIC DESIGN AUTOMATION SOFTWARE TOOLS
The evolution of programmable logic IC technology enabled engineers to fit an
increasing number of large, complex functions onto a single IC. This higher
level of integration reduced the size and cost, and increased the quality and
reliability, of the electronic systems using these ICs. With the adoption rate
and complexity of programmable logic ICs growing rapidly, design engineers need
software tools to speed the design process. Design engineers need to reduce
both the COST of designing with new ICs and the TIME-TO-MARKET for the systems
in which ICs are used. EDA tools span the entire electronic design process from
initial design through final test simulation. Data I/O's EDA software tools
allow the design engineer to describe their design's behavior using concise,
easy-to-understand expressions. The software then "prepares" the design for
implementation on a particular IC and stores the design in a standard format
that can be used by an IC programmer. The IC
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programmer records the design into the programmable IC, and the IC can then be
used in the particular product or system for which it was designed.
PRODUCTS
The table below details the contribution the Company's two principal product
groups made to total net sales for the last three fiscal years (in thousands of
dollars):
Programming Systems Software Total Sales
------------------------------ ----------------------------- ------------------
Percent Percent Percent Percent Percent
Year Amount Growth of Total Amount Growth of Total Amount Growth
---- ------ ------- -------- ------ ------- -------- ------ -------
1994 $53,455 (3.1%) 87.0% $8,023 (0.2%) 13.0% $61,478 (2.7%)
1993 55,147 (8.9%) 87.3% 8,039 (9.0%) 12.7% 63,186 (8.9%)
1992 60,507 2.8% 87.3% 8,830 3.4% 12.7% 69,337 2.9%
PROGRAMMING SYSTEMS
Data I/O's broad line of Programming Systems includes a wide variety of systems,
modules and accessories including both single-IC programmers, multiple-IC
("parallel") programmers, as well as automated handling systems which program,
handle, and label ICs in high volumes. With this broad range of capabilities,
Data I/O's systems can program the vast majority of the more than 6,000
different types of programmable ICs currently on the market for both engineering
(prototyping) and manufacturing applications.
Because semiconductor manufacturers continually develop new programmable ICs,
the Company continually updates its programmer line to provide support for the
newest ICs. In addition to incorporating new IC support into the latest
versions of its products, the Company packages and sells IC support updates to
allow customers to keep their existing products current.
Data I/O works closely with all major semiconductor manufacturers of
programmable ICs to ensure that the Company's Programming Systems use
programming methodology that complies with each semiconductor manufacturer's
specifications. The majority of these manufacturers perform some testing of
Data I/O programming systems and issue a letter of certification indicating that
the Data I/O programming system is able to program the semiconductor
manufacturer's IC. In addition, many semiconductor manufacturers endorse Data
I/O programming systems as equipment that they recommend for end-user
applications as well as for use in their own development and production
environments. These relationships enable Data I/O to keep its Programming
Systems product line up to date with the latest technology and to provide end
users with broad IC support.
IC PROGRAMMERS
The UniSite -TM- Universal Programmer, introduced in July 1986, is the Company's
top-of-the-line programmer. The UniSite, based on Data I/O's proprietary pin-
driver technology, allows any pin of any IC to perform any programming function.
This gives the programmer its universality, allowing programming of each IC
according to its unique specifications. In 1990, the Company enhanced UniSite
by adding its proprietary universal socketing technology, which permits the
programming of programmable integrated circuits in surface-mount packages. This
very small and delicate package type can be mounted onto the surface of a
circuit board without drilling holes through the circuit board for the IC pins.
This allows ICs to be attached to both sides of the board, doubling the board's
"real estate" for ICs and circuitry. Data I/O's socketing technology
significantly reduces the need for costly and less efficient IC adapters for
every different type of IC, and at the same time, reduces costly programming
errors and IC damage.
The 2900 and 3900 Programming Systems, introduced in April 1990 and October
1991, respectively, use the same operating system as the UniSite and incorporate
the Company's proprietary universal socketing technology. Both can program the
most complex ICs. The 2900 is a highly-advanced mid-priced programmer that can
program and test memory and logic ICs with up to 44 pins. The 3900 programs ICs
with as many as 88 pins and provides added capability at a price between the
mid-priced 2900 and the top-of-the-line UniSite. The introductions of the 2900
and 3900 represented the first two steps of the Company's strategy of broadening
its product line to provide engineering and manufacturing solutions at a variety
of price points.
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The third step in broadening the product line was the ChipLab -TM- Project
Programmer, introduced in August 1993. ChipLab is a programmer designed and
priced for individual engineers purchasing a programmer for a specific project.
This contrasts with the 2900/3900 and UniSite which are intended for groups or
departments. ChipLab runs directly from an engineer's personal computer as a
peripheral, and is designed to be intuitive and easy to use.
The UniSite, 2900, 3900 and ChipLab share a similar software architecture and
are supported by Data I/O's proprietary programming development tool. This
tool, licensed by Data I/O to leading semiconductor manufacturers, allows Data
I/O and the manufacturers to work together efficiently and effectively to
develop support for new ICs as quickly as possible. These semiconductor
manufacturers use this tool to develop programming instructions for Data I/O
programmers, enhancing both the time to market of their ICs, and Data I/O's
support and enhancement efforts.
Data I/O's PSX1000 and PSX500 parallel programmers were introduced in 1992 to
serve the needs of mid- and high-volume manufacturing users of programmable
memory and microcontroller ICs. The PSX1000 and PSX500 can duplicate twenty or
ten ICs at a time, respectively, and support numerous package types using Data
I/O's proprietary socketing technology of low-cost interchangeable modules. A
large number of the major electronic manufacturers and semiconductor
manufacturers, who develop programmable memory or microcontrollers, use this
product line because of its durability and high throughput.
The PSX400 introduced in December of 1994 is the Company's low-cost parallel
programmer able to program eight ICs at a time. This replaced the 288A Multi-
Programmer. The PSX400 addresses low-volume manufacturing, as well as
engineering applications in which designers use several ICs on a single board
and want to program them all in a single operation.
The BoardSite [Registrered Trademark] In-Circuit Programmer, introduced in
November 1988, is a unique product that is designed to program or reprogram AN
ENTIRE CIRCUIT BOARD full of programmable ICs while they are mounted on the
board. This allows circuitry to be updated in the field, and also provides an
alternative way for manufacturing operations to deal with programmable ICs. The
product is available as a bench-top workstation or as a portable programmer for
field applications.
AUTOMATED HANDLING SYSTEMS
Data I/O's ProMaster [Registered Trademark] line of equipment provides
manufacturers with an automated method for handling, programming, testing and
labeling programmable ICs whether the ICs are housed in conventional through
hole or surface-mount packages. During manufacturing, the ProMaster's "pick-
and-place" technology feeds the ICs out of their protective tubes; places them
into the socket of the programmer; triggers programming; applies a label or
marks the IC with a laser; sorts out the ICs which could not be programmed
correctly; and loads good ICs back into tubes or onto special tape which is
rolled onto reels. The ICs are then ready to be attached to printed circuit
boards with other automated equipment.
The ProMaster 3000, introduced in January 1990, and the ProMaster 7000,
introduced in July 1991, both address HIGH-THROUGHPUT NEEDS (a combination of
volume and yield of good ICs) for programming, testing, labeling or marking
programmable ICs. They both support conventional and surface-mount packages
with proprietary socketing technology that offers customers highly reliable
production capacity at a relatively low cost per IC. The ProMaster 3000 applies
printed labels, while the ProMaster 7000 marks ICs with a laser. The ProMaster
7500, introduced in the fall of 1994, offers even higher speed and capacity by
extending the ProMaster 7000 to include a second programmer allowing it to
program two ICs at a time.
ProMaster 2500, introduced in September 1993, was the world's first fully-
integrated system for automated programming, handling, labeling and testing of
programmable ICs. Designed for medium-volume manufacturing applications, the
2500 supports both conventional through hole and popular surface-mount packages.
The 2500 internalized and integrated the programmer inside the system unlike the
other ProMaster models that connect an AutoSite programmer. It uses labels to
mark the ICs and is the entry level priced automated handling system.
The ProMaster 9500, introduced in February 1995, is a new fine-pitch IC
automated handling system created to address extremely high volume manufacturing
of the new generation of highly miniaturized and fragile ICs.
The AutoSite -TM- Production Programmer, based on the Company's latest
programming architecture, was introduced in April 1992. It was the Company's
first IC programmer specifically designed to be connected to and integrated with
automated handling systems. This programmer is connected to the ProMaster 3000,
7000 and 7500 and performs the programming function within these automated
handling systems.
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The Company also provides a complete line of labels for use with its automated
programming systems. These labels are custom manufactured by Data I/O for the
ProMaster 2500, the ProMaster 3000 and their predecessors, the ProMaster 2000
and the AutoLabel 1000.
COMPUTER PERIPHERAL EQUIPMENT
In December 1992 the Company introduced CardPro -TM-, a PC card drive for
personal computers. This PC peripheral allows PC users to easily transfer the
information stored on memory cards between their mobile computers (laptop and
notebook computers, for example) and their desktop PCs.
PROGRAMMING SYSTEMS PRICING
The U.S. manufacturer's suggested list prices for Data I/O's IC programmers
range from approximately $1,000 for the ChipLab to $23,000 for a fully
configured UniSite Universal Programmer. The ProMaster 2500 automated handling
system sells for approximately $45,000, while the ProMaster 7500 with tape and
reel option, can sell for as much as $225,000. The new ProMaster 9500 will sell
for up to $400,000. The Company's CardPro drives sell for less than $400.
SOFTWARE PRODUCTS
Data I/O's Software products include Synario -TM-, ABEL [Registered Trademark]
and Engineering Capture System. Data I/O's strategy is to provide the designers
and manufacturers of electronic systems with software tools which assist in
developing designs for programmable logic ICs. The Company concentrates
specifically on software products for: design entry, the process of describing
the functions the IC needs to perform; and logic synthesis, the process of
implementing those descriptions for the specific technology, features and
functions of a particular IC.
The Company continually updates and upgrades its software to support new ICs
offered by semiconductor manufacturers and to ensure compatibility with both new
and existing computer systems. The Company sells software updates and upgrades
to enable customers to take advantage of the latest ICs as they become
available.
Historically, the Company focused on entry-level or mid-level, single-user
design software tools. This gave engineers an easy way to describe how they
wanted a particular PLD to behave, instead of having to draw the circuitry as
schematics. When the Company introduced Synario Universal FPGA Design System in
October 1993, it expanded into complete EDA design tool sets for more complex
CPLDs and FPGAs, a type of very sophisticated and fast growing programmable
logic IC. This Microsoft [Registered Trademark] Windows -TM- -based design
environment automates the customization of CPLDs and FPGAs with a fully-
integrated set of tools that support the complete design process. This
includes: schematic capture (for portions of the design best described with
schematic drawings); choices of behavioral design languages including VHSIC
Hardware Description Language ("VHDL"), Verilog and ABEL; simulation software to
allow engineers to simulate how a circuit will behave before it is programmed;
and fully-integrated software written by semiconductor manufacturers to help
implement the design correctly for each particular IC. Synario also
incorporates a feature called Project Navigator, which allows designers to
quickly adapt a design intended for one IC to a completely new or different IC
by automatically restructuring the design process for the engineer. Synario is
compatible with and uses the Company's ABEL language as one of its initial
building blocks, allowing designers who are currently using ABEL to use their
existing ABEL files and to more easily adapt to the Synario design environment.
ABEL (Advanced Boolean Expression Language), first released in March 1984, has
become an industry standard behavioral design entry tool for PLDs and CPLDs. A
1992 study conducted by ELECTRONIC ENGINEERING TIMES showed that ABEL was the
most popular PLD software design tool, used by more than 50% of the engineers
designing with PLDs. The Company also sells as ABEL options, ABEL IC "fitters,"
which can further optimize or "fit" the design for the specific IC selected.
The narrow focus of ABEL contrasts with Synario, which is a full-featured
integrated design tool that encompasses schematic design, behavioral design,
simulation and synthesis for PLDs, CPLDs, FPGAs and printed circuit board
designs.
Engineering Capture System ("ECS") is a software design tool used to create
schematic diagrams of specific programmable ICs or an entire printed circuit
board. Designers may use ECS with other vendors' simulation and design tools
that are needed for other steps in the design process. ECS replaced the
Company's DOS-based FutureNet [Registered Trademark] Schematic Designer and has
the additional capability of running in the Windows environment.
Page 7
Several of the Company's Software products are licensed to other EDA and
semiconductor companies through Original Equipment Manufacturer ("OEM") reseller
agreements, whereby Data I/O products are bundled into the OEM's product
offerings. The U.S. manufacturer's suggested list price of Data I/O's software
products ranges from $495 for an entry-level version of ABEL up to $12,000 for a
complete Synario system including the specialized software required for one
family of semiconductor ICs.
MARKETS AND CUSTOMERS
The Company's products are used primarily by electronic equipment manufacturers
in the design and manufacturing of equipment for industrial, commercial and
military applications. The Company estimates that during 1994, it sold products
to approximately 7,000 corporate accounts throughout the world, none of which
accounted for more than 10% of the Company's net sales. None of the Company's
independent distributors, resellers or OEMs accounted for more than 5% of the
Company's net sales.
PROGRAMMING SYSTEMS
In terms of total revenue, the Company believes that the worldwide market for
conventional IC programmers for engineering applications is slowly declining. A
worldwide reduction in defense spending, shifts in electronic design engineering
buying habits, and the recent recessionary conditions in many economies have all
contributed to the decline of the market in recent periods.
Long-term trends are also contributing to this market decline. Over the last
several years, advances in semiconductor processing technology have lowered the
barriers to entry in the IC programmer business. New competitors enter the
market regularly, each trying to carve out a niche, causing downward price
pressure and lowering the customers' perception of an acceptable price for a
conventional IC programmer. Technological improvements in personal computers
and design software tools have caused engineering design teams to shift away
from hardware tools to software design tools. Further, within the remaining
hardware tools market, economic pressures are shifting demand away from higher-
priced, full-featured universal programmers (which can program the vast majority
of ICs on the market) toward lower-priced, project-specific programmers and
single-point solutions. These industry changes are adversely affecting the
Company, especially because in the past, Data I/O's product line has been
heavily oriented toward hardware tools and, within hardware tools, toward the
higher-priced universal IC programmers.
After researching these trends, the Company anticipates they will continue for
the foreseeable future. As a result, the Company has developed and released a
new low-cost product line (ChipLab); added an entry level parallel programmer
(PSX400); reorganized the Company's distribution channels; and significantly
reduced its overall cost structure.
In the electronic manufacturing market, the proliferation of hard-to-handle
surface mount packages in a variety of types is causing a major worldwide trend
toward automation and integration of manufacturing processes. In addition,
service, corporate reputation and product reliability are considered key
decision-making factors for customers considering automation systems. Data I/O
believes its line of parallel programmers and automated handling systems is well
positioned to capitalize on these trends.
SOFTWARE PRODUCTS
The Company believes that, while the growth of the overall EDA market is nearly
flat, the segment which the Company's products address is growing. As complex
PLDs and FPGAs gain acceptance, Synario, ECS and ABEL should combine to increase
the Company's software business over the long term. Anticipating growth, the
Company has made significant investments in new product development over the
last two years. New channels of distribution were also established in 1993 and
1994 to better facilitate this growth opportunity.
SALES AND CUSTOMER SUPPORT
During 1993 and 1994, the Company restructured its sales operations to better
align the Company with its evolving markets and customers, and better position
itself for the future. First, the Company decided strategically to change its
worldwide software sales channel to specialized software value added resellers
("VARs"), which the Company believes are more
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appropriate for Windows-based EDA software such as Synario. The Company
announced and began implementation of this change during the latter part of
1993, and its implementation is substantially complete. Second, the Company
decided to sell its new low-cost ChipLab programmer through non-exclusive
distributors and telesales which are more suitable for low-cost, higher-volume
programmer sales. Third, the Company has expanded the use of its lower cost
telesales operations. Fourth, to accommodate these strategic changes, the
Company decreased its worldwide direct sales force. In Germany and the United
Kingdom, where the Company has international subsidiaries, the Company relies
primarily on independent sales representatives, rather than primarily on a
direct sales force as in the past. The Company has also expanded its use of
independent sales representatives in the U.S. and Canada.
U.S. SALES
The Company markets its products throughout the U.S. using a variety of sales
channels including its own direct field sales organization, direct telesales
organization, independent sales representatives, OEMs, VARs and retail
distributors. The Company has made substantial changes to its sales channels
during the past two years to better align the Company's products with the
channel that most effectively reaches that product's particular customers. This
has resulted in an increasing reliance on telesales, VARs and independent sales
representatives to sell the Company's products. The Company's U.S. independent
sales representatives obtain orders on an agency basis, with shipments made
directly to the customer by the Company. VARs, OEMs and retail distributors
purchase products directly from the Company for resale to customers. Sales are
recognized by the Company at the time of shipment.
FOREIGN SALES
Foreign sales represented approximately 46% of net sales in 1994, 47% of net
sales in 1993, and 50% of net sales in 1992. Foreign sales are made through the
Company's wholly-owned subsidiaries in Japan, Germany, Canada and the United
Kingdom, as well as independent distributors, VARs and sales representatives
located in 30 other countries (see Note 11 of "Notes to Consolidated Financial
Statements"). Sales made through foreign subsidiaries are denominated in local
currency and recognized when the subsidiary ships to the end-user. The
Company's independent foreign distributors and VARs purchase Data I/O products
in U.S. dollars for resale; and the sale is recognized at the time of shipment
to the distributor or VAR. Distributors and VARs are allowed to return a
portion of their Data I/O product inventory for credit on future purchases,
subject to 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 at the time of shipment.
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, VARs 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
GENERAL
The programming systems and EDA software markets are highly competitive.
Important competitive factors include product features, price, quality,
reliability, performance, distribution channels, post sales support, service,
and the ability to respond to rapid technological change with new and improved
products. The Company believes its competitiveness depends on offering the most
effective combination of these capabilities.
Page 9
PROGRAMMING SYSTEMS
The Company believes that maintaining close relationships with programmable IC
manufacturers, superior service, broad IC support and the critical mass of a
large installed base will enable Data I/O to maintain its leading position in
this marketplace. The Company does not expect its market share to grow
dramatically, because much of the remaining market is fragmented both
geographically and technologically. This situation will always allow smaller
niche suppliers to exist and, in some markets, to thrive.
Although independent market information is not available, the Company believes
that, based on information from: studies performed each year internally by the
Company; a Company-commissioned outside consultant's market study; and market
statistical information published by industry publication, ELECTRONIC
ENGINEERING TIMES; it has between 40% and 45% of the worldwide market share of
revenue for IC programmers in the design engineering segment. Based on
information available, the Company believes approximately 15% to 20% of this
market is served by vendor-specific IC programmers supplied by the semiconductor
manufacturers themselves. The remainder of the market is divided among several
dozen, mostly regional, competitors. The most significant of these competitors
are BP Microsystems, Logical Devices, Stag Microsystems, System General, Hi-Lo
and Minato. Today, the competition for programming business is based primarily
on the breadth of IC support and price. Most new entrants compete based on
price alone, because competing against the more established companies' IC
support is quite expensive. The Company believes that its move into the low-
cost portion of the market with ChipLab has increased market share for Data I/O
because this moved the Company into a new market segment in which the Company's
previous product line did not compete well.
The Company does not have independent market information but did commission a
study to obtain limited market data for the parallel programmer market.
Principle competitors in the parallel programmer market are Elan, Minato, Hi-Lo,
Bytek, System General, Needham Electronics and SMS. The Company believes that
other firms, particularly in specific geographic regions, hold the dominant
share of this market. The Company believes this is primarily due to the Company
historically not having competitive products at the low-cost end of the market.
The Company believes that it is dominant in the high-volume end of the parallel
programmer market.
The market for automated handling systems used in automated manufacturing
operations is shared primarily by Data I/O and Exatron. Although Exatron does
not offer complete system solutions, its partnerships with other IC programmer
companies enable it to offer systems which can be configured by the customer.
Even Data I/O IC programmers can be mated to Exatron automated handling systems.
The most important competitive criteria for this market segment are product
reliability, service, IC and package support, throughput, ease of use and cost
of ownership. Data I/O believes its share of this market has grown
significantly over the last two years, and recently, the market has begun to
grow rapidly. Although the Company previously estimated that this market was
at or near its peak, it now appears the expanded use of programmables in high
volume manufacturing situations is fueling growth of this market.
SOFTWARE PRODUCTS
Prior to the Company's development and introduction in 1993 of its first full-
featured EDA software system, Synario, the Company's line of software products
was focused primarily on schematic capture and behavioral design tools for PLDs.
As design software has become more sophisticated covering a broader range of
design functions, the Company's older, more narrowly focused products have
become increasingly used as front-end design tools in conjunction with other
more expensive and sophisticated software design tools offered by other
companies. Long presence in the market, a large installed base and on-going
improvements to features and functions have kept the Company's software dominant
in their niches of the design market. In addition, the Company has used OEMs
which bundled the Company's software products with their own software tools to
create a full-featured tool set. These OEM agreements have helped maintain
ABEL's dominance for the PLD design niche. Increased competition and technology
advancements have, however, led to significant price reductions over the years.
The Company developed Synario to address the industry's increasing demand for
broad-based integrated EDA software tools for the newer more complex CPLDs and
FPGAs. It also sought to arrest the erosion of the Company's Software market
share by companies offering more complete lines of broad-based products.
Principal competitors to Synario are products manufactured or distributed by
Viewlogic Systems, Inc. and semiconductor manufacturer-specific development
systems sold by Xilinx and Altera, although there are several other competitors
with products for specific design applications.
Page 10
ABEL, the Company's software for designing PLDs, has become an industry
standard. The Company believes this reflects the fact that ABEL is the most
"universal" tool in its market with support for the architectures of most major
programmable logic manufacturers. Competitors of ABEL are products from MINC
and Logical Devices.
The Company's ECS product is sold into a very competitive market. ECS' ability
to run in the Windows environment gives it a strong competitive advantage for
users adopting Windows as their operating environment. Principal competitors
marketing products similar to ECS are Orcad and Viewlogic Systems, Inc.
MANUFACTURING AND BACKLOG
Data I/O operates two principal manufacturing operations. The facility in
Redmond, Washington manufactures IC programmers including component parts
assembly, final assembly and testing. The Company's automated handling
equipment is produced at its manufacturing facility in Anaheim, California. The
Company is in the process of moving and consolidating its Anaheim facility into
its Redmond facility. This move is taking place in transitional steps starting
in 1995 and is scheduled to be completed in the first half of 1996. The cost of
this move and consolidation was provided for as part of the Company's
restructuring charge.
During 1993, the Company decided to consolidate and out-source certain
manufacturing processes. Implementation of these manufacturing process changes
began in 1994 and is expected to be completed by the end of 1996. The cost of
these manufacturing changes was provided for as part of the Company's
restructuring charge.
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's policy is to maintain substantial
inventories of most single-source components; it believes that additional
sources could be developed for present single-source components without
significant difficulties in obtaining supplies. There can, however, be no
assurance that single-source components will continue to be readily available.
Most product orders are scheduled for delivery within one to sixty days after
receipt of order and, in accordance with industry practices, are subject to
cancellation prior to shipment without penalty. 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 products based upon
a combination of backlog and anticipated orders. The size of backlog at any
particular date is not necessarily an 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 extensive support of the
latest programmable ICs, the Company is committed to a substantial research and
development program. Research and Development activities include applied
research, design of new products and continual enhancement and support of
existing products. Data I/O has focused its efforts on applied rather than
basic research, concentrating on technical innovation for long-term product
requirements. The Company made expenditures for research and development of
$9,227,000, $9,700,000, and $7,797,000 in 1994, 1993 and 1992, respectively,
representing 15.0%, 15.4%, and 11.2% of net sales, respectively.
The Company has currently directed its main product development efforts toward:
new versions of IC programmers to address the industry's shift toward lower-
cost, project-oriented tools; expansion and enhancement of the automated
handling systems product line; and enhancements for its new EDA Software
products. Substantial engineering resources are also being devoted to
developing updates and upgrades for both Programming Systems and Software
products and providing IC support for new programmable ICs as they are
introduced by semiconductor manufacturers.
Page 11
PATENTS, COPYRIGHTS, TRADEMARKS AND LICENSES
Intellectual property rights applicable to various Data I/O products include
patents, copyrights, trade secrets and trademarks. However, rather than depend
on patents and copyrights, which are frequently outdated by the 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.
The Company attempts to protect its rights in proprietary software products 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 shipped in shrink wrapped 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 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.
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. In early 1993, the Company was advised by a customer
of a claim by a third party that a portion of a software product supplied by the
Company infringes one or more claims of a patent issued to such third party in
late 1992. The Company investigated this claim and immediately advised the
third party that it believes the claim is without merit and to this date has
received no response. 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, if resolved against the
Company, could adversely affect the Company's reputation, preclude it from
offering certain products, and subject it to substantial liability.
EMPLOYEES
As of December 29, 1994, the Company had 379 total employees, of which 47 were
located outside the U.S. 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. To date, the Company believes it has been successful in its efforts
to recruit qualified employees, but there is no assurance that it will continue
to be as successful 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.
Page 12
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the executive officers of the
Company as of March 1, 1995:
Name Age Position
---- --- --------
William C. Erxleben 52 President
Chief Executive Officer
Steven M. Gordon 35 Vice President
Finance and
Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurer
William J. Haydamack 52 Vice President
General Manager, Design
Software
Neil G. Mathison 47 Vice President
Worldwide Sales and
Service
J.T. Montgomery 53 Director of Manufacturing
Susan S. Webber 40 Director of Quality and
Human Resources
William C. Erxleben joined the Company on October 29, 1993 in his present
position. Mr. Erxleben has been a member of the Board of Directors of Data I/O
since 1979. Prior to joining Data I/O, Mr. Erxleben had been a partner in the
Seattle-based law firm of Lane Powell Spears Lubersky since March 1991. From
March 1985 to March 1991 he was a partner with the Seattle law firm of Foster
Pepper & Shefelman. Prior to that time, he was a member of the faculty of the
University of Washington Graduate School of Business and the Regional Director
of the Federal Trade Commission.
Steven M. Gordon was named Chief Financial Officer, Secretary and Treasurer on
October 29, 1993. Mr. Gordon first joined Data I/O in April 1989 as Corporate
Controller and Chief Accounting Officer. He was promoted to Vice President of
Finance in May 1992. From May 1988 until joining Data I/O, Mr. Gordon served as
Treasurer for Concept Health Group. Prior to that time Mr. Gordon held various
management positions at American Health Group International and Ernst & Young.
William J. Haydamack joined the Company in August 1993 in his present position.
From 1986 until joining the Company, Mr. Haydamack served in various senior
management positions with Cadence Design Systems, an EDA software company.
Prior to Cadence Design Systems, Mr. Haydamack served in management positions
with Waferscale Integration, Inc., Hewlett Packard and General Dynamics.
Neil G. Mathison joined the Company in May 1992 in his present position. Prior
to joining the Company, Mr. Mathison had been employed by Sun Microsystems since
1987. His most recent position was Vice President-Worldwide Business
Development and Support. Prior to Sun Microsystems, Mr. Mathison was with
Fairchild Semiconductor, Digital Equipment Corporation and the U.S. Navy.
J.T. Montgomery joined the Company in May 1994 in his present position. Prior
to joining the Company, Mr. Montgomery had been employed by Interpoint
Corporation, a manufacturer of power supplies and custom hybrid microcircuits,
since 1986. His most recent position was Senior Vice President and General
Manager, Custom Hybrid Division. Prior to Interpoint Corporation, Mr.
Montgomery was with Product Planning Systems, Advanced Technology Laboratories
and The Boeing Company.
Susan S. Webber joined the Company in April 1994 as Director of Quality and was
given the responsibility for Human Resources in November of 1994. Prior to
joining the Company, Ms. Webber had been employed by AG Communication Systems, a
designer and manufacturer of telecommunications systems, since 1985. Her most
recent position was Quality Director. Prior to AG Communication Systems, Ms.
Webber was with Motorola and was an Assistant Professor with the University of
Nebraska.
Page 13
ITEM 2. PROPERTIES
Data I/O's headquarters and principal facility is a 100,000 square foot building
on approximately 79 acres of land, both owned in their entirety by the Company
and located in Redmond, Washington. In September 1991, the Company engaged the
services of a real estate broker and began a formal process of negotiating to
sell excess land at its headquarters. This land has been classified as Land
Held for Sale in the Company's financial statements. In June of 1992, as a
result of compliance with a Sensitive Areas Ordinance enacted in July 1992 by
the City of Redmond, Washington, which increased development restrictions
relating to land classified as wetlands, the Company recorded a write-down of
$2.6 million ($1.7 million after taxes) to the value of land effectively
condemned by this ordinance. In addition, in December 1993 the Company recorded
a $2.0 million write-down in the value of this land due to changes in valuation
for commercial real estate comparable to the land held by Data I/O. See Note 4
of "Notes to Consolidated Financial Statements".
The Company currently leases approximately 20,000 square feet of space for its
manufacturing facility in Anaheim, California. In addition, approximately 4,000
square feet of space is leased at two U.S. sales and service locations and
approximately 22,000 square feet is leased at four foreign sales and service
locations (see Note 8 of "Notes to Consolidated Financial Statements"). As part
of the restructuring of its sales and distribution channels, the Company has
plans to abandon approximately 6,000 square feet of space in the foreign sales
and service locations (see Note 2 of "Notes to Consolidated Financial
Statements").
ITEM 3. LEGAL PROCEEDINGS
Nothing to report.
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 29, 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Reference is made to the unaudited information regarding market, market price
range and dividend information appearing in Note 12 of "Notes to Consolidated
Financial Statements."
Page 14
ITEM 6. SELECTED FIVE-YEAR FINANCIAL DATA
Year Ended
- --------------------------------------------------------------------------------------------------------------------------
Dec. 29, Dec. 30, Dec. 31, Dec. 26, Dec. 27,
(in thousands, except employee and per share data) 1994 1993 1992(1) 1991 1990
- --------------------------------------------------------------------------------------------------------------------------
For The Year:
Net sales $61,478 $63,186 $69,337 $67,387 $60,631
Gross margin 33,094 31,775 39,292 38,824 35,319
Research and development 9,227 9,700 7,797 7,911 6,678
Selling, general and administrative 20,032 26,094 26,872 25,524 24,082
Provision for business restructuring (2) 6,120
Operating income (loss) 3,835 (10,139) 4,623 5,389 4,559
Non-operating expense 134 2,218 310 463 247
Income (loss) before taxes, extraordinary item
and cumulative effect of accounting change 3,701 (12,357) 4,313 4,926 4,312
Income tax expense (benefit) 975 (700) 1,445 1,897 1,690
Income (loss) before extraordinary item and
cumulative effect of accounting change 2,726 (11,657) 2,868 3,029 2,622
Extraordinary item, net of tax (3) (1,675)
Cumulative effect of accounting change (4) 400
Net income (loss) $ 2,726 ($11,257) $1,193 $3,029 $2,622
- --------------------------------------------------------------------------------------------------------------------------
AT YEAR-END:
Working capital $10,038 $3,582 $9,940 $5,174 $4,590
Total assets $43,487 $43,025 $49,702 $46,730 $43,817
Long-term debt (5) $ 1,500 $1,500
Total debt $ 1,940 $3,867 $3,422 $3,219 $2,944
Stockholders' equity $24,343 $21,183 $31,343 $29,377 $25,602
Number of employees 379 445 517 487 482
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA:
Earnings per share-
Income (loss) before extraordinary item and
cumulative effect of accounting change $0.37 ($1.63) $0.40 $0.44 $0.39
Net income (loss) $0.37 ($1.57) $0.17 $0.44 $0.39
Book value per share $3.28 $2.92 $4.46 $4.35 $3.83
Shares outstanding 7,432 7,250 7,030 6,749 6,677
Weighted average shares outstanding 7,420 7,170 7,117 6,900 6,710
- --------------------------------------------------------------------------------------------------------------------------
KEY RATIOS:
Current ratio 1.6 1.2 1.6 1.3 1.3
Gross margin to sales 53.8% 50.3% 56.7% 57.6% 58.3%
Operating income (loss) to sales 6.2% (16.0%) 6.7% 8.0% 7.5%
Net income (loss) to sales (6) 4.4% (18.4%) 4.1% 4.5% 4.3%
Return on average total assets (6) 6.4% (23.7%) 6.1% 6.7% 6.2%
Return on average stockholders' equity (6) 12.3% (39.3%) 9.5% 11.1% 11.1%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
FOOTNOTES:
(1) Fiscal 1992 was a 53 week year.
(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 10 of "Notes to Consolidated Financial
Statements."
(5) For further discussion, see Note 7 of "Notes to Consolidated Financial
Statements."
(6) Computed based on net income (loss) before cumulative effect of accounting
change and extraordinary item.
Page 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
(In thousands) 1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
Net sales $61,478 (2.7%) $63,186 (8.9%) $69,337
- -------------------------------------------------------------------------------
1994 VS. 1993
Sales of the Company's Programming Systems products declined 3.1% while sales of
Software products were approximately flat in 1994 compared to 1993. Sales in
the U.S. decreased 2.4% while international sales decreased 3.1%. Sales in the
U.S. accounted for approximately 54% of the Company's sales in 1994 compared to
53% in 1993. The increase as a percentage of total sales in the Company's sales
to U.S. customers resulted primarily from the continued economic weakness in the
Japanese and German markets during 1994.
The Company experienced quarterly year over year revenue growth of 4.5% and 3.3%
for the third and fourth quarters of 1994 compared to 1993 due primarily to
increased sales of automated handling systems. For the year, decreased sales in
the first half of 1994 compared to 1993 offset the second half sales growth for
an overall decline in sales of 2.7%. The 1994 sales decline was due primarily
to a decline in sales of the Company's traditional line of IC programmers offset
by increased sales of the Company's automated handling systems for the
manufacturing environment.
Net sales for 1994 in the Company's traditional line of IC programmers declined
by $5.9 million or 13.1% over 1993. The Company experienced decreased sales for
nearly all of the products in this product line, except for the low-priced
ChipLab. This reflects the continuing market shift toward lower-priced project-
specific programmers and away from higher-priced, full-featured universal
programmers. In addition, the Company believes that there has been a shift in
the demand for tools by engineering design teams in favor of increased software
design tools to automate portions of the design process and work with the
increased IC complexity and functionality. Finally, the Company believes that
advances in semiconductor processing technology have lowered the barriers to
entry in the programmer business over the last several years. This has caused
new market entrants to appear regularly, each trying to carve out a niche. New
entrants cause downward price pressure and each cycle of new competitors lowers
the acceptable price of a conventional IC programmer in the customer's view.
These industry changes had, and are continuing to have, an adverse effect on the
Company's programmer sales and gross margins, especially because the Company's
products historically have been oriented toward hardware tools and, within
hardware tools, toward higher-priced universal IC programmers. However, the
Company believes the trends toward low-cost IC programmers, EDA tools and
automated handling systems will eventually mean increased sales of its new
products ChipLab, Synario, ProMaster 7500, ProMaster 2500 and the ProMaster
9500.
Sales of the Company's automated handling systems for the manufacturing
environment increased by approximately 40.3% in 1994 compared to 1993. The
Company believes this growth is due to a trend toward the expanded use of
programmable ICs in high volume manufacturing situations. The Company believes
this trend is due to a reduction in the relative cost of programmable ICs
relative to fixed ICs; manufacturer's desire to improve the time-to-market for
new and improved products, and the ICs increased functionality and
miniaturization. The Company believes this trend will continue contributing to
further growth and expansion of this market. As this is a newer market focus
for the Company, the Company's participation in this growth depends upon the
market's acceptance of its new products; its ability to understand and meet the
changing needs of this market; and its response to and development of changes in
technology. The automated handling systems product line accounted for
approximately 24% of revenues in 1994 compared to 16% in 1993. A market shift
in the ProMaster product mix toward higher priced models also contributed to the
sales increase. The Company's new products, ProMaster 7500, ProMaster 2500 and
Tape and Reel, provided approximately 70% of this growth during 1994.
Page 16
Sales of the Company's Software products were approximately flat in 1994
compared to 1993. Although the Company's new Synario software product provided
incremental sales increases, this was offset by declines of the Company's ABEL
and FutureNet products due to competitive pricing pressures and lower unit
sales. While software product sales declined for the first three quarters of
1994 compared to 1993, the fourth quarter reflected a 14.5% increase. The
Company believes that the strategic decision in 1993 to change its software
sales channel to value-added resellers, which it believes are more appropriate
for Windows-based software, continued to have a negative transitional impact
during early 1994. In addition, this change resulted in lower net sales by the
Company as it receives lower wholesaler/distributor pricing instead of
direct/retail sales pricing. The change in the industry demand toward greater
usage of software products has not yet had a significant impact on the Company's
software products, which have historically been oriented to more fundamental
schematic capture and behavioral design tools. This has changed with the
introduction of Synario, which is targeted at the above-described market
demand.
1993 VS. 1992
Sales of the Company's Programming Systems products declined 8.9%, while sales
of Software products declined 9.0% in 1993 compared to 1992. Sales in the U.S.
decreased 3.1%, while international sales decreased 14.7%. As a result of these
geographical changes, sales in the U.S. accounted for approximately 53% of the
Company's sales in 1993, compared to 50% in 1992.
The Company experienced decreased sales in 1993 for nearly all of its products
compared to 1992. The exceptions being newly introduced products, such as the
PSX Parallel Programmers, which replaced the S1000; ChipLab, which replaced the
Model 212; and Synario, the Company's new software product. However, as ChipLab
and Synario were not released until late 1993, their impact on total sales was
minimal. The Company believes the decline in net sales in 1993 is primarily due
to the combination of: continued economic recessions in Japan and Europe;
decreased worldwide military spending; and increasing customer preference for
lower-priced products.
The major factors contributing to the decline in the Company's sales of
Programming Systems were the economic difficulties experienced in both Japan and
Europe, coupled with a trend away from high-priced, full-featured universal
programmers toward lower-priced, project-specific products. Indicative of this
trend is the 8.9% decline in revenues during 1993, while total unit sales
remained approximately flat with those in 1992. In addition to these factors,
the Company believes there has been a shift in the demand for tools by
engineering design teams in favor of increased software design tools. Also, as
discussed above, advances in semiconductor processing technology have
contributed to increased competition. These industry changes had an adverse
effect on the Company's programmer sales and gross margins.
Sales of the Company's Software products declined primarily due to further price
decreases for the Company's FutureNet product, the impact of recessionary
economic conditions in Japan and changes made in 1993 to the Software sales
channel. In anticipation of future Software sales for the Company's new Synario
software product, which was released in October 1993, the Company decided
strategically to change its Software sales channel to value-added resellers and
pre-introduced Synario at the DAC trade show in June 1993. The Company believes
that these steps had a negative transitional impact on Software sales during the
second half of 1993.
The increase as a percentage of total sales in the Company's sales to U.S.
customers resulted primarily from the cyclical economic downturn in Japan and
Europe during 1993. These conditions were partially offset by the favorable net
impact to sales from changes in year-over-year exchange rates on sales made by
the Company's international subsidiaries.
Page 17
GROSS MARGIN
(In thousands) 1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
Gross margin $33,094 4.2% $31,775 (19.1%) $39,292
Percentage of
net sales 53.8% 50.3% 56.7%
- -------------------------------------------------------------------------------
1994 VS. 1993
The gross margin increased in both dollars and as a percentage of sales during
1994 compared to 1993 despite the decline in sales. The Company's gross margin
in 1993 was depressed due to increased reserves for excess and obsolete
inventories. The Company's restructuring reduced costs in its manufacturing,
service and distribution operations improving margins in 1994. In addition, the
Company experienced improved gross margins on the automated handling system
products in 1994 due to increased volume and a shift toward higher-priced
models.
Offsetting a portion of these gross margin improvements are the lower sales
volume and a shift from higher priced to lower priced programmers in the
Company's traditional IC programmer line. The lower sales in Japan and Germany
also unfavorably impacted gross margins as the Company generally receives higher
gross margins on sales to these countries.
1993 VS. 1992
The decrease in gross margin as a percentage of net sales was primarily
attributable to a shift in product mix of sales, lower production volume,
decreases in prices for certain products and increases in reserves for excess
and obsolete inventories. The Company experienced significant sales declines
for its higher-priced, higher-margin products, while sales growth came
primarily from lower-priced and lower-margin products, such as PSX and ChipLab
which were introduced during 1993. The Company believes a large contributing
factor to this change in sales mix was a shift in industry demand for hardware
tools away from higher-priced universal programmers toward lower-cost, project-
specific programmers. Lower production volumes negatively impacted gross margin
percentage as manufacturing overhead costs were spread over the lower production
volume, thereby increasing the overhead rate as a percentage of total cost of
sales. These negative factors significantly exceeded the favorable impact of
higher margins realized on sales of automated handling systems, in contrast to
the distributor margins received on this equipment in 1992 prior to the purchase
of Quality Automation, Inc. and Q.A. Engineering, Inc. (collectively "QA") in
September 1992.
RESEARCH AND DEVELOPMENT
(In thousands) 1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
Research and
development $9,227 (4.9%) $9,700 24.4% $7,797
Percentage of
net sales 15.0% 15.4% 11.2%
- -------------------------------------------------------------------------------
1994 VS. 1993
Research spending declined slightly both in dollars and as a percentage of
sales. The decline is primarily due to personnel reductions made as a part of
the Company's restructuring. The Company focused its research and development
efforts in 1994 on its strategic growth markets, namely automated handling
systems, Windows-based EDA software design tools and low-priced application
specific IC programmers and expects to continue this focus in the future. The
Company believes that it is essential to invest in research and development to
support its existing products and to create new products as markets develop and
technologies changes.
1993 VS. 1992
Increased research and development spending during 1993 resulted from a
combination of the Company's acquisition of QA in September 1992, increased
development spending on new products to expand the software product line, and
additional development and support needed for enhancements and improvements to
existing products to respond to changes within the industry.
Page 18
SELLING, GENERAL AND ADMINISTRATIVE
(In thousands) 1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
Selling, general and
administrative $20,032 (23.2%) $26,094 (2.9%) $26,872
Percentage of
net sales 32.6% 41.3% 38.8%
- -------------------------------------------------------------------------------
1994 VS. 1993
The decrease in selling general and administrative expenditures in 1994 was due
primarily to the restructure efforts which reduced the number of personnel
worldwide and focused on matching cost effective sales channels to our products
and markets. These reductions were partially offset by performance bonuses and
incentive compensation which were not incurred in 1993.
1993 VS. 1992
The decrease in selling, general and administrative expenditures in 1993 was due
to the absence of profit sharing and incentive compensation expense in 1993 as a
result of the Company's operating loss. Partially offsetting this cost decrease
were a full year's costs associated with the operations of QA, which the Company
acquired in September 1992; the creation of new general manager positions for
each of the Company's operating units in mid 1993; establishing a corporate-
sponsored marketing effort in Europe; costs incurred to establish new sales
channels for ChipLab and the Company's software products, including recruiting,
contracting with and training the new software VAR sales channels; and the
amortization of other assets which were acquired in connection with the purchase
of QA and CAD/CAM Group, Inc. ("CAD/CAM").
BUSINESS RESTRUCTURING PROGRESS
During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1
million related to the restructure of its sales and distribution channels;
downsizing its operations to a level consistent with anticipated lower sales and
product margins; and to consolidate and outsource certain manufacturing
processes. The purpose of the restructure was primarily to reduce expenses and
significantly lower the Company's break-even point in reaction to the 1993
reduced sales and gross margins explained above. Additionally, the Company made
several strategic changes to its sales and distribution channels to better align
distribution of the Company's current and anticipated future products to their
markets and customers. The general downsizing of operations and restructuring
of the sales and distribution system were substantially completed at December
29, 1994. The Company began implementation of the planned changes to its
manufacturing processes in the first quarter of 1994 for completion by the end
of 1996. The Company will begin the process of consolidating its Anaheim,
California manufacturing facility into its Redmond, Washington facility in the
second quarter of 1995 for completion in the first half of 1996.
Of the total restructure charge of $6.1 million, $2.1 million relates to
restructuring the sales and distribution system, including severance for
terminated employees, facilities and equipment lease abandonment, facilities
relocation costs, the write-off of intangible assets associated with the
acquisition and setup of direct sales operations in Germany and the United
Kingdom, and costs associated with implementing new accounting and distribution
systems and processes; $2.0 million relates to the consolidation and outsourcing
of certain portions of the Company's manufacturing operations, including the
write-down of production equipment to net realizable value, severance for
terminated employees, facility relocation costs, and costs associated with
outsourcing certain manufacturing processes; and the remaining $2.0 million
relates to general organizational downsizing, including severance for terminated
employees, asset write-downs and costs associated with rearrangement of
facilities.
Of the total $6.1 million restructuring charge, the Company paid approximately
$1.5 million in cash in 1993 (including approximately $300,000 of previously
accrued vacation and pension payments), and paid approximately $2.1 million in
1994 (including approximately $200,000 of previously accrued vacation and
pension payments), and expects to pay approximately $1.1 million in 1995 and
$800,000 thereafter. The Company expects to fund these cash payments from
internally generated funds and, if necessary, borrowings on its lines of credit.
In addition, in 1993 the Company recorded approximately $1.1 million in asset
write-downs related to its restructuring.
Page 19
The combined effects of all the restructuring activities included a worldwide
reduction of the Company's workforce by approximately 28% or 145 employees. The
costs associated with the workforce reduction including severance and benefits
totaled approximately $2.9 million, plus cash payments for previously accrued
vacation and pension benefits of approximately $700,000. The balance of the
restructure charges related to facility and equipment lease abandonment of
$550,000, facility relocation and rearrangement costs of $900,000, assets write-
downs, including inventory, equipment and intangibles, of $1.1 million, $100,000
associated with new accounting and distribution systems, the costs associated
with the outsourcing of certain manufacturing processes of $400,000, and
professional fees of $150,000.
In the aggregate, the restructuring of the Company's operations reduced total
costs and expenses by a net of $7 million in 1994, with approximately $6.6
million of the savings attributable to reduced employee costs, approximately
$200,000 due to reduced facility and equipment lease expense, and approximately
$200,000 due to reduced depreciation and amortization.
In addition to the actions described above, the Company implemented a temporary
pay and work week reduction of 10% for all U.S. employees for the period
January 1, 1994 through February 28, 1994. The Company realized savings of
approximately $250,000 in salary costs related to this reduction.
INTEREST
(In thousands) 1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
Interest income $144 433.3% $27 (35.7%) $42
Interest expense $273 (14.2%) $318 16.1% $274
- -------------------------------------------------------------------------------
1994 VS. 1993
Net interest expense decreased in 1994 to $129,000. This decline relates to
increased interest income from investment of higher cash balances and to
decreased average borrowings on the Company's lines of credit.
1993 VS. 1992
Net interest expense increased slightly in 1993 to $291,000. This increase
relates to increased average borrowings during 1993, primarily due to the
funding of the purchase of QA and CAD/CAM and the losses sustained during the
year.
ADJUSTMENT OF CARRYING VALUE OF LAND HELD FOR SALE
Due to the changes in valuation for commercial real estate comparable to the
land held by Data I/O, the Company recorded a $2.0 million valuation reserve
against the land held for sale at December 30, 1993. The Company has and
intends to continue to market this excess land. See Note 4 of "Notes to
Consolidated Financial Statements."
INCOME TAXES
(In thousands) 1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
Income tax expense
(benefit) $975 N/A ($700) N/A $1,445
Effective tax (benefit)
rate 26.3% (5.7%) 33.5%
- -------------------------------------------------------------------------------
1994 VS. 1993
The effective income tax rate for 1994 differed from the statutory 34% tax rate
primarily due to reversal of tax valuation reserves established in 1993. The
valuation reserves reversed due to the Company utilizing foreign subsidiary loss
carryforwards and the ability to offset reversing temporary differences against
the 1994 income. See Note 10 of "Notes to Consolidated Financial Statements."
Page 20
The Company has valuation allowances of $3,358,000 at December 29, 1994 which
may continue to reverse in 1995 after the Company has recorded pre-tax income in
excess of $1.5 million. In 1996, the criteria that requires the Company to
maintain its valuation allowance will be less restrictive if the Company has
three years of cumulatively profitable operations. The Company believes this may
allow further reductions in the valuation allowance for deferred tax assets.
The potential reversal of these valuation allowances may significantly reduce
the Company's effective tax rate in the future.
The Company has been notified by the Internal Revenue Service that an
examination of the Company's 1992 federal income tax returns will take place.
The Company believes that adequate income tax accruals have been provided for
all years.
1993 VS. 1992
The effective income tax rate for the 1993 loss benefit was reduced primarily
due to valuation reserves established for deferred tax assets. Valuation
reserves were increased during 1993, due to the loss generated during the year
and the increased uncertainty of the Company's ability to utilize the benefits
from its deferred tax assets, particularly net operating loss carryforwards.
The valuation reserves were set up for net operating loss carryforwards of
foreign subsidiaries and as a result of an assessment of the benefit obtainable
for deferred tax assets. The benefit was limited to temporary differences of
$4.5 million, which are expected to result in loss carryback benefits when they
reverse. These temporary differences relate primarily to restructure charges
becoming tax deductions when paid. The benefit of these future carrybacks was
limited by the alternative minimum tax (see Note 10 of "Notes to Consolidated
Financial Statements").
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was adopted during 1993 and the cumulative benefit of $400,000 was
included in net income as the cumulative effect of accounting change (see Note
10 of "Notes to Consolidated Financial Statements").
NET INCOME AND EARNINGS PER SHARE
(In thousands except
per share data)) 1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
Before extraordinary item and cumulative effect of accounting change:
Income (loss) $2,726 N/A ($11,657) N/A $2,868
Percentage of
net sales 4.4% (18.4%) 4.1%
Earnings (loss)
per share $0.37 N/A ($1.63) N/A $0.40
Net income (loss) $2,726 N/A ($11,257) N/A $1,193
Earnings (loss)
per share $0.37 N/A ($1.57) N/A $0.17
- -------------------------------------------------------------------------------
1994 VS. 1993
The change in the Company's profitability before extraordinary item and
cumulative effect of accounting change was due primarily to the reduced
operating expenses and costs of goods sold resulting from the Company's
restructure of its operations.
1993 VS. 1992
The change in the Company's profitability before extraordinary item and
cumulative effect of accounting change was due primarily to the provision for
business restructuring of $6.1 million, the downward revaluation of the carrying
value of land held for sale of $2.0 million and the reduced effective income tax
rate. Excluding the provision for business restructuring, operating income
decreased $8.6 million in 1993 compared to 1992, primarily due to the
combination of decreased net sales coupled with an increase in cost of goods
sold and increased investment in research and development activities throughout
1993.
Page 21
INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
In the past, the Company has been able to offset the impact of inflation through
efficiency increases and price adjustments. Heightened competition has made the
Company's products more price competitive and has diminished its ability to
offset the impacts of inflation.
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. Exchange rates impact absolute U.S. dollar
amounts but do not impact the percentage of net sales ratios. As only
approximately one-third of the Company's sales are made by foreign subsidiaries,
and independent currency fluctuations tend to minimize the effect of any
individual currency exchange, foreign currency rates have not significantly
impacted the Company's financial results. Additionally, the Company hedges its
foreign currency exposure on the 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) 1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
Working capital $10,038 $6,456 $3,582 ($6,358) $9,940
Total debt $1,940 ($1,927) $3,867 $445 $3,422
- -------------------------------------------------------------------------------
Working capital increased during 1994 primarily due to funds provided by
operations, which is net of $1.9 million of restructure related expenditures.
The Company reduced inventory levels by approximately $1.3 million or 16% during
1994. This was done as a continuing part of a 1993 change in the Company's
inventory stocking policies and procedures aimed at better aligning the
inventory level to the sales volume, while maintaining appropriate product
delivery lead times. The Company collected approximately $1.6 million of tax
refunds during 1994. The Company also recorded increases in its deferred
revenue on the sales of annual maintenance and update contracts of $900,000
during 1994. These resources have been used to reduce the level of bank
borrowings by $1.9 million; fund the Company's trade accounts receivable
increase of $800,000, or 8%, reflecting the quarterly rise in sales for the
fourth quarter of 1994 compared to 1993; and build the Company's cash position
from $1.7 million to $7.3 million during 1994.
As of December 29, 1994, the Company had total debt of $1.9 million or
approximately 8% of its $24.3 million in equity. Of this total, approximately
$440,000 is current debt, consisting entirely of borrowings on its foreign line
of credit. The $1.5 million of long term debt consists of a note due in 1998
for the balance of the purchase price for CAD/CAM (see Note 6 of "Notes to
Consolidated Financial Statements"). At December 29, 1994, the Company also had
an unused $8.0 million U.S. line of credit maturing in May 1995 under which
borrowings would be charged interest at the bank's published Prime rate or the
Libor rate plus 150 basis points.
The foreign line of credit of $1.5 million matures in August 1995.
Historically, this debt and the U.S. line of credit, have been structured as
short-term and have been continuously renewed on their maturity dates. The
Company currently expects to be able to renew these lines of credit on maturity
under substantially the same terms as those presently in place. No assurances
can be made, however, in regard to the renewal of these agreements, if the
Company again experiences losses.
The Company estimates that capital expenditures for property, plant and
equipment during 1995 will be approximately $2.0 million. Such expenditures are
currently expected to be funded from internally generated funds and, if
necessary, borrowings from the Company's existing credit lines. Although the
Company fully expects that such expenditures will be made, it has commitments
for only a small portion of these amounts.
At December 29, 1994, the Company's material short-term unused sources of
liquidity consisted of approximately $7.3 million in cash and cash equivalents
and available borrowings of $8.0 million under its U.S. line of credit and
approximately
Page 22
$1.1 million under its foreign line of credit. The Company also expects to
receive an approximate $400,000 tax refund in 1995 relating to a carryback of
tax losses incurred in 1994 to earlier years. Assuming that the Company does
not experience further significant declines in sales, the Company believes these
sources will be sufficient to fund, during 1995, working capital needs, service
existing debt, finance planned capital acquisitions and fund its remaining
restructure costs. Additional capital will also be provided if the Company
successfully disposes of its land held for sale (see Note 4 of "Notes to
Consolidated Financial Statements").
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 24 through 40.
Page 23
- -------------------------------------------------------------------------------
R E P O R T O F E R N S T & Y O U N G L L P ,
I N D E P E N D E N T A U D I T O R S
- -------------------------------------------------------------------------------
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 29, 1994, and December 30, 1993, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 29, 1994. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Data I/O Corporation at December 29, 1994, and December 30, 1993, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 29, 1994, in conformity with generally
accepted accounting principles. 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 10 of "Notes to Consolidated Financial Statements," in 1993
the Company changed its method of accounting for income taxes.
Seattle, Washington //S// ERNST & YOUNG LLP
February 9, 1995 ERNST & YOUNG LLP
- -------------------------------------------------------------------------------
R E P O R T O F M A N A G E M E N T
- -------------------------------------------------------------------------------
Management is responsible for preparing the Company's 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 generally accepted accounting
principles. 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 accounting policies, procedures and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements, and that assets are
adequately safeguarded.
Independent audits of the Company's financial statements are performed in
accordance with generally accepted auditing standards and provide an objective,
independent review of the fairness of reported financial condition and results
of operations.
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// WILLIAM C. ERXLEBEN //S// STEVEN M. GORDON
WILLIAM C. ERXLEBEN STEVEN M. GORDON
President Vice President
Chief Executive Officer Finance and Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurer
Page 24
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
Dec. 29, Dec. 30, Dec. 31,
FOR THE YEARS ENDED 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $61,478 $63,186 $69,337
Cost of goods sold 28,384 31,411 30,045
------- ------- -------
Gross margin 33,094 31,775 39,292
Operating expenses:
Research and development 9,227 9,700 7,797
Selling, general and administrative 20,032 26,094 26,872
Provision for business restructuring 6,120
------- ------- -------
Total operating expenses 29,259 41,914 34,669
------- ------- -------
Operating income (loss) 3,835 (10,139) 4,623
Non-operating expense:
Interest income (144) (27) (42)
Interest expense 273 318 274
Foreign currency exchange 5 (73) 78
Adjustment of carrying value of land held for sale 2,000
------- ------- -------
Total non-operating expense 134 2,218 310
------- ------- -------
Income (loss) before income taxes, extraordinary item
cumulative effect of accounting change 3,701 (12,357) 4,313
Income tax expense (benefit) 975 (700) 1,445
------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change 2,726 (11,657) 2,868
Extraordinary item, net of income taxes of $925 (1,675)
Cumulative effect of accounting change 400
------- ------- -------
Net income (loss) $2,726 ($11,257) $1,193
------- ------- -------
------- ------- -------
Earnings per share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $0.37 ($1.63) $0.40
Extraordinary item ($0.23)
Cumulative effect of accounting change $0.06
------- ------- -------
Net income (loss) $0.37 ($1.57) $0.17
------- ------- -------
------- ------- -------
Weighted average shares outstanding 7,420 7,170 7,117
------- ------- -------
------- ------- -------
See notes to consolidated financial statements.
Page 25
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
Dec. 29, Dec. 30,
1994 1993
- ------------------------------------------------------------------------------------------
(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $7,279 $1,704
Trade accounts receivable,
less allowance for doubtful
accounts of $277 and $332, respectively 10,145 9,364
Inventories 6,937 8,282
Recoverable income taxes 453 1,689
Deferred income taxes 675 1,475
Other current assets 1,361 687
------ ------
TOTAL CURRENT ASSETS 26,850 23,201
Land held for sale 2,006 1,983
Property, plant and equipment - net 10,737 12,200
Other assets 3,894 5,641
------- -------
TOTAL ASSETS $43,487 $43,025
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,908 $1,267
Accrued compensation 3,460 3,634
Deferred revenue 5,331 4,383
Other accrued liabilities 2,786 3,171
Accrued costs of business restructuring 1,890 3,826
Income taxes payable 997 971
Notes payable 440 2,367
------- -------
TOTAL CURRENT LIABILITIES 16,812 19,619
LONG TERM DEBT 1,500 1,500
LONG TERM OTHER PAYABLES 361 323
DEFERRED INCOME TAXES 471 400
COMMITMENTS (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 7,431,901
and 7,250,036 shares, respectively 20,729 20,242
Retained earnings 3,185 459
Currency translation adjustments 429 482
------- -------
TOTAL STOCKHOLDERS' EQUITY 24,343 21,183
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,487 $43,025
------- -------
------- -------
See notes to consolidated financial statements
Page 26
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------
Dec. 19, Dec. 30, Dec. 31,
For the years ended 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES:
Net income (loss) $2,726 ($11,257) $1,193
Adjustments to reconcile income (loss)
to net cash provided by operating activities:
Depreciation and amortization 4,671 4,860 3,598
Stock option compensation expense 80
Adjustment of carrying value of land held
for sale 2,000 1,675
Income and deferred income taxes 2,133 (533) (305)
Cumulative effect of accounting change (400)
Business restructure (1,936) 4,955
Deferred revenue 921 468 464
Changes in current items other
than cash and cash equivalents:
Trade accounts receivable (741) 3,518 171
Inventories 1,345 2,393 (3,501)
Other current assets (218) 48 (9)
Accounts payable and accrued liabilities 54 (1,451) 318
------- ------- ------
Cash provided by operating activities 8,955 4,601 3,684
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,876) (2,820) (2,272)
Additions to other assets (53) (1,405) (1,272)
------- ------- -------
Cash used for investing activities (1,929) (4,225) (3,544)
FINANCING ACTIVITIES:
Proceeds from (repayment of) notes payable (1,931) (1,060) 172
Sale of common stock 327 410 348
Proceeds from exercise of stock options 160 275 794
Purchase of common stock (65) (137)
------- ------- -------
Cash provided by (used for) financing activities (1,444) (440) 1,177
------- ------- -------
Increase (decrease) in cash and cash equivalents 5,582 (64) 1,317
Effects of exchange rate changes on cash (7) (6) (37)
Cash and cash equivalents - Beginning of year 1,704 1,774 494
------- ------- -------
Cash and cash equivalents - End of year $7,279 $1,704 $1,774
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $255 $343 $236
Income taxes $405 $573 $1,501
See notes to consolidated financial statements.
Page 27
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------
Currency
Common Stock Retained Translation
--------------------------------
Shares Amount Earnings Adjustment
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands except share data)
BALANCE AT DECEMBER 26, 1991 6,748,587 $17,980 $10,523 $ 874
Net income 1,193
Stock options exercised 199,476 794
Issuance of stock through
Employee Stock Purchase Plan 108,650 348
Purchase of common stock (26,782) (137)
Compensation on exercised or expired
stock options 205
Currency translation adjustment, net of
tax benefit of $203 (437)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1992 7,029,931 19,190 11,716 437
Net loss (11,257)
Stock options exercised 88,450 275
Issuance of stock through
Employee Stock Purchase Plan 149,259 410
Purchase of common stock (17,604) (65)
Compensation on exercised or expired
stock options 432
Currency translation adjustment, net of
tax of $23 45
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 30, 1993 7,250,036 20,242 459 482
Net income 2,726
Stock options exercised 44,875 160
Issuance of stock through
Employee Stock Purchase Plan 136,990 327
Currency translation adjustment, net of
tax benefit of $27 (53)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 29, 1994 7,431,901 $20,729 $ 3,185 $ 429
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to consolidated financial statements.
Page 28
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 1994 and 1993 are for fifty-two week periods whereas 1992
consisted of a fifty-three week period.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenues, costs, and expenses 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 on foreign
currency transactions are included in non-operating expense as Foreign Currency
Exchange.
In an effort to minimize the effect of exchange rate fluctuations on the results
of its operations, the Company hedges certain portions of its foreign currency
exposure through the use of forward exchange contracts. At December 29, 1994,
the Company had approximately $2.3 million in foreign exchange contracts
outstanding with the contract exchange rate being approximately equal to the
market exchange rate. These contracts range from sixty days to one year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with insignificant
interest rate risk. The Company invests in the highest grade commercial paper
with original maturities of three months or less. The Company intends that
these investments are held to maturity. Interest earned is reported in non-
operating expense as Interest Income.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is computed on a
currently adjusted standard basis, which approximates actual cost on an average
or first-in/first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated using the
straight-line method over estimated useful lives as follows:
Building 40 years
Equipment 3 to 7 years
Leasehold improvements Lesser of lease term or estimated useful life
Page 29
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment or customer
acceptance, if an acceptance clause is specified in the sales terms. Revenue
from software products licensed to original equipment manufacturers is
recognized when earned per the terms of the contracts. Revenue from the sale of
service and update contracts is recorded as deferred revenue and recognized as
earned revenue on a straight-line basis over the contractual period.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. No software
development costs have been capitalized due to immateriality.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. Total expenses were
$1,771,000, $2,123,000 and $2,331,000 in 1994, 1993 and 1992, 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
which may be incurred under its product warranties.
INCOME TAXES
Income tax expense includes U.S., state and foreign income taxes. Certain
items of income and expense are not reported in both the tax returns and
financial statements in the same year. The resulting difference is reported as
deferred income taxes.
The Company adopted in 1993 Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes," which requires the use of the
liability method in computing income taxes. Under the liability method,
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
These deferred tax assets and liabilities are measured by the provisions of
currently enacted tax laws. The adoption of SFAS 109 during the first quarter
of 1993 resulted in an increase in the net deferred tax asset by approximately
$400,000, which was reported separately as the cumulative effect of a change in
the method of accounting for income taxes in the consolidated statement of
operations for the year ended December 30, 1993.
EARNINGS PER SHARE
The Company calculates and reports earnings per share on a primary basis, using
the treasury stock method of computing weighted average common and common stock
equivalent shares outstanding during the period. Common stock equivalents which
are antidilutive are not considered. Stock options are common stock equivalents.
Fully diluted earnings per share is approximately the same as primary earnings
per share.
DIVERSIFICATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. 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. The
Company performs ongoing credit evaluations of its customers' financial
condition and requires collateral, such as letters of credit and bank
guarantees, whenever deemed necessary.
Page 30
RECLASSIFICATIONS
Certain prior years' balances have been reclassified to conform to current year
presentation.
NOTE 2 - PROVISION FOR BUSINESS RESTRUCTURING
During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1
million related to the restructure of its sales and distribution channels,
downsizing its operations to a level consistent with anticipated lower sales and
product margins, and consolidating and outsourcing of certain manufacturing
processes. The purpose of the restructure is primarily to reduce expenses and
significantly lower the Company's break-even point in reaction to the reduced
sales and gross margins realized in 1993. Additionally, the Company made
several strategic changes to its sales and distribution channels to better align
the Company's current and anticipated future products to their markets and
customers. The general downsizing of operations and restructure of the sales
and distribution system were substantially completed at December 29, 1994. The
Company began implementation of planned changes to its manufacturing processes
in the first quarter of 1994 for completion by the end of 1996.
Of the total restructure charge of $6.1 million, $2.1 million relates to
restructuring the sales and distribution system, including severance for
terminated employees, facilities and equipment lease abandonment, facilities
relocation costs, the writeoff of intangible assets associated with the
acquisition and set up of direct sales operations in Germany and the United
Kingdom, and costs associated with implementation of new accounting and
distribution systems and processes; $2.0 million relates to the consolidation
and outsourcing of certain portions of the Company's manufacturing operations,
including the writedown of production equipment to net realizable value,
severance for terminated employees, facility relocation costs, and costs
associated with outsourcing certain manufacturing processes; and the remaining
$2.0 million relates to general organizational downsizing, including severance
for terminated employees, asset write-downs and costs associated with
rearrangement of facilities.
At December 29, 1994 approximately $1.9 million of the total restructure charge
remained in accrued liabilities to be paid out in 1995 and 1996. Approximately
$1.9 million and $1.2 million had been spent during 1994 and 1993, respectively,
and $1.1 million had been charged against related assets.
NOTE 3 - INVENTORIES
Inventories consisted of the following components (in thousands):
December 29, December 30,
1994 1993
------------ ------------
Raw material $3,327 $2,963
Work-in-process 1,955 2,513
Finished goods 1,655 2,806
------------ ------------
$6,937 $8,282
------------ ------------
------------ ------------
NOTE 4 - LAND HELD FOR SALE
The Company owns 79.4 acres of land at its headquarters site in Redmond,
Washington, which it purchased in various parcels between 1979 and 1986. The
land was intended as a campus on which to consolidate the operations of the
Company as it expanded internally and through acquisitions. The Company has
since abandoned its aggressive acquisition and consolidation strategy. In 1990
the Company decided to market and sell the approximately 40 acres of land in
excess of that required for its current 100,000 square foot building and another
50,000 square foot expansion facility. At that time the land was reclassified,
at cost plus estimated disposition expenses, to Land Held for Sale in the
Company's financial statements. Based on information available at that time,
the cost approximated market value.
Page 31
In June 1992 the Company recorded an extraordinary $2.6 million ($1.7 million
after-tax) write-down to reflect a decrease in the market value of its land.
This decrease in value was caused primarily by the enactment, in July 1992, of a
Sensitive Areas Ordinance ("SAO") by the City of Redmond. The SAO prohibits
building not only on land classified as wetlands, but on steep slopes and on
buffers around the wetlands which are wider than those required by most
jurisdictions. In addition, due to the changes in valuation for commercial real
estate comparable to the land held by Data I/O, the Company recorded a $2.0
million valuation provision for the land held for resale at December 30, 1993.
Since placing the land on the market in 1990, the Company has entered into two
separate option agreements to sell the property. Both of these agreements were
allowed to expire due to the changes in regulatory requirements and valuations
of commercial real estate comparable to the land held by the Company, discussed
above. The Company intends to continue to market this excess land.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
December 29, December 30,
1994 1993
------------ ------------
Land $ 910 $ 910
Building and improvements 7,334 6,863
Equipment 21,507 22,140
------------ ------------
29,751 29,913
Less accumulated depreciation 19,014 17,713
Property, plant & equipment - net $10,737 $12,200
------------ ------------
------------ ------------
NOTE 6 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
December 29, December 30,
1994 1993
------------ ------------
Long-term lease deposits $ 156 $ 504
Investment in product lines 6,883 6,883
------------ ------------
7,039 7,387
Less accumulated amortization 3,145 1,746
------------ ------------
$3,894 $5,641
------------ ------------
------------ ------------
Total amortization recorded for 1994, 1993 and 1992 was $1,399,000, 1,338,000
and $582,000, respectively. The decrease in long-term lease deposits is
attributable to the termination of a foreign office lease.
INVESTMENT IN PRODUCT LINES
CAD/CAM GROUP, INC.
On January 19, 1993, the Company acquired substantially all of the assets of
CAD/CAM Group, Inc. and entered into non-compete agreements with its two
founding technologists. The acquisition was accounted for under the purchase
method of accounting. Of the total purchase price of $3.0 million to be paid to
CAD/CAM Group, Inc. and its two founding technologists, $1.5 million was paid
during 1993 and the balance plus accrued interest payable at the U.S. Treasury
Bill rate is payable in 1998. Of the total consideration, approximately $2.9
million plus approximately $200,000 of transaction costs were allocated to
various identifiable intangible assets. These are reported in the accompanying
balance sheet as Other Assets and is being amortized ratably over the economic
life of the specific assets acquired (two to eight years). The net book value
Page 32
of the assets capitalized in Other Assets related to this acquisition was $1.8
million at December 29, 1994 and $2.4 million at December 30, 1993.
QUALITY AUTOMATION, INC.
On September 25, 1990, the Company acquired exclusive rights to distribute
automated handling and labeling equipment manufactured by Quality Automation,
Inc. The Company also obtained options to acquire Quality Automation's existing
and future products as well as certain other assets. On September 25, 1992, the
Company exercised its options and purchased the assets, technology and rights in
the products of Quality Automation Inc., and Q.A. Engineering, Inc. (both herein
combined and referred to as "Quality Automation" or "QA"). The acquisition was
accounted for as a purchase, with the aggregate purchase price totaling $4.8
million. The aggregate purchase price, along with the associated transaction
fees, was allocated to the assets acquired, based on estimated fair market
value. Of the total acquisition cost, approximately $3.8 million of various
identifiable intangible assets were 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 $1.9 million
and $2.7 million at December 29, 1994, and December 30, 1993, respectively.
NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following components:
(In thousands) December 29, December 30,
1994 1994
------------ ----------
Borrowings under a $5.0 million
unsecured U.S. revolving line of credit,
maturing May 31, 1994, with a weighted
average interest rate of 4.4% at
December 30, 1993. $1,250
Borrowings under a $1.5 million
unsecured foreign revolving line of
credit maturing August 11, 1995, with
variable interest rates of 3.0% to 4.1%
and a weighted average rate of 3.2% at
December 29, 1994 and a weighted
average interest rate of 4.4% at
December 30, 1993. $440 1,117
Unsecured note payable to the CAD/CAM
Group, Inc., maturing in full on January 19,
1998, with variable interest rates based on
one-year U.S. Treasury Bills (7.15% at
December 29, 1994). 1,500 1,500
---------- ----------
Total debt 1,940 3,867
Less current maturities 440 2,367
---------- ----------
Total long-term debt $1,500 $1,500
---------- ----------
---------- ----------
In addition to the $5.0 million line of credit, at December 30, 1993, the
Company had an unused $3.0 million unsecured U.S. revolving/term loan requiring
equal quarterly principal payments beginning on March 31, 1995, and maturing on
December 31, 1996. At December 30, 1993, the Company was in violation of
certain covenants of its borrowing agreement with the lender of both of these
U.S. lines of credit. The lender granted to the Company a waiver of these
covenant violations through February 28, 1994. On February 28, 1994, the two
U.S. lines of credit described above were canceled and the Company signed a new
loan agreement for an $8.0 million revolving line of credit, secured by the
Company's accounts receivable and inventory and maturing on May 31, 1995.
Borrowings under this line of credit were restricted to $1.0 million plus 75% of
accounts receivable. In addition, the Company could borrow up to $2.0 million
against a negative pledge of its equipment until June 30, 1994. This new line
of credit called for interest at rates 50 to 125 basis points above the rates
charged on the previous lines of credit. Effective July 22, 1994, the Company's
lender for its $8 million U.S. line of credit agreed to release the collateral
supporting the credit line, eliminate the borrowing base calculation used to
determine available borrowings on the credit line and reduce the interest rate
charged on outstanding borrowings by 25 to 30 basis points. On November 16,
Page 33
1994, the Company's lender again reduced the interest rate charged on
outstanding borrowings by an additional 45 basis points to the bank's published
Prime rate or the Libor rate plus 150 basis points.
Historically, the U.S. and foreign lines of credit have been structured as
short-term and have been continuously renewed on their maturity dates. The
Company anticipates renewing these lines of credit in 1995 under substantially
the same terms. No assurance can be made, however, in regard to the renewal of
these agreements if the Company again experiences losses.
NOTE 8 - COMMITMENTS
The Company has commitments under non-cancelable operating leases and other
agreements, primarily for office space, with initial or remaining terms of one
year or more as follows (in thousands):
1995 $820
1996 526
1997 97
1998 3
Lease and rental expense was $1,169,000, $1,432,000 and $1,415,000 in 1994, 1993
and 1992, respectively. The Company has renewal options on substantially all of
its major leases.
NOTE 9 - EMPLOYEE STOCK AND RETIREMENT PLANS
STOCK OPTION PLANS
At December 29, 1994, there were 760,138 shares of common stock reserved for
issuance 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. Options granted under the plans
have termination dates ranging from five to seven years from the date of grant.
At December 29, 1994, options to purchase 219,125 shares were exercisable at
prices ranging from $2.06 to $6.38. The following table summarizes activity
under the plans for each of the three years ended December 29, 1994:
Shares Option Price
------------ ----------------------------------------
Outstanding December 26, 1991 853,248 $1.60 - $5.88
Granted 177,500 3.75 - 6.38
Exercised (199,476) 1.98 - 4.60
Expired and terminated (48,697) 1.60 - 5.75
------------
Outstanding December 31, 1992 782,575 1.60 - 6.38
Granted 266,000 2.59 - 4.50
Exercised (88,450) 1.60 - 3.73
Expired and terminated (213,375) 1.98 - 5.88
------------
Outstanding December 30, 1993 746,750 2..06 - 6.38
Granted 413,000 2.44 - 3.59
Exercised (44,875) 2.06 - 3.75
Expired and terminated (298,875) 2.06 - 5.88
------------
Outstanding December 29, 1994 816,000 2.06 - 6.38
------------
------------
At December 29, 1994, the Company had granted 55,862 more options than it had
available for grant under its plans. The Company expects that this difference
will be partially offset by options that will expire or terminate during the
first half of 1995. Additionally, the Company will request that stockholders
approve a resolution authorizing an additional 500,000
Page 34
shares of common stock be reserved for the stock option plans. This resolution
will be voted on at the Company's 1995 annual meeting. The terms of the
resolution are included in the Company's Proxy Statement relating to the annual
meeting of stockholders to be held on May 16, 1995.
There were 55,720 and 110,470 shares available for grant under the plans at
fiscal year-end 1993 and 1992, respectively.
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 1994, 1993 and 1992, a total of
136,990, 149,259 and 108,650 shares were purchased under the plan at average
prices of $2.39, $2.74 and $3.21 per share, respectively. At December 29,
1994, a total of 246,394 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, no compensation expense has been recorded under this plan.
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, but no
more than approximately $9,000 per plan year. The Company contributes 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 $384,000, $400,000 and $355,000 in 1994, 1993 and 1992,
respectively.
Page 35
NOTE 10 - ACCOUNTING FOR INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 109. This requires the establishment of deferred tax assets
and liabilities for expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and the tax basis of assets and
liabilities using currently enacted tax rates which are expected to be in effect
during the years in which the differences are anticipated to reverse. The
cumulative effect of this change in accounting for income taxes of $400,000 was
determined as of January 1, 1993, and is reported separately in the consolidated
statement of operations for the year ended December 30, 1993. Prior years'
financial statements have not been restated to apply the provisions of SFAS 109.
Year Ended December
------------------------------
1994 1993 1992
---------- ---------- ----------
Components of income (loss) before taxes were: (in thousands):
U.S. operations $2,615 ($10,736) $3,933
Foreign operations 1,086 (1,621) 380
---------- ---------- ----------
$3,701 ($12,357) $4,313
---------- ---------- ----------
---------- ---------- ----------
Income tax expense (benefit) consists of (in thousands):
Current tax expense (benefit)
U.S. Federal ($176) ($1,665) $1,635
State 127 (46) 110
Foreign 151 117 95
---------- ---------- ----------
102 (1,594) 1,840
Deferred tax expense (benefit)
U.S. Federal 859 538 (395)
Foreign 14 356
---------- ---------- ----------
873 894 (395)
---------- ------------------------------
Total income tax expense (benefit) $975 ($700) $1,445
---------- ---------- ----------
---------- ---------- ----------
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 $15,000, $49,000 and $64,000 in 1994, 1993 and 1992, respectively.
Foreign currency translation adjustments, which were recorded directly in
equity, were recorded net of the related deferred tax assets of $27,000 in 1994
and $203,000 in 1992 and a deferred tax liability of $23,000 in 1993. In 1992,
the extraordinary loss on land held for sale was recorded net of the applicable
$925,000 income tax benefit.
Deferred taxes relating to timing differences in 1992 were (in thousands):
1992
----------
Inventory and product return allowances ($352)
Leases 10
Intercompany profit in foreign subsidiaries' inventory 192
Depreciation and amortization 3
Accrued compensation, pension and retirement (141)
Domestic International Sales Corporation (50)
Other (57)
----------
($395)
----------
----------
Page 36
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
accordance with SFAS 109 (in thousands):
Upon
Adoption at
December 29, December 30, January 1,
1993 1994 1993
------------ ------------ ------------
Deferred income tax assets:
Receivables allowance for doubtful accounts $ 79 $ 84 $ 80
Inventory, product return reserves and basis differences 1,079 1,088 973
Land basis 966 980
Compensation accruals 253 271 346
Intercompany profit 308 578 523
Pension and retirement accruals 127 390 325
Restructure asset and liability reserves 606 1,424
Accrued liability reserves 270 252 251
Foreign net operating loss carryforwards 720 1,127 618
Alternative minimum tax credit carryforwards 275
Other, net 93 119 116
------------ ------------ ------------
4,776 6,313 3,232
Valuation allowance (3,358) (3,751) (311)
------------ ------------ ------------
$1,418 $2,562 $2,921
------------ ------------ ------------
------------ ------------ ------------
Deferred income tax liabilities:
Tax accelerated depreciation and amortization $798 $1,017 $916
Foreign currency translation 279 307 284
Other 138 163 152
------------ ------------ ------------
$1,215 $1,487 $1,352
------------ ------------ ------------
------------ ------------ ------------
The valuation allowance for deferred tax assets decreased $393,000 during the
year ended December 29, 1994, due primarily to reversals of temporary
differences offset partially by an alternative minimum tax credit in
carryforward. The $3,440,000 increase in valuation allowance during the year
ended December 30, 1993 related to net operating losses of foreign subsidiaries
and to an assessment of the benefit obtainable for other net deferred tax
assets. The net deferred tax assets recorded were limited to temporary
differences of $1.5 million at December 29, 1994 and $4.5 million at December
30, 1993 which are expected to result in loss carryback benefits when they
reverse. These temporary differences relate primarily to restructure charges
becoming tax deductions when paid. The benefit of these future carrybacks was
limited by the alternative minimum tax.
A reconciliation of the Company's effective income tax rate and the U.S. federal
tax rate is as follows:
Year Ended December
--------------------------------------------------
1994 1993 1992
---------- ---------- ----------
Statutory rate 34.0% (34.0%) 34.0%
Foreign Sales Corporation tax benefit (2.7%) (0.3%) (5.9%)
State and foreign income tax, net of
federal income tax benefit 5.1% 0.4% 3.6%
Valuation allowance for deferred assets (10.7%) 28.1%
Other .6% 0.1% 1.8%
---------- ---------- ----------
26.3% (5.7%) 33.5%
---------- ---------- ----------
---------- ---------- ----------
The Company has foreign net operating loss ("NOLs") carryforwards of
approximately $2,117,000, with the following expirations: $881,000 in 1998 and
$1,236,000 available indefinitely. The Company has alternative minimum tax
credit carryforwards of $275,000, which are available indefinitely to reduce
future regular federal income taxes. Deferred tax assets arising from these
foreign NOLs and alternative minimum tax credits are fully provided for in the
valuation allowance.
Page 37
NOTE 11 - GEOGRAPHIC SEGMENT INFORMATION
Data I/O and its subsidiaries operate predominantly within a single industry
segment: the design, manufacture, sale and service of programming systems and
design software for programmable integrated circuits. No one customer accounted
for more than 10% of the Company's revenues in the years ended December 29,
1994, December 30, 1993 and December 31, 1992. Major operations outside the
U.S. include sales subsidiaries in Japan, Germany, Canada and the United
Kingdom.
Geographic information for the three years ended December 29, 1994, is presented
in the table that follows. Net sales, as shown in the table below, is based
upon the geographic area into which the products were sold and delivered. As
such, U.S. export sales of $18,522,000, $22,626,000 and $22,520,000 in 1994,
1993 and 1992, respectively, have been excluded from U.S. reported net sales.
Transfers between geographic areas are made at prices consistent with rules and
regulations of governing tax authorities. The profit on transfers between
geographic areas is not recognized until sales are made to non-affiliated
customers. 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. 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.
Year Ended December
-------------------------------------------
(In thousands) 1994 1993 1992
------------- ------------ ------------
Net sales:
U.S. $ 32,930 $ 33,738 $ 34,816
Europe 16,221 15,910 19,447
Other 12,327 13,538 15,074
------------- ------------ ------------
$ 61,478 $ 63,186 $ 69,337
------------- ------------ ------------
------------- ------------ ------------
Operating income (loss):
U.S. $ 1,235 ($ 6,847) $ 1,014
Europe 2,012 (2,306) 1,446
Other 588 (986) 2,163
------------- ------------ ------------
$ 3,835 ($ 10,139) $ 4,623
------------- ------------ ------------
------------- ------------ ------------
Identifiable assets:
U.S. $ 35,790 $ 34,638 $ 38,398
Europe 4,284 4,626 6,338
Other 3,413 3,761 4,966
------------- ------------ ------------
$ 43,487 $ 43,025 $ 49,702
------------- ------------ ------------
------------- ------------ ------------
Page 38
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited selected quarterly financial data for
the Company for 1994 and 1993. 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 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.
1994
-----------------------------------------------------
For the quarters ended: Mar. 31 June 30 Sept. 29 Dec. 29
------- ------- -------- -------
(In thousands except per share data)
Net sales $14,404 $16,131 $15,620 $15,324
Gross margin 7,016 8,772 8,381 8,925
Net income (loss) (399) 788 797 1,541
Earnings per share:
Net income (loss) ($0.05) $0.11 $0.11 $0.20
Market price per share:
High $3.62 $3.38 $3.50 $5.75
Low $2.25 $2.50 $2.63 $3.00
1993
-----------------------------------------------------
For the quarters ended: Apr. 1 July 1 Sept. 30 Dec. 30
------- ------- -------- -------
(In thousands except per share data)
Net sales $16,443 $16,962 $14,947 $14,834
Gross margin 9,135 8,479 8,376 5,786
Income (loss) before cumulative effect of
accounting change 121 (593) ( 1,306) ( 9,879)
Net income (loss) 521 (593) ( 1,306) ( 9,879)
Earnings per share:
Income (loss) before cumulative effect of
accounting change $0.02 ($0.08) ($0.18) ($1.36)
Net income (loss) $0.07 ($0.08) ($0.18) ($1.36)
Market price per share:
High $4.88 $4.38 $3.25 $3.13
Low $4.25 $3.00 $2.88 $2.25
For the first three quarters of 1994, the Company's effective tax rate reflected
building additional valuation allowances for foreign subsidiary losses and tax
credits. The fourth quarter income bore an effective tax rate of zero due to
the reversal of valuation allowances. The valuation allowances that reversed
related primarily to reversals of temporary differences and utilization of
foreign loss carryforwards.
In the fourth quarter of 1993, the Company recorded a $6.1 million restructure
charge (see Note 2 of "Notes to Consolidated Financial Statements") and a $2.0
million writedown of its land held for sale (see Note 4 of "Notes to
Consolidated Financial Statements").
For the first quarter of 1993, the Company estimated that its effective tax rate
would be 38%. For the remaining quarters of 1993, the Company estimated its
effective tax benefit rate would be 34% before changes in the valuation account.
The actual tax benefit rate for 1993 operations was 5.7% (see Note 10 of "Notes
to Consolidated Financial Statements").
Data I/O Corporation's common stock is traded in the over-the-counter National
Market System (NASDAQ symbol is DAIO) and quoted in many financial publications,
including the WALL STREET JOURNAL. The per share prices reported in the table
above are those reported by NASDAQ. The approximate number of stockholders of
record at March 1, 1995, was 7,492,042.
Page 39
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. The Company's U.S.
line of credit agreement restricts the payment of cash dividends through a
requirement for minimum levels of tangible net worth.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
Page 40
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, 1995, 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, 1995, 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, 1995, 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.
Page 41
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
10.1.
(2) 1984 Deferred Compensation Plan. See Exhibit 10.2.
(3) Retirement Plan and Trust Agreement. See Exhibit 10.14 and 10.21.
(4) 1985 Stock Option Plan. See Exhibit 10.3.
(5) 1984 FutureNet Employee Stock Option Plan. See Exhibit 10.4.
(6) Summary of Management Incentive Compensation Plan. See Exhibit 10.5,
10.14 and 10.16.
(7) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit
10.9.
(8) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.10.
(9) Form of Change in Control Agreements. See Exhibit 10.20.
(A) LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT: PAGE
(1) INDEX TO FINANCIAL STATEMENTS:
Report of Independent Auditors 24
Report of Management 24
Consolidated Statements of Operations for each of the
three years ended December 29, 1994 25
Consolidated Balance Sheets as of December 29, 1994,
and December 30, 1993 26
Consolidated Statements of Cash Flows for each of the
three years ended December 29, 1994 27
Consolidated Statements of Stockholders' Equity for each
of the three years ended December 29, 1994 28
Notes to Consolidated Financial Statements 29
Page 42
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES:
II Consolidated Valuation and Qualifying Accounts 46
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:
3 ARTICLES OF INCORPORATION:
3.1 The Company's restated Articles of
Incorporation filed November 2, 1987
(Incorporated by reference to Exhibit 3.1
to 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 January 18, 1994.
(Incorporated by reference to Exhibit 3.2
to the Company's 1993 Annual Report on Form
10K (File No. O-10394)). N/A
3.3 Certificate of Designation, Preferences and
Rights of Series A Junior Participating
Preferred Stock (Incorporated by reference
to Exhibit 1 to the Company's Registration
Statement on Form 8-A filed April 5, 1988
(File No. 0-10394)). N/A
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES:
4.1 Form of Rights Agreement, dated as of March
31, 1988, between the Company and Chemical
Trust Company of California, (formerly
First Jersey Shareholder Services, Inc.)
which includes as Exhibit B thereto the
form of Rights Certificate (Incorporated by
reference to the Company's Registration
Statement Form 8-A filed on April 5, 1988
(File No. 0-10394)). N/A
10 MATERIAL CONTRACTS:
10.1 Amended and restated 1982 Employee
Stock Purchase Plan (Incorporated by
reference to Exhibit 10.1 to the Company's
Registration Statement of Form S-8, File
No. 33-42010, filed August 1, 1991). N/A
10.2 1984 Deferred Compensation Plan
(Incorporated by reference to Exhibit 10.22
of the Company's 1983 Annual Report on
Form 10-K (File No. 0-10394)). N/A
10.3 1985 Stock Option Plan (Incorporated by
reference to Exhibit 10.22 of the Company's
1984 Annual Report on Form 10-K (File No.
0-10394)). N/A
10.4 1984 FutureNet Employee Stock Option
Plan (Incorporated by reference to Exhibit
10.23 of the Company's 1984 Annual Report
on Form 10-K (File No. 0-10394)). N/A
10.5 Summary of Management Incentive
Compensation Plan. (Incorporated by
reference to Exhibit 10.21 of the Company's
1991 Annual Report on Form 10-K
(File No. 0-10394)). N/A
Page 43
10.6 Business Loan Agreement dated November
25, 1992, with Seattle First National Bank
for $8.0 million (Incorporated by reference
to Exhibit 10.20 of the Company's 1992
Annual Report on Form 10-K (File No. 0-
10394)). N/A
10.7 Asset Purchase Agreement, dated as of
December 31, 1992, by and among Data I/O
Corporation, CAD/CAM Group, Inc., and
certain of its shareholders, and an
Amendment thereto, dated January 19, 1993
(Incorporated by reference to Exhibit 10.21
of the Company's 1992 Annual Report on Form
10-K (File No. 0-10394)). N/A
10.8 Software Development Agreement, dated
as of January 19, 1993, by and among
Data I/O Corporation, Michael J. Mendelsohn
and Peter C. Niday (Incorporated by
reference to Exhibit 10.22 of the Company's
1992 Annual Report on Form 10-K (File No.
0-10394)). N/A
10.9 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
10.10 Amended and Restated 1986 Stock Option
Plan dated February 3, 1993 (Incorporated
by reference to Exhibit 10.24 of the
Company's 1992 Annual Report on Form 10-K
(File No. 0-10394)). N/A
10.11 Amendment, dated April 30, 1993, to the
business loan agreement dated November 25,
1992, with Seattle First National Bank.
(Incorporated by reference to Exhibit 10.22
of the Company's 1993 Annual Report on Form
10K (File No. O-10394)). N/A
10.12 Restated Option to Purchase Real
Property dated as of July 13, 1993, with the
Quadrant Corporation. (Incorporated by
reference to Exhibit 10.23 of the Company's
1993 Annual Report on Form 10K (File No. O-
10394)). N/A
10.13 Business loan agreement dated February
28, 1994, with Seattle First National Bank
for $8.0 million. (Incorporated by
reference to Exhibit 10.24 of the Company's
1993 Annual Report on Form 10K (File No. O-
10394)). N/A
10.14 Summary of 1994 Management Incentive
Compensation Plan. (Incorporated by
reference to Exhibit 10.25 of the Company's
1993 Annual Report on Form 10K (File No. O-
10394)). N/A
10.15 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
10.16 Management Incentive Compensation Plan 47
10.17 Performance Bonus Plan 55
10.18 Amendment, dated July 22, 1994, to the
business loan agreement dated February 28,
1994, with Seattle First National Bank 59
10.19 Amendment, dated November 16, 1994 to
the Business Loan Agreement dated February
28, 1994, with Seattle First National Bank 61
10.20 Form of Change in Control Agreements 62
Page 44
10.21 First Amendment to the Data I/O Tax
Deferred Retirement Plan 69
11 STATEMENT RE: COMPUTATION OF EARNINGS PER
SHARE 47
22 SUBSIDIARIES OF THE REGISTRANT 48
24 INDEPENDENT AUDITORS' CONSENT 49
(B) FORM 8-K:
No reports on Form 8-K were filed during the fourth quarter of
1994.
Page 45
DATA I/O CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
SCHEDULE II
Collection
Charged/ of
(Credited) Accounts
Balance at to Costs Previously Accounts Balance at
Beginning and Written Written End of
Year Ended of Period Expenses Off Off Period
- --------------------- ---------- ----------- ----------- -------- ----------
December 31, 1992: $290 $131 $61 ($116) $366
---------- ----------- ----------- -------- ----------
---------- ----------- ----------- -------- ----------
December 30, 1993: $366 $32 $14 ($80) $332
---------- ----------- ----------- -------- ----------
---------- ----------- ----------- -------- ----------
December 29, 1994: $332 $4 $12 ($71) $277
---------- ----------- ----------- -------- ----------
---------- ----------- ----------- -------- ----------
Page 46