UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
December 31, 2002
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the period from ___________ to _____________
Commission File No. 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0864123
(State or other Incorporation)
(I.R.S. Employer Identification Number)
P.O. Box 97046, 10525 Willows Road N.E., Redmond, Washington, 98073-9746
(Address, including zip code, of registrant's principle executive
offices and telephone number, including area code (425) 881-6444)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (No Par Value)
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __ No X
Aggregate market value of voting and non-voting common stock held by
non-affiliates of the registrant as of June 28, 2003
$6,897,967
7,883,188 shares of Common Stock, no par value, outstanding as of March 21, 2003
Documents incorporated by reference
Portions of the registrant's Proxy Statement relating to its May 20, 2003 Annual
Meeting of Shareholders are incorporated into Part III of this Annual Report on
Form 10-K.
Page 1 of 52
Exhibit Index on Page 41
DATA I/O CORPORATION
FORM 10-K
For the Fiscal Year Ended December 31, 2002
INDEX
Part I Page
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
Part III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 40
Item 13. Certain Relationships and Related Transactions 40
Item 14. Controls and Procedures 40
Part IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 41
Signatures 45
PART I
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about Data I/O(R) Corporation's industry, management's
beliefs and certain assumptions made by management. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Forward Looking
Statements."
General
Data I/O Corporation ("Data I/O") designs, manufactures, and sells programming
systems used by designers and manufacturers of electronic products. Our
programming system products are used to program integrated circuits ("ICs" or
"devices" or "semiconductors") so that the ICs will function as desired in the
customer's electronic product. They are an important tool for the electronics
industry experiencing growing use of programmable ICs. Data I/O markets and
distributes our programming systems worldwide, and is a global leader in this
market. Data I/O incorporated in the State of Washington in 1969.
Data I/O Mission. Data I/O's mission is to design and deliver innovative
customer-focused programming solutions, which enable customers to manage their
firmware supply chain, getting their products to market faster, while reducing
costs in their process. We align our products and services to make programming
easy, delight our customers and satisfy their whole product needs.
Helping customers manage their firmware supply chain. In modern electronics,
hardware is increasingly becoming a commodity. Wireless telephones are a notable
example. Most of the innovation and competitive advantage of a telephone comes
from the software buried inside the telephone, which is commonly referred to as
"firmware." Companies use firmware to differentiate their products from their
competitors' products, constantly writing new code to add features. This allows
them to build multiple models with identical hardware and many versions of
firmware, all on one production line. Any improvement in production efficiency
boosts the profitability of all products on that line. Many original equipment
manufacturers ("OEMs") now outsource production to specialists in electronic
manufacturing services ("EMS") to maximize the profit impact from highly
efficient production. The challenges of managing the firmware supply chain
remain, however, and can even increase with this additional interface. Our
systems allow our customers - both OEM and EMS companies - to build telephones
with the exact firmware (feature set) that consumers specify, virtually
real-time with the latest software release. We help our customers eliminate
inventory risks, delays, rework, and lost market opportunities while enabling
them to better serve their customers.
Connected Strategy. Data I/O's connected strategy leverages network capable
products to move the customer's intellectual property seamlessly and securely up
and down the supply chain. Our connected strategy allows customers to connect
engineering to manufacturing to end customers.
Business Restructuring. The economic slowdown continued in 2002 and
significantly affected our business. During 2002, we continued the restructuring
process from 2001 and recorded restructuring charges in the third and fourth
quarter of 2002 of $497,000 and $135,000 respectively for a total of $632,000
associated with actions taken to reduce our breakeven point and realign Data I/O
with our market opportunities. We required this operational repositioning
because of the impact of the economic slowdown and the decline in capital
spending across a high number of customer groups on general demand for
programming equipment.
We reduced our quarterly breakeven point from approximately $7 million of net
sales at the beginning of 2002 to approximately $5.7 million at the end of 2002.
Most of these reductions were achieved by reducing our personnel from 155 at the
beginning of 2002 to 125 at the end of 2002.
During 2001, we took a number of strategic restructuring actions to reduce our
breakeven point. Repositioning included the following: a reduction in our global
workforce from 224 at the start of the year to 155 at the end of 2001;
discontinuance or reallocation of numerous projects and activities not essential
to our long-term goals; streamlining activities to decrease discretionary
marketing, distribution and promotional expenses, consolidation of numerous
functions across the organization to create a team which was more productive and
able to respond faster to global customer needs; and closure of a facility in
Germany and moving its operations to other locations within Data I/O.
At December 31, 2002 all restructuring expenses associated with the activities
detailed above were paid except for approximately $204,000, which was primarily
associated with severance, facility, consulting and legal fees.
We believe that the progress made in these areas positions us for a successful
turnaround and profitable operations if sales remain stable or improve. However,
consistently profitable operations may not always be possible, nor is there any
assurance that the turnaround efforts will be successful.
Industry Background
Data I/O operates in a niche of the electronics equipment industry that provides
programming systems used to load specific data and design information into
programmable devices. Companies that design and manufacture electronic products
that utilize programmable devices purchase these systems from us. These
companies, our primary customers, design and manufacture a broad range of
electronic products for both consumer and industry use.
Programmable devices represent an over $10 billion segment of the semiconductor
industry, and have grown more rapidly than the semiconductor industry as a whole
in recent years. Programmable devices offer advantages to the electronic product
designer allowing them to bring products to market more quickly and
inexpensively than using fixed-function devices, and can offer the advantage of
simpler rapid product upgrades. Programmable devices also offer attractive
functionality to the user of the electronic product, such as storing personal
information or customizing product functionality. As a result, use of
programmable devices is growing rapidly in both high-volume consumer electronic
products and more complex electronic systems.
Due to this growth, more than 100 vendors provide programmable devices offering
thousands of different programmable devices on the market, developed by numerous
device vendors. The technology trends driving the programmable device market
result in a broad range of requirements for programming information into these
devices. Programmable memory devices continue to have higher capacity and occupy
smaller circuit board space. Programmable microcontroller devices are now more
prevalent because semiconductor vendors are standardizing their manufacturing
processes. These technology advances require advanced programming equipment.
Automated programming systems integrate programming and handling functions into
one product for increasing handling and programming capacity. Quality conscious
customers continue to drive this portion of our business, which includes
high-volume manufacturing and high-volume programming center customers.
Products
In order to accommodate the expanding variety and quantities of programmable
devices being manufactured today, Data I/O offers multiple solutions for the
numerous types of devices used by our customers in the various market segments
and applications. We work closely with major manufacturers of programmable
devices to develop our products to meet the requirements of a particular device.
Data I/O's line of programming systems includes a broad range of products,
systems, modules, and accessories, which we group into two general categories:
automated programming systems and non-automated programming systems. We group
automated programming systems into two categories: off-line and in-line. In
addition, we provide device support and service on all of our products. Device
support is a critical aspect of our business and consists of writing algorithms
for devices and developing socket adapters to hold and connect to the device for
programming.
Within the categories of automated and non-automated systems, Data I/O targets
specific solutions at specific market segments. Data I/O optimizes the solution
based on the customer's device, process and business needs. We think the market
growth opportunity is not a relatively costly universal solution with very broad
device support, but optimized systems focused on a narrower range of devices
(such as flash devices) which provide customers with the economical programming
solutions for high volumes of devices and lean processes. Our recent product
introductions have focused on these growth markets and targeted their specific
needs.
TaskLink(R) is our software platform that provides a common intuitive user
interface and enhances the quality of the customer's programming process. As
part of our core technology, TaskLink also supports Data I/O's connected
strategy, allowing customers to connect engineering to manufacturing to end
customers.
Automated Programming Systems
Data I/O provides our manufacturing and programming center customers with
automated programming systems solutions that include robotic handlers, a variety
of programmers, input and out media handling (such as tray stackers, tubes,
loaders or taping), and marking solutions. Our ProLINE-RoadRunner is a unique
and innovative in-line programming system with programming speed capability
which outstretches the speed at which Flash devices can currently accept data.
Many of our customers need to program flash devices in large quantities and very
quickly. ProLINE-RoadRunner mounts directly onto the assembly machine in the
production line (Siemens, Fuji, Universal and Assembleon machines, with a
version for Panasonic machines nearly complete) and delivers programmed parts
from reels of blank devices to the production line in a just-in-time fashion.
Our ProLINE-RoadRunner eliminates production bottlenecks associated with high
density flash devices, allowing last minute firmware changes and eliminating
programmed part inventories, ultimately streamlining and reducing the customer's
production and process costs. The ProLINE-RoadRunner enables customers to
implement lean processes and is a key element to Data I/O's connected strategy,
allowing customers and partners to more effectively manage their firmware supply
chain. The ProLINE-RoadRunner currently retails from $85,000 to $135,000,
depending on programming capacity. We continue to leverage our
ProLINE-RoadRunner in our platform to reach a broader market. For example, our
Infinity(TM) product uses multiple ProLINE-RoadRunners in an automated off-line
system that yields incremental improvement in capacity and extremely high
throughput for high volume manufacturers.
Data I/O's PS300 family of automated programming solutions offers highly
flexible solutions for off-line batch programming. Data I/O can configure PS300
systems to support not only Flash devices, but also a wide variety of other
devices, such as microcontrollers. These systems provide a number of marking,
labeling, and input/output options. Most importantly, customers can make
changeovers extremely fast. This feature allows the EMS or programming center
customers to rapidly respond to diverse demands with very little downtime.
Customers can optimize the PS300 family systems for any job to maximize
throughput and, when combined with fast changeover times and high reliability,
provide the highest levels of output during a production shift. Our latest
product, the PS300-FC, integrates the same FlashCORE(TM) programmer we use in
our ProLINE-RoadRunner and FlashPAK and builds on our connected strategy and
common architecture. For smaller memory, microcontroller and logic devices, our
ProMaster systems offer a cost-effective, high-yield automated solution. Prices
for our off-line systems range from $50,000 to $500,000, with an average
configuration costing between $200,000-$300,000.
Non-Automated Programming Systems
Our line of non-automated programming systems provides solutions for both
engineering and low to medium-volume manufacturing customers. Non-automated
programming systems require a user to physically handle the devices being
programmed. These types of programmers are also sometimes referred to as
"manual" or "desktop" programmers. We now have three families of non-automated
programmers: the Sprint, UniSystem and FlashPAK.
Engineering customers typically use single-site programming systems during the
prototype phase of a new design, and may purchase inexpensive systems for
limited device needs or more expensive systems to support more complex devices
or a large variety of device types. Single-site programming systems can perform
programming on only one programmable device at a time.
Data I/O offers a range of high quality, universal single socket manual
programming solutions through our UniSystem family of programming systems. The
UniSite and 3980 xpi programming systems offer the highest levels of signal
integrity which ensure the highest programming standards. Popular in military,
aerospace, telecommunications and other mission critical applications, the
systems range from $7,000 to $25,000.
For more cost constrained or higher volume applications, the Sprint family of
products offers excellent value for the money and versatility. The Sprint Quad
and Octal programming systems offer 4 and 8 socket universal programming
configurations for the higher volume applications. These two families of
products range in price from under $1,000 to $16,000 for the multiple socket
solutions.
Our newest programmer, the FlashPAK, leverages the high-speed proprietary
FlashCORE programming technology in the ProLINE-RoadRunner system. We believe
FlashPAK, priced at $6,000, is the world's fastest programming architecture,
limited today only by the speed at which Flash devices can accept data. FlashPAK
is another key element of Data I/O's connected strategy providing OEMs and new
product introduction facilities with a high performance Flash programming system
that can be used to validate designs before moving down the firmware supply
chain. For manufacturing applications, the FlashPAK, a high speed, multi-socket,
small footprint desktop solution, provides manual programming operations with
the highest level of flexibility at the lowest cost per part. Manufacturers that
use manual programming because of lower labor costs in areas like Asia find
FlashPAK an attractive solution.
Data I/O supports and completes our product offering with a full range of
software and device update products and worldwide service and repair capability.
Customers
Data I/O sells our products to customers worldwide in a broad range of
industries, including wireless handset and other telecommunication companies,
consumer electronics, computers, test and measurement, medical, transportation,
military, aerospace, electronic contract manufacturing, and semiconductors.
These customers either design and/or manufacture electronic products that
incorporate programmable devices or provide device programming services. During
2002, we sold products to over 2,500 customers throughout the world, none of
whom accounted for 10% or more of our net sales.
Programmable device consumption continues to grow as more and more electronic
product manufacturers take advantage of the flexibility and cost effectiveness
of programmable memory, microcontroller and logic devices. Electronic products
today utilize programmable technology in one form or another, from
microcontrolled home appliance devices to set top boxes and wireless devices,
which use increasingly vast amounts of memory for Internet connectivity and new
leading edge features. Therefore, our customers come from virtually all
industries manufacturing electronic products, and include the consumer
electronic products, cell phone, personal data assistants ("PDAs") and other
wireless device manufacturers, home entertainment product sectors, aerospace and
military applications, the personal computer ("PC") and PC peripheral industry
and automotive electronics.
Flash memory growth. The Flash memory customer segment is experiencing some of
the most impressive growth of all programmable devices. As cell phones, PDAs,
games consoles, set top boxes and other consumer devices become more capable,
powerful and compact, the demand for Flash units and megabytes continues to
grow.
Microcontroller growth. As the demand for smarter electronic devices increases,
demand for greater numbers of microcontroller devices increases. Many household
appliances today contain a microcontroller to control the critical functions of
the product and provide new features. Examples of these appliances include
toasters, refrigerators, garage door openers and even thermostats. This growth
creates new market opportunities for us. In addition, the number of
microcontrollers in automotive electronic applications is growing rapidly, with
some cars having as many as 60 or more microcontrollers that control functions
from airbag and ABS systems to air conditioning, information centers and
entertainment and communication systems. We are also targeting the automotive
segment as a critical and growing target segment for our solutions.
Geographic Markets and Distribution
Data I/O markets and sells our products through a combination of direct sales,
internal telesales, and indirect sales representatives and distributors. We
continually evaluate our sales channels against our evolving markets and
customers.
U.S. Sales
We market our products throughout the U.S. using a variety of sales channels,
including our own field sales management personnel, independent sales
representatives, and a direct telesales organization. Our U.S. independent sales
representatives obtain orders on an agency basis, with shipments made directly
to the customer by Data I/O. Sales of our semiconductor programming equipment
products requiring installation by us that is other than perfunctory are
recorded when installation is complete, or at the later of customer acceptance
or installation, if an acceptance clause is specified in the sales terms. We
recognize revenue from other product sales at the time of shipment. We record
revenue from the sale of service and update contracts as deferred revenue and we
recognize it on a straight-line basis over the contractual period. Net Sales in
the United States for 2002, 2001, and 2000 were $8,347,000, $9,526,000 and
$15,588,000 respectively.
Foreign Sales
Foreign sales represented approximately 64% of net sales of our programming
systems in each of 2002, 2001 and 2000 (see Note 15 of "Notes to Consolidated
Financial Statements"). We make foreign sales through our wholly-owned
subsidiaries in Germany, China and Canada, as well as through independent
distributors and sales representatives located in 35 other countries. We record
sales made through foreign subsidiaries requiring installation by Data I/O that
is other than perfunctory when installation is complete, or at the later of
customer acceptance or installation, if an acceptance clause is specified in the
sales terms. We recognize revenue from other product sales at the time of
shipment. We record revenue from the sale of service and update contracts as
deferred revenue and recognize it on a straight-line basis over the contractual
period. Our independent foreign distributors purchase Data I/O products in U.S.
Dollars for resale and we recognize the sale at the time of shipment to the
distributor. 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 us. We recognize sales, denominated in U.S. Dollars, upon shipment,
if installation is perfunctory or does not need to be performed by us, or when
the equipment is installed at the end-user's site, if installation is more than
perfunctory and is to be performed by us, or in the case where acceptance is
required, upon acceptance.
Net foreign sales for 2002, 2001, and 2000 were $14,491,000, $17,300,000 and
$27,321,000 respectively. We determine total foreign sales by the international
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 our
foreign distributors and to our representatives' customers. Foreign sales do not
include transfers between Data I/O and our foreign subsidiaries. Export sales
are subject to U.S. Department of Commerce regulations. We have not, however,
experienced any difficulties to date as a result of these requirements.
Fluctuating exchange rates and other factors beyond our 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. We cannot predict the effect of such factors on our business.
Competition
The competition in the programming systems market is highly fragmented with a
large number of smaller organizations offering inexpensive solutions. We
estimate that prior to the past couple years the total number of programming
systems sold each year has been less than $150 million, with Data I/O capturing
an estimated 20 to 25% of the global market. Over the last two years, we believe
the amount has declined by about 50% and that Data I/O has gained market share
versus our significant competitors.
Competitive factors often include prices, features, device support and
programming speed, as the programming process impacts more on the major
manufacturers' total production process. However, competitive factors are
changing. The added value for customers is becoming the whole product solution
that fits the customer's required process. As an example, ProLINE-RoadRunner
offers a unique solution which best addresses the customer's process needs in
high volume Flash applications. To this extent, the value proposition of this
specific programming solution is very different from traditional solutions.
Therefore, addressing customers' process needs is critical to increasing the
opportunity for programming solutions beyond the current amount in this market
niche. We have prepared an estimate that customers are spending between $1 to $2
billion a year on programming memory, microcontroller and logic devices and much
of this programming is achieved through the use of the customers' test equipment
offered by companies like Agilent and Teradyne or homegrown solutions for
specific markets like automotive. The main competitive solution in the
programmable market is, therefore, the in-house solution, and the opportunity
exists to substitute customers' solutions with more economical and more easily
maintainable solutions to solve the problems which traditional programmers do
not address. Boundary scan tools also fall into this category, although still a
very small market with a number of small companies participating who principally
focus on test solutions. A number of companies are part of a trend towards using
in-system programming, which Data I/O does not currently address but continues
to evaluate.
Manufacturing, Raw Materials, and Backlog
Data I/O performs primarily assembly and testing of our products at our
principal facility in Redmond, Washington and we outsource our circuit board
manufacturing and fabrication. We use a combination of standard components,
proprietary custom ICs and fabricated parts manufactured to Data I/O
specifications. An outside supplier located in Germany manufactures our Sprint
non-automated programming systems. 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. We believe that additional
sources can be developed for present single-source components without
significant difficulties in obtaining supplies. We cannot be sure that
single-source components will always continue to be readily available. If we
cannot develop alternative sources for these components, or if we experience
deterioration in relationship with these suppliers, there may be delays or
reductions in product introductions or shipments, which may materially adversely
affect our operating results.
In accordance with industry practices, generally all orders are subject to
cancellation prior to shipment without penalty except for contracts calling for
custom configuration. To date, such cancellations have not had a material effect
on our sales volume. To meet customers' delivery requirements, we manufacture
certain products based upon a combination of backlog and anticipated orders.
Most orders are scheduled for delivery within 1 to 60 days after receipt of the
order. Our backlog of pending orders was approximately $1.3 million, $1.9
million and $3.0 million as of December 31, 2002, December 31, 2001 and December
28, 2000, respectively. The size of backlog at any particular date is not
necessarily a meaningful indicator of the trend of our business.
Research and Development
Data I/O believes that continued investment in research and development is
critical to our future success. We continue to develop new technologies and
products and significant enhancements of existing products. Future growth is to
a large extent dependent upon the timely development and introduction of new
products and algorithm development for the latest programmable devices. We are
currently focusing our research and development efforts in our strategic growth
markets, namely new programming technology and automated handling systems for
the manufacturing environment, including NAND FLASH support, Microcontroller
support for FlashCORE and additional platforms and improvements for
ProLINE-RoadRunner. We continue to also focus on increasing our capacity and
responsiveness for new device support requests from customers and programmable
IC manufacturers by revising and enhancing our internal processes and tools.
During this past year, our research and development resulted in improvements and
extensions of ProLINE-RoadRunner, PS300, XPI and FlashPAK.
During 2002, 2001 and 2000, we made expenditures for research and development of
$5,331,000, $6,740,000, and $8,716,000, respectively, representing 23.3%, 25.1%
and 20.3% of net sales, respectively. Research and development costs are
expensed as incurred.
Patents, Copyrights, Trademarks, and Licenses
Intellectual property rights applicable to various Data I/O products include
patents, copyrights, trade secrets and trademarks. Data I/O also relies on
patents, copyrights, trade secrets and trademarks to protect our intellectual
property, as well as product development and marketing skill to establish and
protect our market position. We also grew our patent portfolio over the past few
years as we developed strategic technologies like the ProLINE-RoadRunner and
FlashCORE that are critical to our connected strategy.
We attempt to protect our rights in proprietary software products, including
TaskLink and other software products, by retaining the title to and copyright of
the software and documentation, by including appropriate contractual
restrictions on use and disclosure in our licenses, and by requiring our
employees to execute non-disclosure agreements. Our software products are
typically shipped in sealed packages, or on CDs, on which notices are
prominently displayed informing the end-user that, by breaking the seal of the
packaging, or installing the software, the end-user agrees to be bound by the
license agreement contained in the package or product. 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 or installation of
the product are unclear. We are not aware of any situation where a license
agreement restricting an end-user's authorized use of a licensed product
resulted in enforcement action. Our software products are not normally sold
separately from sales of programming systems. However, on those occasions where
software is sold separately, revenue is recognized when a sales agreement
exists, when delivery has occurred, when the fee is fixed or determinable, and
when collectibility is probable.
Because of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, portions of our products might possibly
infringe upon existing patents or copyrights, and we may, therefore, be required
to obtain licenses or discontinue the use of the infringing technology. We
believe that any exposure we may have regarding possible infringement claims is
a reasonable business risk similar to that assumed by other companies in the
electronic equipment and software industries. However, any claim of
infringement, with or without merit, could be costly and a diversion of
management's attention, and an adverse determination could adversely affect our
reputation, preclude us from offering certain products, and subject us to
substantial liability.
Employees
As of December 31, 2002, we had 125 employees, of which 28 were located outside
the U.S. We also utilize independent contractors for specialty work, primarily
in research and development, and utilize temporary workers to adjust capacity to
fluctuating demand. Many of our employees are highly skilled and our continued
success will depend in part upon our ability to attract and retain employees who
can be in great demand within the industry. None of our employees are
represented by a collective bargaining unit and we believe relations with our
employees are favorable.
Environmental Compliance
Our 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
our capital expenditures, financial position, results of operations or
competitive position.
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of Data
I/O as of March 21, 2003:
Name Age Position
Frederick R. Hume 60 President and Chief Executive Officer
Joel S. Hatlen 44 Vice President
Chief Financial Officer
Secretary and Treasurer
Frederick R. Hume joined Data I/O as President and Chief Executive Officer in
February 1999. He was appointed to the Board of Directors of Data I/O in January
1999. From 1988 until his retirement in 1998, Mr. Hume served as Vice President
and General Manager of Keithley Instruments in Cleveland, Ohio. From 1972 to
1988, he held various management positions at Fluke Corporation, including Group
Vice President for Manufacturing and Research and Development.
Joel S. Hatlen joined Data I/O in September 1991 as a Senior Tax Accountant and
became Tax Manager in December 1992. He was promoted to Corporate Controller in
December 1993. In February 1997, he became Chief Accounting Officer and
Corporate Controller. In January 1998, he was promoted to Vice President of
Finance and Chief Financial Officer, Secretary and Treasurer. From September
1981 until joining Data I/O, Mr. Hatlen was employed by Ernst & Young LLP, where
his most recent position was Senior Manager.
Cautionary Factors That May Affect Future Results
Data I/O's disclosure and analysis in this Annual Report contains some
forward-looking statements. Forward-looking statements include our current
expectations or forecasts of future events. The reader can identify these
statements by the fact that they do not relate strictly to historical or current
facts. In particular, these include statements relating to future action,
prospective products, new technologies, future performance or results of current
and anticipated products, sales efforts, expenses, outsourcing of functions,
outcome of contingencies, and financial results.
Any or all of the forward-looking statements in this Annual Report or in any
other public statement made may turn out to be wrong. They can be affected by
inaccurate assumptions we might make, or known or unknown risks and
uncertainties can affect these forward-looking statements. Many factors -- for
example, product competition and product development -- will be important in
determining future results. Moreover, neither Data I/O nor anyone else assumes
responsibility for the accuracy and completeness of this forward-looking
statements. Actual future results may materially vary.
We undertake no obligation to publicly update any forward-looking statements
after the date of this Annual Report, whether as a result of new information,
future events or otherwise. The reader should not place undue reliance on such
forward-looking statements. The reader is advised, however, to consult any
future disclosures Data I/O makes on related subjects in our 10-Q, 8-K and 10-K
reports to the SEC and press releases. Also, note that Data I/O provides the
following cautionary discussion of risks, uncertainties and possible inaccurate
assumptions relevant to our business. These are factors that we think could
cause Data I/O's actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect Data I/O. This discussion is permitted by the Private Securities
Litigation Reform Act of 1995.
RISK FACTORS
Development, Introduction and Shipment of New Products
Data I/O currently is developing new engineering and automated programming
systems. Significant technological, supplier, manufacturing or other problems
may delay the development, introduction or production of these products.
For example, we may encounter these problems:
o technical problems in the development of a new programming system
platform or the robotics for new automated handing systems
o inability to hire qualified personnel
o delays or failures to perform by third parties involved in our
development projects
Delays in the development, completion and shipment of new products, or failure
of customers to accept new products, may result in a decline in sales in 2003.
Variability in Quarterly Operating Results
Data I/O's operating results tend to vary from quarter to quarter. Our revenue
in each quarter substantially depends upon orders received within that quarter.
Conversely, our expenditures are based on investment plans and estimates of
future revenues. We may, therefore, be unable to quickly reduce our spending if
our revenues decline in a given quarter. As a result, operating results for that
quarter will suffer. Our results of operations for any one quarter are not
necessarily indicative of results for any future periods.
Other factors, which may cause our quarterly operating results to fluctuate,
include:
o increased competition
o timing of new product announcements
o product releases and pricing changes by us or our competitors
o market acceptance or delays in the introduction of new products
o production constraints
o labor or material shortages
o the timing of significant orders
o war or terrorism
o customers' budgets
o adverse movements in exchange rates, interest rates or tax rates
o cyclical nature of demand for our customers' products
o general economic conditions in the countries where we sell products
Due to all of the foregoing factors, it is possible that in some future
quarters, our operating results will be below expectations of analysts and
investors.
Rapid Technological Change
Product technology in Data I/O's industry evolves rapidly, making timely product
innovation essential to success in the marketplace. Introducing products with
improved technologies or features may render our existing products obsolete and
unmarketable. Technological advances that may negatively impact our business
include:
o new device package types, densities, and technologies requiring
hardware and software changes in order to be programmed by our products
o electronics equipment manufacturing practices, such as widespread use
of in-circuit programming
o customer software platform preferences different from those on which
our products operate
o more rigid industry standards, which would decrease the value-added
element of our products and support services
If we cannot develop products in a timely manner in response to industry
changes, or if our products do not perform well, our business and financial
condition will be adversely affected. Also, our new products may contain defects
or errors that give rise to product liability claims against us or cause our
products to fail to gain market acceptance. Our future success depends on our
ability to successfully compete with other technology firms in attracting and
retaining key technical personnel.
Economic and Market Conditions
Our business is highly impacted by capital spending plans and other economic
cycles that affect the users and manufacturers of ICs. These industries are
highly cyclical and are characterized by rapid technological change, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. As we experienced in 2002, our operations may in the
future reflect substantial fluctuations from period-to-period as a consequence
of these industry patterns, general economic conditions affecting the timing of
orders from major customers, and other factors affecting capital spending. These
factors could have a material adverse effect on our business and financial
condition.
History of Losses
We have incurred net losses in each of our last three fiscal years. We have
decreased our operating expenses in recent periods through the restructuring
plans that we initiated during our prior fiscal year. We will continue to
examine our level of operating expense based upon our projected revenues. Any
planned increases in operating expenses may result in larger losses in future
periods if projected revenues are not achieved. As a result, we may need to
generate greater revenues than we have recently to achieve and maintain
profitability. However, we cannot provide assurance that our revenues will
increase and our strategy may not be successful resulting in future losses.
Affects of Restructuring Activities
Beginning in the prior fiscal year and continuing in the past fiscal year, we
reduced our workforce from 224 to 125 employees. There have been and may
continue to be substantial costs associated with this workforce reduction
related to severance and other employee-related costs and our restructuring plan
may yield unanticipated consequences, such as increased burden on our
administrative, operational, and financial resources and has increased the
responsibilities for our management personnel. As a result, our ability to
respond to unexpected challenges may be impaired and we may be unable to take
advantage of new opportunities.
In addition, many of the employees that were terminated possessed specific
knowledge or expertise, and that knowledge or expertise may prove to have been
important to our operations. In that case, their absence may create significant
difficulties. Further, the reduction in workforce may reduce employee morale and
may create concern among current and potential employees about job security at
Data I/O, which may lead to difficulty in hiring and retaining employees, and
divert management's attention. In addition, the headcount reductions may subject
us to the risk of litigation, which could result in substantial cost. Any
failure by us to properly manage this rapid change in workforce could impair our
ability to efficiently manage our business, to maintain and develop important
relationships with third-parties, and to attract and retain customers. It could
also cause us to incur higher operating cost and delays in the execution of our
business plan or in the reporting or tracking of our financial results.
Need for Additional Funding
Our past revenues have been and our future revenues may continue to be
insufficient to support the expense of our operations and any expansion of our
business. We may therefore need additional equity or debt capital to finance our
operations. If we are unable to generate sufficient cash flows from operations
or to obtain funds through additional debt or equity financing, we may have to
reduce some or all of our development and sales and marketing efforts and limit
the expansion of our business.
We believe our existing cash and cash equivalents will be sufficient to meet our
working capital requirements for at least the next twelve months. Thereafter,
depending on the development of our business, we may need to raise additional
cash for working capital or other expenses. We may also encounter opportunities
for acquisitions or other business initiatives that require significant cash
commitments, or unanticipated problems or expenses that could result in a
requirement for additional cash before that time.
Therefore, we may seek additional funding through public or private debt or
equity financing or from other sources. We have no commitments for additional
financing, and we may experience difficulty in obtaining funding on favorable
terms, if at all. Any financing we obtain may contain covenants that restrict
our freedom to operate our business or may require us to issue securities that
have rights, preferences or privileges senior to our Common Stock and may dilute
your ownership interest.
Competition
Technological advances have reduced the barriers of entry into the programming
systems markets. We expect competition to increase from both established and
emerging companies. If we fail to compete successfully against current and
future sources of competition, our profitability and financial performance will
be adversely impacted.
Dependence on IC Manufacturers
We work closely with most semiconductor manufacturers to ensure that our
programming systems comply with their requirements. In addition, many
semiconductor manufacturers recommend our programming systems for use by users
of their programmable devices. These working relationships enable us to keep our
programming systems product line up to date and provide end-users with broad and
current programmable device support. Our business may be adversely affected if
our relationships with semiconductor manufactures deteriorate.
Dependence on Suppliers
Certain parts used in our products are currently available from either a single
supplier or from a limited number of suppliers. If we cannot develop alternative
sources of these components, if sales of parts are discontinued by the supplier
or we experience deterioration in our relationship with these suppliers, there
may be delays or reductions in product introductions or shipments, which may
materially adversely affect our operating results.
Because we rely on a small number of suppliers for certain parts, we are subject
to possible price increases by these suppliers. Also, we may be unable to
accurately forecast our production schedule. If we underestimate our production
schedule, suppliers may be unable to meet our demand for components. This delay
in the supply of key components may materially adversely affect our business.
Over estimation of demand will lead to excess inventories that may become
obsolete.
The non-automated programming system products we acquired when we acquired SMS
in November 1998 are currently manufactured to our specifications by a
third-party foreign contract manufacturer. We may not be able to obtain a
sufficient quantity of these products if and when needed, which may result in
lost sales.
Reliance on Third-Party Distribution Channels
Data I/O has an internal sales force and also utilizes third-party
representatives, and distributors. Therefore, the financial stability of these
distributors is important. Highly skilled professional engineers use most of our
products. To be effective, third-party distributors must possess significant
technical, marketing and sales resources and must devote their resources to
sales efforts, customer education, training and support. These required
qualities limit the number of potential third-party distributors. Our business
will suffer if we cannot attract and retain a sufficient number of qualified
third-party distributors to market our products.
International Operations
International sales represented 64% of our net revenue for the fiscal year ended
December 31, 2002. We expect that international sales will continue to be a
significant portion of our net revenue. International sales may fluctuate due to
various factors, including:
o migration of manufacturing to low cost geographies
o unexpected changes in regulatory requirements
o tariffs and taxes
o difficulties in staffing and managing foreign operations
o longer average payment cycles and difficulty in collecting
accounts receivable
o fluctuations in foreign currency exchange rates
o impact of the Euro
o compliance with applicable export licensing requirements
o product safety and other certification requirements
o political and economic instability
The European Community and European Free Trade Association have established
certain electronic emission and product safety requirements ("CE"). Although our
products currently meet these requirements, failure to obtain either a CE
certification or a waiver for any product may prevent us from marketing that
product in Europe.
We operate subsidiaries in Germany, China and Canada. Our business and financial
condition is sensitive to currency exchange rates or any other restrictions
imposed on their currencies. Currency exchange fluctuations in Canada, China and
Germany may adversely affect our investment in our subsidiaries.
Protection of Intellectual Property
Refer to the section captioned "Patents, Copyrights, Trademarks and Licenses" in
Item 1 above.
Acquisitions
We may pursue acquisitions of complementary technologies, product lines or
businesses. Future acquisitions may include risks, such as:
o burdening management and our operating teams during the integration
of the acquired entity
o diverting management's attention from other business concerns
o failing to successfully integrate the acquired products
o lack of acceptance of the acquired products by our sales channels
or customers
o entering markets where we have no or limited prior experience
o potential loss of key employees of the acquired company
o additional burden of support for an acquired programmer architecture
Future acquisitions may also impact Data I/O's financial position. For example,
we may use significant cash or incur additional debt, which would weaken our
balance sheet. We may also capitalize goodwill and intangible assets acquired,
the impairment of which would reduce our profitability. We cannot guarantee that
future acquisitions will improve our business or operating results.
Dependence on Key Personnel
Refer to the section captioned "Employees" above.
Potential Volatility of Stock Price
The stock prices of technology companies tend to fluctuate significantly, and
many experienced significant reductions in value during 2002. We believe factors
such as announcements of new products by us or our competitors and quarterly
variations in financial results may cause the market price of Data I/O's Common
Stock to fluctuate substantially. In addition, overall volatility in the stock
market, particularly in the technology company sector, is often unrelated to the
operating performance of companies. If these market fluctuations continue in the
future, they may adversely affect the price of Data I/O's Common Stock.
Item 2. Properties
In May 1997, Data I/O completed the sale of the land and building comprising our
Redmond, Washington corporate headquarters and it is currently leasing the
96,000 square foot building on a 10-year leaseback agreement with an option to
renew the lease for an additional 10 years. This lease required base annual
rental payments in 2002 of approximately $1,084,000. See Note 6 of "Notes to
Consolidated Financial Statements." As part of our 1999 restructuring plan
implementation, we vacated one floor of the leased Redmond facility
(approximately 25,000 square feet) and sublet the majority of this space for a
period of 28 months beginning January 1, 2000, at a rate of approximately
$33,000 per month through April 2002. The sublease terminated in June 2002. We
have not been successful in subleasing this space and believe the market for
this space is currently quite limited.
In addition to the Redmond facility, approximately 9,000 square feet is leased
at five foreign locations, including our Canadian sales and service office
located in Mississauga, Ontario, German sales, service and engineering
operations located in Munich, Germany, and three sales and service offices in
China.
Item 3. Legal Proceedings
As of the date of this Annual Report, Data I/O is not a party to any legal
proceedings, the adverse outcome of which in management's opinion, individually
or in the aggregate, would have a material adverse effect on our results of
operations or financial position. From time to time, we may be involved in
litigation relating to claims arising out of our operations in the normal course
of business.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted for a vote of shareholders of Data I/O during the
fourth quarter of the fiscal year ended December 31, 2002.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The following table shows, for the periods indicated, the high and low bid
information for Data I/O's common stock as reported by the NASDAQ National
Market tier of The NASDAQ Stock Market (NASDAQ symbol is DAIO). Effective
December 31, 2002 Data I/O transferred to the NASDAQ SmallCap Market.
Period High Low
2002 Fourth Quarter $1.45 $0.60
Third Quarter 1.55 0.41
Second Quarter 1.75 0.86
First Quarter 2.00 1.20
2001 Fourth Quarter $2.11 $1.30
Third Quarter 2.81 1.50
Second Quarter 2.84 1.50
First Quarter 3.81 1.50
The approximate number of shareholders of record as of March 21, 2003 was 761.
Except for a special cash dividend of $4.15 per share paid on March 8, 1989,
Data I/O has not paid cash dividends on our common stock and does not anticipate
paying regular cash dividends in the foreseeable future.
No shares of unregistered securities were made by Data I/O during the period
ended December 31, 2002.
Equity Compensation Plan Information
The following table gives information about our Common Stock that may be issued
upon the exercise of options and rights under all of our existing equity
compensation plans as of December 31, 2002. See Notes 11 and 12 of "Notes to
Consolidated Financial Statements."
(a) Number of securities (b) Weighted-average (c) Number of securities remaining
to be issued upon the exercise price of available for future issuance under
exercise of outstanding outstanding options, equity compensation plans (excluding
options, warrants and warrants and rights securities reflected in column (a)
rights
Equity compensation plans
approved by the security
holders (1) (3) 1,247,000 $2.35 678,070
Equity compensation plans not
approved by the security
holders (2) 10,000 $5.19 0
(1) Represents shares of Data I/O's Common Stock issuable pursuant to our 2000
Stock Incentive Compensation Plan, 1986 Stock Option Plan, 1992 Employee
Stock Purchase Plan, and Director Fee Plan.
(2) Director option grant represents a one-time option grant to Directors in
May 1998 prior to shareholder approval of an option plan covering
Directors.
(3) Stock Appreciation Rights Plan ("SAR") provides that directors, executive
officers or holders of 10% or more of Data I/O's Common Stock have an
accompanying SAR with respect to each exercisable option. While the plan
has been approved by the security holders, no amounts are included in
columns a,b or c relating to the SAR.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained herein in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Data I/O adopted SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101) in the fourth quarter of fiscal year 2000, effective beginning of the first
quarter of fiscal year 2000. The pro forma information in the table below
reflects the adoption of SAB 101. Historical results are not necessarily
indicative of future results.
Year Ended
- -------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 28, Dec. 30, Dec. 31,
(in thousands, except employee and per share data) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
For The Year:
Net sales $22,838 $26,826 $42,909 $34,113 $35,338
Cost of goods sold 11,556 15,078 22,760 17,948 24,933
------------------------------------------------------------------
Gross margin 11,282 11,748 20,149 16,165 10,405
Research and development 5,331 6,740 8,716 8,403 9,109
Selling, general and administrative 8,254 9,707 10,616 11,022 14,386
Write-off acquired in-process R&D (1) - - - - 1,959
Net provision for business restructuring (2) 632 1,211 (255) (215) 4,370
------------------------------------------------------------------
Operating income (loss) (2,935) (5,910) 1,072 (3,045) (19,419)
Non-operating income (loss) (232) 124 876 1,920 952
------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes and cumulative effect of accounting change (3,167) (5,786) 1,948 (1,125) (18,467)
Income tax (expense) benefit 61 (224) (36) (55) (58)
------------------------------------------------------------------
Income (loss) from continuing operations, before
cumulative effect of accounting (3,106) (6,010) 1,912 (1,180) (18,525)
change
Income from discontinued operations (4) - - 90 831 894
Cumulative effect of accounting change (3) - - (2,531) - -
------------------------------------------------------------------
Net income (loss) ($3,106) ($6,010) ($529) ($349) ($17,631)
Pro forma net income (loss) - - - ($2,880) ($17,631)
--------------------------------------------------------------------------------------------------------------------------
At Year-end:
Working capital $9,125 $12,010 $16,792 $16,179 $15,084
Total assets $16,367 $20,340 $28,746 $30,050 $40,089
Total debt - - - - $564
Stockholders' equity $9,284 $12,154 $18,039 $18,058 $18,909
Number of employees from continuing operations 125 155 224 199 270
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock Data (3):
Basic earnings per share:
From continuing operations, after taxes, before
cumulative effect of accounting change ($0.40) ($0.79) $0.26 ($0.16) ($2.59)
Net income (loss) ($0.40) ($0.79) ($0.07) ($0.05) ($2.46)
Pro forma net income (loss) - - - ($0.40) ($2.46)
Diluted earnings per share:
From continuing operations, after taxes, before
cumulative effect of accounting change ($0.40) ($0.79) $0.26 ($0.16) ($2.59)
Net income (loss) ($0.40) ($0.79) ($0.07) ($0.05) ($2.46)
Pro forma net income (loss) - - - ($0.40) ($2.46)
Book value per share at year-end $1.20 $1.59 $2.41 $2.48 $2.63
Shares outstanding at year-end 7,768 7,614 7,495 7,290 7,187
Weighted-average basic shares outstanding 7,704 7,572 7,405 7,254 7,154
Weighted-average diluted shares outstanding 7,704 7,572 7,405 7,254 7,154
- -------------------------------------------------------------------------------------------------------------------------------
Key Ratios:
Current ratio 2.6 2.9 2.9 2.7 1.8
Gross margin to sales 49.4% 43.8% 47.0% 47.4% 29.4%
Operating income (loss) to sales (12.9%) (22.0%) 2.5% (8.9%) (54.9%)
Income (loss) from continuing operations to sales (13.6%) (22.4%) 4.5% (3.5%) (52.4%)
Return on average stockholders' equity (22.7%) (39.8%) 10.6% (6.3%) (63.5%)
- -------------------------------------------------------------------------------------------------------------------------------
Footnotes:
(1) For further discussion, see Note 8 of "Notes to Consolidated Financial
Statements."
(2) For further discussion, see Note 2 of "Notes to Consolidated Financial
Statements."
(3) For further discussion, see Note 1 of "Notes to Consolidated Financial
Statements."
(4) Discontinued operations are amounts that relate to the divestitures of the
Synario and Reel Tech Divisions that took place in 1997.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves as long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Annual Report on Form 10-K are forward-looking. In particular,
statements herein regarding industry prospects and trends; future results of
operations or financial position; integration of acquired products and
operations; market acceptance of our newly introduced or upgraded products;
development, introduction and shipment of new products; and any other guidance
on future periods are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. Although
Data I/O believes that the expectations reflected in these forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, achievements, or other future events. Moreover, neither
Data I/O nor anyone else assumes responsibility for the accuracy and
completeness of these forward-looking statements. Data I/O is under no duty to
update any of these forward-looking statements after the date of this Annual
Report. The Reader should not place undue reliance on these forward-looking
statements. The following discussions and the section entitled "Business -
Cautionary Factors That May Affect Future Results" describes some, but not all,
of the factors that could cause these differences.
BUSINESS RESTRUCTURING PROGRESS
During 2002, we continued the restructuring process from 2001 and recorded
restructuring charges in the third and fourth quarter of 2002 of $497,000 and
$135,000 respectively for a total of $632,000 associated with actions taken to
reduce our breakeven point and realign Data I/O with our growth activities. We
required this operational repositioning because of the impact of the economic
slowdown and the decline in capital spending across a high number of customer
groups on general demand for programming equipment.
We reduced our quarterly breakeven point from approximately $7 million of net
sales at the beginning of 2002 to approximately $5.7 million at the end of 2002.
Most of these reductions were achieved by reducing our personnel from 155 at the
beginning of 2002 to 125 at the end of 2002.
During 2001, we took a number of strategic restructuring actions to reduce our
breakeven point. Repositioning included the following: a reduction in our global
workforce from 224 at the start of the year to 155 at the end of 2001;
discontinuance or reallocation of numerous projects and activities not essential
to our long-term goals; streamlining activities to decrease discretionary
marketing, distribution and promotional expenses, consolidation of numerous
functions across the organization to create a team which was more productive and
able to respond faster to global customer needs; and closure of a facility in
Germany and moving our operations to other locations within Data I/O.
At December 31, 2002 all restructuring expenses associated with the activities
detailed above were paid except for approximately $204,000, which was primarily
associated with severance, facility and consulting and legal fees.
We believe that the progress made in these areas positions us for a successful
turnaround and profitable operations. However, consistently profitable
operations may not always be possible, nor is there any assurance that the
turnaround efforts will be successful.
CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that we make
estimates and judgments which affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, Data I/O evaluates our estimates,
including those related to sales returns, bad debts, inventories, investments,
intangible assets, income taxes, warranty obligations, restructuring charges,
contingencies such as litigation, and contract terms that have multiple elements
and other complexities typical in the telecommunications equipment industry. We
base our estimates on historical experience and other assumptions that we
believe are reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
Data I/O believes the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue Recognition: Sales of our semiconductor programming equipment products
requiring installation by us that is other than perfunctory are recorded when
installation is complete, or at the later of customer acceptance or
installation, if an acceptance clause is specified in the sales terms. We
recognize revenue from other product sales at the time of shipment. We record
revenue from the sale of service and update contracts as deferred revenue and we
recognize it on a straight-line basis over the contractual period, which is
typically one year. We establish a reserve for sales returns based on historical
trends in product returns and estimates for new items. If the actual future
returns differ from historical levels, our revenue could be adversely affected.
Allowance for Doubtful Accounts: We base the allowance for doubtful accounts
receivable on our assessment of the collectibility of specific customer accounts
and the aging of accounts receivable. If there is a deterioration of a major
customer's credit worthiness or actual defaults are higher than historical
experience, our estimates of the recoverability of amounts due us could be
adversely affected.
Inventory Provisions: We base inventory purchases and commitments upon future
demand forecasts and historic usage. If there is a significant decrease in
demand for our products or there is a higher risk of inventory obsolescence
because of rapidly changing technology and customer requirements, Data I/O may
be required to increase our inventory provision adjustments and our gross margin
could be adversely affected.
Warranty Accruals: Data I/O accrues for warranty costs based on the expected
material and labor costs to fulfill our warranty obligations. If we experience
an increase in warranty claims, which are higher than our historical experience,
our gross margin could be adversely affected.
Results of Continuing Operations
Net Sales
(in thousands)
Net sales by product line: 2002 Change 2001 Change 2000
- -----------------------------------------------------------------------------------------------------------------------------
Non-automated programming systems $11,532 (2.4%) $11,821 (33.1%) $17,672
Automated programming systems 11,306 (24.7%) 15,005 (40.5%) 25,237
------------------ ----------------- ---------------
Totals $22,838 (14.9%) $26,826 (37.5%) $42,909
================== ================= ===============
Net sales by location:
United States $8,347 (12.4%) $9,526 (38.9%) $15,588
% of total 36.5% 35.5% 36.3%
International $14,491 (16.2%) $17,300 (36.7%) $27,321
% of total 63.5% 64.5% 63.7%
- -----------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001
Data I/O sales declined for the year 2002 compared to 2001. However, for the
third and fourth quarters of 2002, sales increased over the same quarters in
2001. The overall decline is attributed to the continued economic downturn,
especially in capital spending. Sales declined in all product categories, but
the declines were offset in part by increased sales from our ProLine-RoadRunner
and new FlashPAK product lines. Sales declined in both in the US and
international markets with the Americas and Europe declining the most. We see a
continuing trend in migration of customers moving manufacturing operations to
low-cost geographies, thereby increasing international sales opportunities. The
weakened US dollar, especially compared to the Euro, is expected to assist in
export sales as foreign currencies have more buying power.
We are continuing our connected strategy and transition to a common programming
architecture, which resulted in the new FlashPAK and PS 300 FlashCORE. In 2002,
we also introduced ProLINE Infinity, ProLINE-RoadRunner Variable Capacity
Options, TF-20 Tray Feeder System, and High Insertion Socket Adapters. We expect
these products to increase revenues, however, partially offsetting this is the
trend of declining sales of our older product lines. Subsequent to year-end, ICE
Technology, who licensed our distribution of a low cost programmer line, ceased
business. In 2002, sales related to these products were approximately $250,000.
We are attempting to sell off our remaining inventory and are offering our other
programmers as substitute products.
2001 vs. 2000
Data I/O experienced a decline in revenues in each of the last three quarters of
2001 versus 2000. The decline was a significant reduction in orders for both our
automated and non-automated programming equipment. We believe this to be due to
the general economic slowing in the wireless communications industry, among
contract manufacturers and in other sectors of the electronics industry. We
experienced a decline in revenues in both the US and international markets.
Gross Margin
(in thousands) 2002 Change 2001 Change 2000
- -----------------------------------------------------------------------------------------------------------------------------
Gross margin $11,282 (4.0%) $11,748 (41.7%) $20,149
Percentage of net sales 49.4% 43.8% 47.0%
- -----------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001
Gross margin decreased in dollars due primarily to the decline in sales volume.
Gross margin increased as a percentage of sales primarily due to the savings
from the restructuring and implementation of cost reductions, as well as lower
inventory reserve and warranty charges. The product mix shift towards additional
ProLINE-RoadRunner and related aftermarket products also improved the gross
margin as a percentage of sales.
The restructuring efforts lowered our breakeven point by bringing cost and
operation expenditures, primarily personnel reductions, in line with the revenue
levels we are experiencing. We expect these efforts and cost reductions,
combined with the expected stability or growth in revenues, to result in
improved gross margin percentages over what have been experienced during the
past three years.
2001 vs. 2000
Gross margins decreased sharply from 2000 to 2001. Data I/O experienced a
decrease in both gross margin dollars and gross margin percentage. The drop in
gross margin dollars was roughly in proportion to the decline in revenue
dollars. By implementing cost reductions and three restructuring activities
during 2001, Data I/O limited the reduction in gross margin percentage to 3.2%.
Research and Development
(in thousands) 2002 Change 2001 Change 2000
- -----------------------------------------------------------------------------------------------------------------------------
Research and development $5,331 (20.9%) $6,740 (22.7%) $8,716
Percentage of net sales 23.3% 25.1% 20.3%
- -----------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001
Research and development ("R&D") spending for 2002 as compared to 2001 declined
both in dollars and as a percentage of sales. This was due primarily to the
lower headcount related to our restructuring actions over the past two years.
During 2002, Data I/O's R&D focused on the new FlashPAK gang programming system
and PS300 FlashCORE automated programming system which integrated the
programming architecture first introduced in the ProLINE-RoadRunner. We also
released the following new products: ProLine Infinity, a ProLine-RoadRunner
utilizing an automated handler; ProLINE-RoadRunner Variable Capacity Options;
TF-20 Tray Feeder System; and High Insertion Socket Adapters.
2001 vs. 2000
While reducing the R&D expenditures by nearly $2 million from the prior year,
R&D spending increased as a percentage of net sales by 4.8%. Significant
spending reductions occurred in salaries and benefits as a result of the
restructuring and cost control efforts.
We believe it is essential to invest in R&D to significantly enhance our
existing products and to create new products as markets develop and technologies
change. We are focusing our R&D efforts in our strategic growth markets, namely
new programming technology and automated programming systems for the
manufacturing environment, particularly extending the capabilities and support
for our FlashCORE architecture and versions of the ProLine-RoadRunner.
Selling, General and Administrative
(in thousands) 2002 Change 2001 Change 2000
- ----------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative $8,254 (15.0%) $9,707 (8.6%) $10,616
Percentage of net sales 36.1% 36.2% 24.7%
- ----------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001
Selling, General and Administrative ("SG&A") spending decreased by $1.5 million
in 2002 versus the prior year due primarily to the restructuring actions. We
reduced our expense by lowering our bad debts reserve due to collection of
accounts receivable, incurring less retirement plan costs and lower commissions,
partially offsetting these reductions were higher rent and insurance costs.
2001 vs. 2000
SG&A spending decreased by $909,000 in 2001 versus the prior year due primarily
to the restructuring actions and reduced marketing expenses. We increased our
direct sales force and decreased our dependence on outside sales rep firms to
sell our products.
Interest
(in thousands) 2002 Change 2001 Change 2000
- ----------------------------------------------------------------------------------------------------------------------------
Interest income $87 (63.6%) $239 (49.3%) $471
Interest expense ($18) 12.54% ($16) (36.0%) ($25)
- ----------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001
Interest income for 2002 decreased as compared to 2001 primarily due to the
reduction in interest rates that occurred during 2002 and 2001.
2001 vs. 2000
Interest income for 2001 decreased as compared to 2000 primarily due to the
reduction in cash, cash equivalents and marketable securities as well as the
reduction in interest rates, which occurred during 2001.
Income Taxes
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Income tax expense(benefit) ($61) $224 $36
- ----------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001 and 2001 vs. 2000
Income tax expense in all years relates entirely to foreign income taxes. For
financial reporting purposes, Data I/O established tax valuation reserves
against our deferred tax assets because of the uncertainty relating to the
realization of such asset values. We had valuation allowances of $10.1 million
at December 31, 2002 compared to $9.0 million at December 31, 2001 and $7.0
million at December 28, 2000.
Inflation and Changes in Foreign Currency Exchange Rates
Sales and expenses incurred by foreign subsidiaries are denominated in the
subsidiary's local currency and translated into U.S. Dollar amounts at average
rates of exchange during the year. We recognized foreign currency transaction
losses of $150,000 and $222,000 in 2002 and 2001 respectively. The transaction
losses resulted primarily from sales by our German subsidiary to our main
customers, which were invoiced in US dollars. We hedge our foreign currency
exposure on sales of inventory and certain loans to our 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) 2002 Change 2001 Change 2000
- ----------------------------------------------------------------------------------------------------------------------------
Working capital $9,125 $(2,885) $12,010 ($4,782) $16,792
- ----------------------------------------------------------------------------------------------------------------------------
In 2002, cash and marketable securities declined by $433,000 comprising a
portion of the working capital used to fund our loss in 2002. Inventories
decreased by $1.9 million primarily due to lower sales volumes, aggressive
measures undertaken during the year to reduce inventory levels, and reduced
incoming purchased components and the implementation of lean manufacturing
techniques. Accounts Receivable decreased by $1.4 million due to increased
collection efforts and settlement of a former distributor receivable. The
decreases in accounts payable and accrued expenses reflect the reduced volume of
business and lower monthly operating costs from the restructure.
We estimate that capital expenditures for property, plant and equipment during
2003 will be between $500,000 and $1.0 million. Although we expect that such
expenditures will be made, we had no significant outstanding purchase
commitments at December 31, 2002. Such expenditures are expected to be funded
from existing and internally generated funds or may be leased. We established a
foreign line of credit for 50,000 Euros in February 2002.
As a result of our significant product development, customer support, and
selling and marketing efforts, Data I/O has required substantial working capital
to fund our operations. We restructured our operations to lower our costs and
operating expenditures to lower our breakeven point, preserve our cash position
and return to profitable operations. We believe that we have sufficient working
capital available under our operating plan to fund our operations and capital
requirements through at least December 31, 2003. Any substantial inability to
achieve the current business plan could have a material adverse impact on our
financial position, liquidity, or results of operations and may require us to
reduce expenditures and/or seek additional financing to enable us to continue
operations through December 31, 2003.
Commitments
Data I/O has commitments under non-cancelable operating leases and other
agreements, primarily for factory and office space, with initial or remaining
terms of one year or more are as follows for the year ending December 31(in
thousands):
2003 $1,345
2004 1,321
2005 1,274
2006 1,182
2007 493
--------------
Total $5,615
==============
Share Repurchase Program
Under a previously announced share repurchase program, Data I/O is authorized to
repurchase up to 1,123,800 shares (approximately 14.8%) of our outstanding
common stock. We may execute these purchases through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and we may commence or discontinue at any time. As of December 31,
2002, Data I/O has repurchased 1,016,200 shares under this repurchase program at
a total cost of approximately $7.1 million. Data I/O has not repurchased shares
under this plan since the second quarter of 1997 although it still has the
authority to do so.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement 143, Accounting for Asset Retirement
Obligations (SFAS 143). This statement requires entities to record a liability
for the estimated retirement and removal costs of assets used in their business.
The liability should be recorded at its fair value, with a corresponding asset
that should be depreciated over the remaining useful life of the long-lived
asset to which the liability relates. Period expenses will also be recognized
for changes in the original value of the liability as a result of the passage of
time and revisions in the undiscounted cash flows required to satisfy the
obligation. The provisions of SFAS 143 are effective for fiscal years beginning
after June 15, 2002. Data I/O is currently assessing and quantifying the asset
retirement obligations associated with our long-lived assets and estimates that
the impact on future annual net income will not be material due to the long
period over which the costs will be depreciated.
The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," on April 30,
2002. Statement No. 145 rescinds Statement No.4, which required all gains and
losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Upon
adoption of Statement No. 145, companies will be required to apply the criteria
in APB Opinion No. 30, "Reporting the Results of Operations, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" in determining the
classification of gains and losses resulting from the extinguishments of debt.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002.
While we have no current debt outstanding, we are evaluating the requirements
and impact of this statement on our operations and financial position.
In June 2002, the FASB issued Statement 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires entities to recognize
costs associated with exit or disposal activities when liabilities are incurred
rather than when the entity commits to an exit or disposal plan, as currently
required. Examples of costs covered by this guidance include one-time employee
termination benefits, costs to terminate contracts other than capital leases,
costs to consolidate facilities or relocate employees, and certain other exit or
disposal activities. This statement is effective for fiscal years beginning
after December 31, 2002, and will impact any exit or disposal activities we
initiate after that date.
In December 2002, the FASB issued Statement 148 (SFAS 148), Accounting for
Stock-Based Compensation -- Transition and Disclosure: an amendment of FASB
Statement 123 (SFAS 123), to provide alternative transition methods for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in annual financial statements
about the method of accounting for stock-based employee compensation and the pro
forma effect on reported results of applying the fair value based method for
entities that use the intrinsic value method of accounting. The pro forma effect
disclosures are also required to be prominently disclosed in interim period
financial statements. This statement is effective for financial statements for
fiscal years ending after December 15, 2002 and is effective for financial
reports containing condensed financial statements for interim periods beginning
after December 15, 2002, with earlier application permitted. We do not plan a
change to the fair value based method of accounting for stock-based employee
compensation and have included the disclosure requirements of SFAS 148 in the
accompanying financial statements.
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. Data I/O previously did not record a
liability when guaranteeing obligations unless it became probable that we would
have to perform under the guarantee. FIN 45 applies prospectively to guarantees
we issue or modify subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December 15,
2002. Data I/O has historically issued guarantees only on a limited basis and
does not anticipate FIN 45 will have a material effect on our 2003 financial
statements. Disclosures required by FIN 45 are included in the accompanying
financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, Accounting
Changes. Data I/O has not determined the effect of adoption of EITF 00-21 on our
financial statements or the method of adoption it will use.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
With respect to our foreign currency exchange rate risk, we currently use only
foreign currency hedge derivative instruments, which, at a given date, are not
material. However, Data I/O is exposed to interest rate risks. We generally
invest in high-grade commercial paper with original maturity dates of twelve
months or less and conservative money market funds to minimize our exposure to
interest rate risk on our marketable securities, which are classified as
available-for-sale as of December 31, 2002 and December 31, 2001. We believe
that the market risk arising from holdings of these financial instruments is not
material.
The table below provides information about our marketable securities, including
principal cash flows and the related weighted average interest rates (in
thousands):
Estimated Fair Estimated Fair
Principal Value at Principal Value at
Cash Flows December 31, Cash Flows December 31,
For 2003 2002 For 2002 2001
-------------- ------------------- --------------- -----------------
Corporate bonds $ 734 $ 734 $ 1,534 $ 1,534
2.936% 3.319%
Euro-dollar bonds 342 342 399 399
2.100% 3.520%
Taxable Auction Securities - - 800 800
2.231%
Asset Backed Securities - - 503 503
2.521%
--------------- ------------------- --------------- ------------------
Total portfolio value $1,076 $1,076 $3,236 $3,236
Item 8. Financial Statements and Supplementary Data
See pages 23 through 39.
- --------------------------------------------------------------------------------
REPORT OF GRANT THORNTON LLP INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Data I/O Corporation
We have audited the accompanying consolidated balance sheets of Data I/O
Corporation as of December 31, 2002 and December 31, 2001, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that the Company plans
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Data I/O Corporation as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
We have also audited Schedule II for the years ended December 31, 2002 and 2001.
In our opinion, the schedule when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material aspects, the
information therein.
//S//GRANT THORNTON LLP
Seattle, Washington
February 3, 2003
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Data I/O Corporation
We have audited the accompanying statements of operations, stockholders' equity,
and cash flows of Data I/O Corporation for the year ended December 28, 2000. Our
audit also includes the financial statement schedule listed in the Index at Item
15(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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Data I/O Corporation for the year ended December 28, 2000, in conformity with
accounting principles generally accepted in the United States. Also in our
opinion, the related financial statement schedule when considered in relation to
the basic financial statements, taken as a whole, presents fairly, in all
material respects the information therein.
As discussed in Note 1 to the consolidated financial statements, in 2000 the
Company changed its method of accounting for revenue recognition in accordance
with guidance provided in SEC Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
//S// Ernst & Young LLP
Seattle, Washington
February 7, 2001
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
The Management of Data I/O Corporation is responsible for the preparation and
integrity of Data I/O's consolidated financial statements and related
information that appears in this Annual Report on Form 10-K. Management believes
that the financial statements fairly reflect the form and substance of
transactions and reasonably present Data I/O's financial condition and results
of its operations, in conformity with accounting principles generally accepted
in the United States of America. Management has included in Data I/O's financial
statements, amounts that are based on estimates and judgments, which it believes
are reasonable under the circumstances.
Data I/O maintains a system of internal control, which is designed to safeguard
Data I/O's assets and ensure that transactions are recorded in accordance with
Company policies.
The Board of Directors of Data I/O has an Audit Committee composed of
non-management Directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing and financial reporting matters.
//S//Frederick R. Hume //S//Joel S. Hatlen
FREDERICK R. HUME Joel S. Hatlen
President and Chief Executive Officer Vice President
Chief Financial Officer
Secretary and Treasurer
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------
Dec.31, Dec. 31,
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,383 $ 2,656
Marketable securities 1,076 3,236
Trade accounts receivable, net of allowance for
doubtful accounts of $187 and $372 4,328 5,666
Inventories 4,476 6,388
Other current assets 509 485
------------- -------------
TOTAL CURRENT ASSETS 14,772 18,431
Property, plant and equipment - net 1,508 1,741
Other assets 87 168
------------- -------------
TOTAL ASSETS $16,367 $20,340
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,200 $1,599
Accrued compensation 826 848
Deferred revenue 1,613 1,686
Other accrued liabilities 1,510 1,871
Accrued costs of business restructuring 204 88
Income taxes payable 294 329
------------- -------------
TOTAL CURRENT LIABILITIES 5,647 6,421
Deferred gain on sale of property 1,435 1,765
------------- -------------
7,082 8,186
COMMITMENTS
- -
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, 7,767,630
and 7,613,754 shares 18,638 18,500
Retained deficit (9,279) (6,173)
Accumulated other comprehensive loss (74) (173)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 9,285 12,154
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,367 $20,340
============= =============
See notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 28,
For the years ended 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $22,838 $26,826 $42,909
Cost of goods sold 11,556 15,078 22,760
----------- ----------- ------------
Gross margin 11,282 11,748 20,149
----------- ----------- ------------
Operating expenses:
Research and development 5,331 6,740 8,716
Selling, general and administrative 8,254 9,707 10,616
Net provision (reversal) for business restructuring 632 1,211 (255)
----------- ----------- ------------
Total operating expenses 14,217 17,658 19,077
----------- ----------- ------------
Operating income (loss) (2,935) (5,910) 1,072
Non-operating income (expense):
Interest income 87 239 471
Interest expense (18) (16) (25)
Foreign currency exchange (301) (99) 430
------------ ----------- ------------
Total non-operating income (loss) (232) 124 876
------------ ----------- ------------
Income (loss) from continuing operations before income taxes and
cumulative effect of accounting change (3,167) (5,786) 1,948
Income tax (expense) benefit 61 (224) (36)
----------- ----------- ------------
Income (loss) from continuing operations before discontinued
operations and cumulative effect of accounting change (3,106) (6,010) 1,912
Discontinued operations, net of income taxes:
Income from operations, net of income tax - - 90
Cumulative effect of accounting change, net of income tax - - (2,531)
----------- ------------ ------------
Net loss ($3,106) ($6,010) ($529)
=========== ============ ============
Basic and diluted earnings (loss) per share:
From continuing operations ($0.40) ($0.79) $0.26
From discontinued operations - - 0.01
From cumulative effect of accounting change - - (0.34)
----------- ------------ ------------
Basic and diluted loss per share ($0.40) ($0.79) ($0.07)
=========== ============ ============
Weighted-average basic and diluted shares outstanding 7,704 7,572 7,405
See notes to consolidated financial statements
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 28,
For the years ended 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $(3,106) ($6,010) $1,912
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 1,018 2,206 2,074
Write off of assets 11 18 -
Amortization of deferred gain on sale (330) (329) (331)
Net change in:
Trade accounts receivable 1,395 4,961 (5,079)
Inventories 1,902 2,778 (2,929)
Recoverable income taxes 1 91 114
Other current assets (19) (48) 101
Accrued cost of business restructuring 114 (29) (376)
Accounts payable and accrued liabilities (859) (1,212) (589)
Deferred revenue (70) (951) 11
---------------- --------------- --------------
Cash provided by (used in) operating activities of continuing 57 1,475 (5,092)
operations
Cash provided by operating activities of discontinued operations - - 90
Cash used in cumulative effect of change in accounting principle - - (2,531)
---------------- --------------- --------------
Net cash provided by (used in) operating activities 57 1,475 (7,533)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (726) (785) (1,111)
Purchases of available-for-sale securities (630) (4,335) (2,346)
Proceeds from maturities of available-for-sale securities 2,789 3,041 10,019
---------------- --------------- --------------
Cash provided by (used in) investing activities 1,433 (2,079) 6,562
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 130 209 171
Proceeds from exercise of stock options 8 - 308
---------------- --------------- --------------
Cash provided by financing activities 138 209 479
---------------- --------------- --------------
Increase(decrease) in cash and cash equivalents 1,628 (395) (492)
Effects of exchange rate changes on cash 99 (82) 28
Cash and cash equivalents at beginning of year 2,656 3,133 3,597
---------------- --------------- --------------
Cash and cash equivalents at end of year $4,383 $ 2,656 $ 3,133
================ =============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 18 $ 16 $ 25
Income taxes $(61) $ 172 $ 41
See notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Retained Other Total
Common Stock Earnings Comprehensive Stockholders'
------------------------
Shares Amount (Deficit) Income (Loss) Equity
----------- --------- ---------- ----------------- --------------------
(in thousands, except share data)
Balance at December 31, 1999 7,290,165 $17,813 $366 $(121) $18,058
Stock options exercised 93,612 288 - - 288
Issuance of stock through
Director Fee Plan 14,228 20 - - 20
Issuance of stock through
Employee Stock Purchase Plan 96,537 171 - - 171
Comprehensive loss:
Net loss - - (529) - (529)
Translation adjustment - - - 28 28
Unrealized gain on
marketable securities - - - 3 3
--------------------
Total comprehensive loss (498)
--------------------
----------- --------- ---------- ----------------- --------------------
Balance at December 28, 2000 7,494,542 18,292 (163) (90) 18,039
Issuance of stock through
Employee Stock Purchase Plan 119,212 208 - - 208
Comprehensive loss:
Net loss - - (6,010) - (6,010)
Translation adjustment - - - (82) (82)
Unrealized gain on marketable - - - (1) (1)
securities
--------------------
Total comprehensive loss (6,093)
----------- --------- ---------- ----------------- --------------------
Balance at December 31, 2001 7,613,754 18,500 (6,173) (173) 12,154
Stock options exercised 5,000 8 - - 8
Issuance of stock through
Employee Stock Purchase Plan 148,876 130 - - 130
Comprehensive loss:
Net loss - - (3,106) - (3,106)
Translation adjustment - - - 99 99
--------------------
Total comprehensive loss (3007)
--------------------
----------- --------- ---------- ----------------- --------------------
Balance at December 31, 2002 7,767,630 $18,638 ($9,279) ($74) $9,285
=========== ========= ========== ================= ====================
See notes to consolidated financial statements.
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Data I/O(R) Corporation ("Data I/O") designs, manufactures, and sells
programming systems used by designers and manufacturers of electronic products.
Our programming system products are used to program integrated circuits ("ICs"
or "devices" or "semiconductors") with the specific unique data necessary for
the ICs contained in various products, and are an important tool for the
electronics industry experiencing growing use of programmable ICs. Customers for
our programming system products are located around the world, primarily in the
United States, Europe and the Far East. Our manufacturing operations are
currently located in the United States. An outside supplier located in Germany
currently manufactures our Sprint non-automated programming system.
As a result of our significant product development, customer support, and
selling and marketing efforts in a period of weak capital spending, Data I/O has
required substantial working capital to fund our operations. We believe that we
have sufficient working capital available under our operating plan to fund our
operations and capital requirements through at least December 31, 2003. Any
substantial inability to achieve the current business plan could have a material
adverse impact on our financial position, liquidity, or result of operations and
may require us to reduce expenditures and/or seek additional financing to enable
us to continue operations through December 31, 2003.
Principles of Consolidation
The consolidated financial statements include the accounts of Data I/O
Corporation and our wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reporting Period
In 2001, Data I/O converted to reporting on a calendar year-end basis. Results
of operations for 2000 are for a fifty-two week period. The first quarter of
2001 covered the period December 29, 2000 to March 31, 2001.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Stock-Based Compensation
Data I/O has stock-based employee compensation plans that are described more
fully in Note 12. Data I/O applies APB Opinion 25, Accounting for Stock Issued
to Employees, and related Interpretations in accounting for our plans. Stock
expense in 2002, 2001, and 2000 would have been the result of options issued
with an exercise price below the underlying stock's market price. The following
table illustrates the effect on net loss and loss per share if Data I/O had
applied the fair value recognition provisions of FASB Statement 123, Accounting
for Stock-Based Compensation, using the assumptions described in Note 12, to our
stock-based employee plans.
Data I/O's pro forma information follows (in thousands, except per share data):
Year Ended December
-------------------------------------------------
2002 2001 2000
--------------- ---------------- --------------
Net loss - as reported ($3,106) ($6,010) ($529)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for awards
granted, modified, or settled, net of related tax effects
(392) (440) (673)
--------------- -------------- ----------------
Net loss - pro forma ($3,498) ($6,450) ($1,202)
=============== ============== ================
Basic and diluted loss per share - as reported ($0.40) ($0.79) ($0.07)
Basic and diluted loss per share - pro forma ($0.45) ($0.85) ($0.16)
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the exchange
rate on the balance sheet date. Revenues, costs and expenses of foreign
subsidiaries are translated at average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are charged or
credited to stockholders' equity, net of taxes. Realized and unrealized gains
and losses resulting from the effects of changes in exchange rates on assets and
liabilities denominated in foreign currencies are included in non-operating
expense as foreign currency transaction gains and losses.
In an effort to minimize the effect of exchange rate fluctuations on the results
of our operations, Data I/O hedges portions of our foreign currency exposure
through the use of forward exchange contracts, none of which are speculative. At
December 31, 2002, we had a notional value of approximately $1,300,000 in three
foreign exchange contracts outstanding, the fair value of which was a liability
of $96,000. The contract terms are 75-90 days. The hedges are perfectly
effective, as currency, settlement date and amount of the underlying receivables
and of the forward contracts coincide, and as spot rates are the same for both
the hedge and the hedged item.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with maturities of three
months or less at date of purchase.
Marketable Securities
Data I/O generally invests in debt securities with original maturities of twelve
months or less and money market funds, all of which are classified as
available-for-sale and recorded at fair value, as defined below. We record
unrealized holding gains and losses, net of any tax effect, as a component of
accumulated other comprehensive income (loss) within stockholders' equity. We
report interest earned in non-operating income as interest income. Marketable
securities are classified in the balance sheet as current and noncurrent based
on maturity dates and our expectation of sales and redemptions in the following
year.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, marketable securities and forward
exchange contracts approximates fair value. The fair value of Data I/O's
marketable securities is based upon the quoted market price on the last business
day of the fiscal year plus accrued interest, if any.
Accounts Receivable
The majority of Data I/O's accounts receivable is due from companies in the
electronics manufacturing industries. Credit is extended based on an evaluation
of a customers' financial condition and, generally, collateral is not required.
Accounts receivable are due within 30 to 60 days and are stated at amounts due
from customers net of an allowance for doubtful accounts. Accounts outstanding
longer than the contractual payment terms are considered past due. Data I/O
determines our allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, Data I/O's previous loss
history, the customer's current ability to pay our obligation to Data I/O, and
the condition of the general economy and the industry as a whole. Data I/O
writes off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Interest is allowed to accrue, according to our standard
sales terms, beginning on the day after the due date of the receivable. However,
interest income is subsequently recognized on these accounts only to the extent
cash is received, or when the future collection of interest and the receivable
balance is considered probable by management.
Inventories
Inventories are stated at the lower of cost or market with cost being the
currently adjusted standard cost, which approximates cost on a first-in,
first-out basis.
Property, Plant and Equipment
Property, plant and equipment, including leasehold improvements, are stated at
cost and depreciation is calculated over the estimated useful lives of the
related assets or lease terms on the straight-line basis. We depreciate
substantially all manufacturing and office equipment over periods of three to
seven years. We depreciate leasehold improvements over the remaining portion of
the lease, or over the expected life of the asset if less than the remaining
term of the lease.
Long lived and other assets are evaluated on an annual basis for impairment. In
this connection, we reviewed the expected cash flows to be generated by the
Sprint product line to determine that they are adequate compared to the
remaining net book value of long lived assets from the SMS acquisition.
Revenue Recognition
Sales of Data I/O's semiconductor programming equipment products requiring
installation by us that is other than perfunctory are recorded when installation
is complete, or at the later of customer acceptance or installation, if an
acceptance clause is specified in the sales terms. We recognize revenue from
other product sales at the time of shipment. We record revenue from the sale of
service and update contracts as deferred revenue and we recognize it on a
straight-line basis over the contractual period.
Data I/O previously recognized revenue from product sales at the time of
shipment, or at customer acceptance, if an acceptance clause was specified in
the sales terms. Effective December 31, 1999, we changed our method of
accounting for product sales requiring Company installation, when installation
is other than perfunctory, to recognize such revenues when installation is
complete, or at the later of customer acceptance or installation, if an
acceptance clause is specified in the sales terms. We believe the change in
accounting principle is preferable based on guidance provided in SEC Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. This change in accounting principle did not impact taxes, as all
affected jurisdictions had net operating loss carryforwards.
Data I/O's software products are not normally sold separately from sales of
programming systems. However, on those occasions where we sell software
separately, we recognize revenue when a sales agreement exists, when delivery
has occurred, when the fee is fixed or determinable, and when collectibility is
probable.
Research and Development
Research and development costs are expensed as incurred.
Advertising Expense
Data I/O expenses advertising costs as incurred. Total advertising expenses
related to continuing operations were $468,000, $487,000, and $904,000 in 2002,
2001, and 2000, respectively.
Warranty Expense
Data I/O records a liability for an estimate of costs that it expects to incur
under our basic limited warranty when product revenue is recognized. Factors
affecting our warranty liability include the number of units sold and historical
and anticipated rates of claims and costs per claim. We periodically assess the
adequacy of our warranty liability based on changes in these factors. Data I/O
normally warrants our products against defects for periods ranging from ninety
days to one year. The FlashPAK which we recently introduced, carries a
three-year warranty on some components. We provide currently for the estimated
cost that may be incurred under our product warranties. Data I/O records
revenues on extended warranties on a straight-line basis over the term of the
related warranty contracts. Service costs are expensed as incurred.
Earnings (Loss) Per Share
Basic earnings/(loss) per share exclude any dilutive effects of stock options.
Basic earnings/(loss) per share are computed using the weighted-average number
of common shares outstanding during the period. Diluted earnings/(loss) per
share are computed using the weighted-average number of common shares and common
stock equivalent shares outstanding during the period. Common stock equivalent
shares are excluded from the computation if their effect is antidilutive.
Earnings per share as presented on the statement of operations exclude employee
stock options that were antidilutive of 1,141,412, 1,115,508 and 1,128,750 in
2002, 2001 and 2000, respectively.
Diversification of Credit Risk
Financial instruments, which potentially subject Data I/O to concentrations of
credit risk, consist primarily of trade receivables. Our cash, cash equivalents
and marketable securities consist of high quality financial instruments. Our
trade receivables are geographically dispersed and include customers in many
different industries. We believe that any risk of loss is significantly reduced
due to the diversity of our end-customers and geographic sales areas. We perform
on-going credit evaluations of our customers' financial condition and require
collateral, such as letters of credit and bank guarantees, whenever deemed
necessary.
Derivatives
Data I/O accounts for our derivatives using SFAS No. 133, Accounting for
Derivatives and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value.
Data I/O utilizes forward foreign exchange contracts to reduce the impact of
foreign currency exchange rate risks where natural hedging strategies cannot be
effectively employed. All of our hedging instruments are fair value hedges.
Generally, these contracts have maturities less than one year and require us to
exchange foreign currencies for U.S. dollars at maturity. The fair value of the
open hedge contracts as of December 31, 2002 is a liability of $96,000 and is
included in accounts payable on the balance sheet.
Data I/O does not hold or issue derivative financial instruments for trading
purposes. The purpose of our hedging activities is to reduce the risk that the
valuation of the underlying assets, liabilities and firm commitments will be
adversely affected by changes in exchange rates. Our derivative activities do
not create foreign currency exchange rate risk because fluctuations in the value
of the instruments used for hedging purposes are offset by fluctuations in the
value of the underlying exposures being hedged. We are exposed to credit-related
losses in the event of nonperformance by counterparties to forward exchange
contracts. However, we have entered into these instruments with creditworthy
financial institutions and consider the risk of nonperformance remote.
New Accounting Pronouncements
In June 2001, the FASB issued Statement 143, Accounting for Asset Retirement
Obligations (SFAS 143). This statement requires entities to record a liability
for the estimated retirement and removal costs of assets used in their business.
The liability should be recorded at its fair value, with a corresponding asset
that should be depreciated over the remaining useful life of the long-lived
asset to which the liability relates. Period expenses will also be recognized
for changes in the original value of the liability as a result of the passage of
time and revisions in the undiscounted cash flows required to satisfy the
obligation. The provisions of SFAS 143 are effective for fiscal years beginning
after June 15, 2002. Data I/O is currently assessing and quantifying the asset
retirement obligations associated with our long-lived assets and estimates that
the impact on future annual net income will not be material due to the long
period over which the costs will be depreciated.
The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," on April 30,
2002. Statement No. 145 rescinds Statement No.4, which required all gains and
losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Upon
adoption of Statement No. 145, companies will be required to apply the criteria
in APB Opinion No. 30, "Reporting the Results of Operations, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" in determining the
classification of gains and losses resulting from the extinguishments of debt.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002.
While we have no current debt outstanding, we are currently evaluating the
requirements and impact of this statement on our operations and financial
position.
In June 2002, the FASB issued Statement 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires entities to recognize
costs associated with exit or disposal activities when liabilities are incurred
rather than when the entity commits to an exit or disposal plan, as currently
required. Examples of costs covered by this guidance include one-time employee
termination benefits, costs to terminate contracts other than capital leases,
costs to consolidate facilities or relocate employees, and certain other exit or
disposal activities. This statement is effective for fiscal years beginning
after December 31, 2002, and will impact any exit or disposal activities we
initiate after that date.
In December 2002, the FASB issued Statement 148 (SFAS 148), Accounting for
Stock-Based Compensation -- Transition and Disclosure: an amendment of FASB
Statement 123 (SFAS 123), to provide alternative transition methods for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in annual financial statements
about the method of accounting for stock-based employee compensation and the pro
forma effect on reported results of applying the fair value based method for
entities that use the intrinsic value method of accounting. The pro forma effect
disclosures are also required to be prominently disclosed in interim period
financial statements. This statement is effective for financial statements for
fiscal years ending after December 15, 2002 and is effective for financial
reports containing condensed financial statements for interim periods beginning
after December 15, 2002, with earlier application permitted. We do not plan a
change to the fair value based method of accounting for stock-based employee
compensation and have included the disclosures required by SFAS 148 in the
accompanying financial statements.
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. Data I/O previously did not record a
liability when guaranteeing obligations unless it became probable that we would
have to perform under the guarantee. FIN 45 applies prospectively to guarantees
we issue or modify subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December 15,
2002. Data I/O has historically issued guarantees only on a limited basis and
does not anticipate FIN 45 will have a material effect on our 2003 financial
statements. Disclosures required by FIN 45 are included in the accompanying
financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, Accounting
Changes. Data I/O has not determined the effect of adoption of EITF 00-21 on our
financial statements or the method of adoption it will use.
NOTE 2 - PROVISION FOR BUSINESS RESTRUCTURING
The economic slowdown continued in 2002 and significantly affected our business.
During 2002, we continued the restructuring process from 2001 and recorded
restructuring charges in the third and fourth quarter of 2002 of $497,000 and
$135,000 respectively for a total of $632,000 associated with actions taken to
reduce our breakeven point and realign Data I/O with our market opportunities.
We required this operational repositioning because of the impact of the economic
slowdown and the decline in capital spending across a high number of customer
groups on general demand for programming equipment.
We reduced our quarterly breakeven point from approximately $7 million of net
sales at the beginning of 2002 to approximately $5.7 million at the end of 2002.
Most of these reductions were achieved by reducing our personnel from 155 at the
beginning of 2002 to 125 at the end of 2002.
During 2001, we took a number of strategic restructuring actions to reduce our
breakeven point. Repositioning included the following: a reduction in our global
workforce from 224 at the start of the year to 155 at the end of 2001;
discontinuance or reallocation of numerous projects and activities not essential
to our long-term goals; streamlining activities to decrease discretionary
marketing, distribution and promotional expenses, consolidation of numerous
functions across the organization to create a team which was more productive and
able to respond faster to global customer needs; and closure of a facility in
Germany and moving our operations to other locations within Data I/O.
At December 31, 2002 all restructuring expenses associated with the activities
detailed above had been paid except approximately $204,000, which was primarily
associated with severance, facility, consulting and legal fees.
An analysis of the restructuring is as follows (in thousands):
2001 Reserve 2002 Reserve
2001 Payments/ Balance at 2002 Payments/ Balance at
Description Expenses Write-offs Dec. 31, 2001 Expenses Write-offs Dec. 31, 2002
----------------- ------------- ------------- --------------- -------------- -------------- ---------------
Downsizing U.S.
Operations:
Employee severance $ 729 $ 725 $ 4 $556 $391 $169
Redmond facility
consolidation (5) 56 46 10 46 10
Consulting and legal
expenses 71 52 19 58 52 25
Downsizing Foreign
Operations 416 407 19 8 27 -
------------- ------------- --------------- --------------- --------------- ---------------
Total $1,211 $1,240 $88 $632 $516 $204
============== ============= =============== =============== =============== ===============
NOTE 3 - MARKETABLE SECURITIES
The estimated fair value of marketable securities consisted of the following (in
thousands):
Dec. 31, Dec. 31,
2002 2001
------------- -------------
Corporate bonds $ 734 $ 1,534
Medium- and short-term notes - -
Euro-dollar bonds 342 399
Taxable auction securities - 800
Asset backed securities - 503
------------- -------------
$1,076 $3,236
============= =============
At December 31, 2002, cost approximated market value for Data I/O's portfolio of
marketable securities and there were no significant unrealized gains or losses.
The maturity for all marketable securities held at December 31, 2002 is within
calendar year 2003. The cost of securities sold is determined by the specific
identification method.
NOTE 4 - ACCOUNTS RECEIVABLE
Receivables consist of the following (in thousands):
Dec. 31, Dec. 31,
2002 2001
--------------- ----------------
Trade receivables $4,436 $5,937
Other 79 101
----------------- ----------------
Total 4,515 6,038
Less allowance for doubtful receivables 187 372
----------------- ----------------
Net receivables $4,328 $5,666
================= ================
Trade receivables relate to sales of parts, for which credit is extended based
on the customer's credit history. Other receivables represent amounts due for
subcontracting work performed for others.
Changes in Data I/O's allowance for doubtful accounts are as follows (in
thousands):
Dec. 31, Dec. 31,
2002 2001
---------------- -----------------
Beginning balance $372 $350
Bad debt expense (reversal) (162) 64
Accounts written-off (37) (42)
Recoveries 14 -
---------------- -----------------
Ending balance $187 $372
================ =================
NOTE 5 - INVENTORIES
Net inventories consisted of the following components (in thousands):
Dec. 31, Dec. 31,
2002 2001
------------------ -------------------
Raw material $2,308 $3,588
Work-in-process 875 1,354
Finished goods 1,293 1,446
------------------ -------------------
$4,476 $6,388
================== ===================
Reserves for excess and obsolete inventory are $3,267,000 and $2,469,000 at
December 31, 2002 and December 31, 2001, respectively. Freight expense for
incoming raw materials and freight out for product shipments is charged to cost
of goods sold.
Certain parts used in Data I/O's products are currently available from either a
single supplier or from a limited number of suppliers. If we cannot develop
alternative sources for these components, or if we experience deterioration in
our relationship with these suppliers, there may be delays or reductions in
product introductions or shipments, which may materially adversely affect our
operating results.
Because Data I/O relies on a small number of suppliers for certain parts, we are
subject to possible price increases by these suppliers. Also, we may be unable
to accurately forecast our production schedule. If we underestimate our
production schedule, suppliers may be unable to meet our demand for components.
This delay in the supply of key components may materially adversely affect our
business.
The non-automated programming system products we acquired when we purchased SMS
in November 1998 are currently manufactured to our specifications by a
third-party contract manufacturer. We may not be able to obtain a sufficient
quantity of these products when needed, which may result in lost sales.
NOTE 6 - SALE - LEASEBACK
In May 1997, Data I/O completed the sale of the land and building comprising our
Redmond, Washington, corporate headquarters. The sale includes a 10-year
leaseback of the building to Data I/O. The sale represented an overall pre-tax
gain to Data I/O of $5.6 million. Of this amount, we recognized $2.3 million in
1997, with the remainder being amortized over the life of the lease.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Dec. 31, Dec. 31,
2002 2001
-------------- --------------
Leasehold improvements $ 239 $ 229
Equipment 12,132 12,188
-------------- --------------
12,371 12,417
Less accumulated depreciation 10,863 10,676
-------------- --------------
Property, plant and equipment - net $ 1,508 $ 1,741
============== ==============
Total depreciation recorded for 2002, 2001, and 2000 was $670,000, $940,000,
$1,036,000, respectively.
NOTE 8 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
Dec. 31, Dec. 31,
2002 2001
-------------- --------------
Long-term lease deposits $ 66 $ 66
Investment in product lines: SMS 3,272 3,272
-------------- --------------
3,338 3,338
Less accumulated amortization 3,251 3,170
-------------- --------------
Other assets - net $ 87 $ 168
============== ==============
Total amortization recorded for 2002, 2001, and 2000 was $81,000, $969,000,
$1,038,000, respectively.
Investment in Product Lines: SMS
In November 1998, Data I/O acquired SMS Holding GmbH. In related transactions,
we acquired a license to the technology, manufacturing and worldwide
distribution rights to Unmanned Solutions' AH 400 robotic handler, which is used
in the fine pitch automated programming system, now the PS300 product family. Of
the total acquisition costs of these transactions, approximately $3.3 million of
developed technology and other various intangible assets are reported as Other
Assets in the accompanying balance sheets and are being amortized ratably over
the economic life of the specific assets acquired (three to five years). The net
book value of the assets capitalized in Other Assets related to this acquisition
is $59,000, $102,000 and $1.2 million at December 31, 2002, 2001 and December
28, 2000, respectively. As part of the SMS acquisition $1.9 million was recorded
as an expense for in-process research and development in 1998.
NOTE 9 - WARRANTY
The changes in Data I/O's product warranty liability are as follows (in
thousands):
December 31, December 31,
2002 2001
------------------ -----------------
Liability, beginning of year $578 $671
Net expense, accrual revisions
and warranty claims (59) (93)
------------------ -----------------
Liability, end of year $519 $578
================== =================
NOTE 10 - COMMITMENTS
Data I/O has commitments under non-cancelable operating leases and other
agreements, primarily for factory and office space, with initial or remaining
terms of one year or more are as follows for the year ending December 31(in
thousands):
2003 $1,345
2004 1,321
2005 1,274
2006 1,182
2007 493
--------------
Total $5,615
==============
Lease and rental expense was $1,387,000, $1,342,000, and $1,348,000 in 2002,
2001, and 2000 respectively. Data I/O has renewal options on substantially all
of our major leases. The initial lease on the Redmond facility expires on
December 31, 2006. So long as we are not in material default of the terms of the
lease nor has there been a material adverse change in the financial condition of
Data I/O, then we have the option to extend the lease for an additional five
years on the same terms as the balance of the lease, except the rent shall be at
the then prevailing fair market rental rate. We will also have the right for a
second five-year extension by giving written notice at least six months prior to
the end of the first extension.
As part of our restructuring plan implementation, Data I/O vacated one floor of
our leased Redmond facility (approximately 25,000 square feet) and has sublet
the majority of this space for a period of 28 months beginning January 1, 2000.
This sublease ended in June 2002. We have not been successful in subleasing this
space since June 2002 and believe the market for this space is currently quite
limited.
NOTE 11 - STOCK AND RETIREMENT PLANS
Stock Option Plans
At December 31, 2002, there were 1,614,623 shares of common stock reserved for
issuance of which 473,211 shares are available for future grant under Data I/O's
employee stock option plans. Pursuant to these plans, options are granted to our
officers and key employees with exercise prices equal to the fair market value
of the common stock at the date of grant and generally vest over four years.
Certain options granted during 1998 and 1999 vest over two years. Options
granted under the plans generally have a maximum term of six years from the date
of grant, except for certain options granted in January 1999 which have a
maximum term of ten years. On May 15, 2002, Data I/O's shareholders approved an
amendment to the Data I/O Corporation 2000 Stock Incentive Compensation Plan
increasing the number of shares reserved for issuance under the 2000 Plan by an
additional 200,000 shares of common stock.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, eligible employees may purchase shares
of Data I/O'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 2002, 2001 and 2000, a total of
148,876, 119,212, and 96,537 shares, respectively, were purchased under the plan
at average prices of $0.87, $1.66, and $1.78 per share, respectively. At
December 31, 2002, a total of 169,115 shares were reserved for future issuance.
Stock Appreciation Rights Plan
Data I/O has a Stock Appreciation Rights Plan ("SAR") under which each director,
executive officer or holder of 10% or more of Data I/O's common stock has a SAR
with respect to each exercisable stock option. The SAR entitles the SAR holder
to receive cash from Data I/O 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
Data I/O's stock, or following approval by shareholders of Data I/O of any
merger, consolidation, reorganization or other transaction providing for the
conversion or exchange of more than 50% of the common shares outstanding. As no
event has occurred which would make the SARs exercisable, and no such event is
deemed probable, no compensation expense has been recorded under this plan.
Director Fee Plan
Data I/O has a Director Fee Plan, not currently in use, which had provided for
payment to directors who are not employees of Data I/O Corporation by delivery
of shares of Data I/O's common stock. No shares were issued from the plan for
2002, 2001 and 2000 board service and 151,332 shares remain available in the
plan.
Retirement Savings Plan
Data I/O 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 their pre-tax salary, subject to IRS
limitations. In fiscal years 2002, 2001 and 2000, Data I/O contributed one
dollar for each dollar contributed by a participant, with a maximum contribution
of 4% of a participant's earnings. Data I/O's matching contribution expense for
the savings plan was approximately $173,000, $271,000, and $275,000 in 2002,
2001 and 2000, respectively.
Share Repurchase Program
Under a previously announced share repurchase program, Data I/O is authorized to
repurchase up to 1,123,800 shares (approximately 14.8%) of our outstanding
common stock. These purchases may be executed through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and may commence or be discontinued at any time. Through December
31, 2002, we have repurchased 1,016,200 shares under this repurchase program at
a total cost of approximately $7.1 million. We have not repurchased shares under
this plan since the second quarter of 1997, although we still have the authority
to do so.
NOTE 12- STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if Data I/O had accounted for our employee
stock options, employee stock purchase plan options and directors' fee shares
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes option-pricing model
with the following weighted-average assumptions:
Employee Stock Employee Stock Director
Options Purchase Plan Fee Plan
------------------------------- -------------------------------- -------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- ---------- --------- --------- ---------
Risk-free interest rates 3.80 4.81 5.65 1.66 4.86 5.94 N/A N/A N/A
Volatility factors .94 .70 .63 .94 .70 .63 N/A N/A N/A
Expected life of the option
in years 4.31 4.31 4.31 .50 .50 .50 N/A N/A N/A
Expected dividend yield None None None None None None None None None
For purposes of pro forma disclosures, the estimated fair value of the options
granted, which is estimated to be $0.92, $1.36, $2.05 per share for 2002, 2001
and 2000, respectively, is amortized to expense over the options' vesting
period.
A summary of Data I/O's stock option activity, and related information follows:
December 31, 2002 December 31, 2001 December 28, 2000
---------------------------- -------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------- ------------- ------------- ------------ --------------- ---------------
Outstanding at beginning of year 1,115,508 2.89 1,128,750 2.98 946,325 2.57
Granted 328,000 1.33 117,500 2.35 327,500 4.00
Exercised (5,000) 1.33 - - (99,877) 2.41
Expired or forfeited (297,096) 2.48 (130,742) 3.19 (45,198) 3.06
--------------- ------------- ---------------
Outstanding - end of year 1,141,412 2.56 1,115,508 2.89 1,128,750 2.98
=============== ============= ===============
Exercisable at end of year 705,477 2.80 675,050 2.86 500,876 2.90
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------ ---------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
----------------- ----------------- ------------------ --------------- ------------------
$1.16 - $1.75 476,751 3.92 1.51 197,515 1.67
$2.20 - $3.47 345,161 3.92 2.65 251,899 2.58
$3.48 - $4.69 301,500 2.10 3.97 238,563 3.80
$5.00 - $5.19 18,000 1.37 5.16 17,500 5.16
----------------- ---------------
$1.16-$5.19 1,141,412 3.40 2.56 705,477 2.80
================= ===============
NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Ending accumulated balances for each item in accumulated other comprehensive
loss are as follows:
(in thousands) December 31, December 31,
2002 2001
------------------- ----------------
Unrealized currency loss ($74) ($ 175)
Unrealized gain on marketable securities - 2
------------------- ----------------
Total accumulated other comprehensive loss ($74) ($173)
=================== ================
NOTE 14- INCOME TAXES
Data I/O accounts for income taxes using the liability method as prescribed by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
Components of income (loss) from continuing operations before taxes:
Year Ended December
---------------------------------------------------
(in thousands) 2002 2001 2000
--------------- --------------- ----------------
U.S. operations ($3,506) ($6,122) $1,615
Foreign operations 339 336 333
--------------- --------------- ----------------
($3,167) ($5,786) $1,948
=============== =============== ================
Income tax expense (benefit) consists of:
Current tax expense (benefit):
U.S. federal (198) (11) -
State 4 6 -
Foreign (61) 223 36
--------------- --------------- ----------------
(255) 218 36
Deferred tax expense (benefit) - U.S. federal 194 6 -
--------------- --------------- ---------------
Total income tax expense (benefit) ($61) $ 224 $ 36
=============== =============== ================
For federal income tax purposes, a deduction is received for stock option
compensation gains.
A reconciliation of Data I/O's effective income tax rate and the U.S. federal
tax rate is as follows:
Year Ended December
----------------------------------------------------
2002 2001 2000
--------------- -------------- ---------------
Statutory rate 34.0% 34.0% 34.0%
Foreign Sales Corporation tax benefit - - (5.3)
State and foreign income tax, net of
federal income tax benefit 1.3 (8.5) 0.3
Valuation allowance for deferred tax assets (33.6) (28.8) (27.9)
Other 0.2 (0.6) 0.7
--------------- --------------- ---------------
1.9% 3.9% 1.8%
=============== =============== ===============
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
Dec. 31, Dec. 31,
2002 2001
------------- --------------
Deferred income tax assets:
Allowance for doubtful accounts $ 49 $ 77
Inventory and product return reserves 2,135 1,498
Compensation accruals 111 123
Accrued liabilities 1,037 1,116
Book-over-tax depreciation and amortization 818 904
Foreign net operating loss carryforwards 5 73
US net operating loss carryforwards and credit carryforwards 5,969 5,162
Other, net 16 14
--------------- ----------------
10,140 8,967
Valuation allowance (10,140) (8,967)
--------------- ----------------
Total deferred income tax assets $- $-
=============== ================
The valuation allowance for deferred tax assets increased $1,173,000 and
$1,985,000 during the years ended December 31, 2002 and December 31, 2001,
respectively, due primarily to the taxable losses and to credit carryforwards
generated in those years. The net deferred tax assets have a full valuation
allowance provided due to uncertainty regarding Data I/O's ability to utilize
such assets in future years. Credit carryforwards consist primarily of research
and experimental and alternative minimum tax credits. Net operating loss
carryforwards expire in 2021 and 2022. Utilization of net operating loss and
credit carryforwards is subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986, as amended.
NOTE 15 - SEGMENT AND GEOGRAPHIC INFORMATION
In 2002 and 2001, no customer accounted for 10% of Data I/O's consolidated
revenues. In 2000, one customer accounted for 23% of Data I/O's revenue; no
other customer accounted for more than 10%. Major operations outside the U.S.
include sales and service support subsidiaries in Germany, Canada and China.
We present geographic information of the continuing operations for the three
years ended December 31, 2002 in the table that follows. Net sales, as shown in
the table below, are based upon the geographic area into which the products were
sold and delivered. Export sales are subject to U.S. Department of Commerce
regulations, and to the market conditions in the countries in which the products
are sold. For purposes of the table below, the profit on the transfers between
geographic areas has been shown in operating income in the geographic area where
the final sale to non-affiliated customers took place. Certain general corporate
expenses are charged to the U.S. segment. Identifiable assets are those assets
that can be directly associated with a particular geographic area. All Company
financial instruments, consisting of cash and marketable securities, are
included in U.S. operations.
Year Ended December
------------------------------------------------------------------
(in thousands) 2002 2001 2000
--------------- -------------- ----------------
Net sales:
U.S. $8,347 $9,526 $15,588
Europe 7,662 8,730 19,678
Rest of World 6,829 8,570 7,643
--------------- -------------- ----------------
$22,838 $26,826 $42,909
=============== ============== ================
Operating income (loss) from continuing operations:
U.S. ($2,754) ($4,710) ($3,070)
Europe 772 (1,437) 3,968
Rest of World (953) 237 174
--------------- -------------- ----------------
($2,935) ($5,910) $1,072
=============== ============== ================
Identifiable assets of the continuing operations:
U.S. $10,273 $13,248 $17,808
Europe 3,235 4,059 7,692
Rest of World 2,859 3,033 3,246
-------------- ----------------
---------------
$16,367 $20,340 $28,746
=============== ============== ================
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth unaudited selected quarterly financial data for
Data I/O for 2002 and 2001. Although our business is not seasonal, growth rates
of sales and earnings have varied from quarter to quarter as a result of factors
such as stocking orders from international distributors, the timing of new
product introductions, business acquisitions and dispositions, business
restructuring, and short-term industry and general U.S. and international
economic conditions. Information as to any one or more quarters is, therefore,
not necessarily indicative of trends in our business or profitability.
Year Ended December 2002
(in thousands except per share data)
-----------------------------------------------------------------
For the quarters ended: Mar 31 June 30 Sept 30 Dec 31
------------- ------------- ------------- -------------
Net sales $5,389 $4,797 $6,443 $6,209
Gross margin 2,502 2,005 3,271 3,504
Income (loss) from continuing operations before cum-
ulative effect of change in accounting principle (1,154) (1,368) (833) 251
Net income (loss) (1,154) (1,368) (833) 251
Basic and diluted earnings (loss) per share from
continuing operations (1) ($0.15) ($0.18) ($0.11) $0.03
Basic and diluted earnings (loss) per share (1) ($0.15) ($0.18) ($0.11) $0.03
(1) The sum of quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted-average shares outstanding and the effects of rounding for each
period.
(in thousands except per share data) Year Ended December 2001
-----------------------------------------------------------------
For the quarters ended Mar 30 June 28 Sept 30 Dec 31
------------- ------------- ------------- -------------
Net sales $7,883 $6,487 $6,479 $5,977
Gross margin 2,736 2,810 3,355 2,847
Income (loss) from continuing operations before cum-
ulative effect of change in accounting principle (2,147) (1,900) (501) (1,238)
Net income (loss) (2,149) (1,920) (571) (1,370)
Basic and diluted earnings (loss) per share from
continuing operations (1) ($0.28) ($0.25) ($0.07) ($0.16)
Basic and diluted earnings (loss) per share (1) ($0.58) ($0.25) ($0.08) ($0.18)
NOTE 17 - LONG-TERM DEBT
As of December 31, 2002 and December 31, 2001, Data I/O had no long-term debt
outstanding. Data I/O established a foreign line of credit for 50,000 Euros in
February 2002.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not Applicable
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 Data I/O's Proxy Statement relating to Data I/O's annual meeting
of shareholders to be held on May 20, 2003 and is incorporated herein by
reference. Such Proxy Statement will be filed within 120 days of Data I/O'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 Data I/O's Proxy
Statement relating to Data I/O's annual meeting of shareholders to be held on
May 20, 2003 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 Data I/O's year-end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information called for by Part III, Item 12, is included in Data I/O's Proxy
Statement relating to Data I/O's annual meeting of shareholders to be held on
May 20, 2003 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 Data I/O's year-end.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, Data I/O evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) and Rule 15d-14(c) under the Exchange
Act) as of a date (the "Evaluation Date") within 90 days prior to the filing
date of this report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to Data I/O (or our consolidated subsidiaries)
required to be included in our periodic SEC filings and Form 8-K reports.
(b) Changes in internal controls.
There were no significant changes made in our internal controls or, to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART IV
Item 15. 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 Data I/O is a participant, unless the method of
allocation of benefits thereunder is the same for management and non-management
participants:
(1) Amended and Restated 1982 Employee Stock Purchase Plan. See Exhibit 10.7.
(2) Retirement Plan and Trust Agreement. See Exhibit 10.2, 10.3, 10.4, 10.11,
10.14, 10.15, and 10.16.
(3) Summary of Management Incentive Compensation Plan. See Exhibit 10.12.
(4) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1.
(5) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.19.
(6) Form of Change in Control Agreements. See Exhibit 10.5.
(7) 1996 Director Fee Plan. See Exhibit 10.6 and 10.17.
(8) Letter Agreement with Frederick R. Hume. See Exhibit 10.21.
(a) List of Documents Filed as a Part of This Report: Page
(1) Index to Financial Statements:
Report of Grant Thornton LLP, Independent Certified Public
Accountants 21
Report of Ernst & Young LLP, Independent Auditors 22
Report of Management 22
Consolidated Balance Sheets as of December 31, 2002 and 2001 23
Consolidated Statements of Operations for each of the three
years ended December 31, 2002 24
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2002 25
Consolidated Statement of Stockholders' Equity for each of
the three years ended December 31, 2001 26
Notes to Consolidated Financial Statements 27
(2) Index to Financial Statement Schedules:
Schedule II - Consolidated Valuation and Qualifying Accounts
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 Data I/O's restated Articles of Incorporation filed
November 2, 1987 (Incorporated by reference to
Exhibit 3.1 of Data I/O's 1987 Annual Report on
Form 10-K (File No. 0-10394)).
3.2 Data I/O's Bylaws as amended and restated as of
March 2001.
3.3 Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 1 of Data I/O's
Registration Statement on Form 8-A filed March 13, 1998
(File No. 0-10394)).
4 Instruments Defining the Rights of Security Holders,
Including Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between Data
I/O Corporation and ChaseMellon Shareholder Services,
L.L.C. as Rights Agent, which includes: as Exhibit A
thereto, the Form of Right Certificate; and, as Exhibit B
thereto, the Summary of Rights to Purchase Series A Junior
Participating Preferred Stock (Incorporated by reference
to Data I/O's Current Report on Form 8-K filed on March
13, 1998).
4.2 Rights Agreement, dated as of March 31, 1988, between Data
I/O Corporation and First Jersey National Bank, as Rights
Agent, as amended by Amendment No. 1 thereto, dated as of
May 28, 1992 and Amendment No. 2 thereto, dated as of July
16, 1997 (Incorporated by reference to Data I/O's Report
on Form 8-K filed on March 13, 1998).
4.3 Amendment No. 1, dated as of February 10, 1999, to Rights
Agreement, dated as of April 4, 1998, between Data I/O
Corporation and ChaseMellon Shareholder Services, L.L.C.
as Rights Agent (Incorporated by reference to Exhibit 4.1
of Data I/O's Form 8-A/A dated February 10, 1999).
10 Material Contracts:
10.1 Amended and Restated 1983 Stock Appreciation Rights Plan
dated February 3, 1993 (Incorporated by reference to
Exhibit 10.23 of Data I/O's 1992 Annual Report on
Form 10-K (File No.0-10394)).
10.2 Amended and Restated Retirement Plan and Trust Agreement.
(Incorporated by reference to Exhibit 10.26 of Data I/O's
1993 Annual Report on Form 10-K (File No. 0-10394)).
10.3 First Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.21 of
Data I/O's 1994 Annual Report on Form 10-K (File No.
0-10394)).
10.4 Second Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.26 of
Data I/O's 1995 Annual Report on Form 10-K (File No.
0-10394)).
10.5 Form of Change in Control Agreements (Incorporated by
reference to Exhibit 10.20 of Data I/O's 1994 Annual
Report on Form 10-K (File No. 0-10394)).
10.6 Data I/O Corporation 1996 Director Fee Plan (Incorporated
by reference to Exhibit 10.27 of Data I/O's 1995 Annual
Report on Form 10K (File No. 0-10394)).
10.7 Data I/O Corporation 1982 Employee Stock Purchase Plan
Amended and Restated December 11, 1996 (Incorporated by
reference to Exhibit 10.1 to Data I/O's Registration
Statement of Form S-8 (File No. 333-20657, filed January
29, 1997)).
10.8 Purchase and Sale Agreement dated as of July 9, 1996
(Relating to the sale of Data I/O Corporation's
headquarters property in Redmond, Washington consisting of
approximately 79 acres of land and an approximately 96,000
square foot building. (Portions of this exhibit have been
omitted pursuant to an application for an order granting
confidential treatment. The omitted portions have been
separately filed with the Commission) (Incorporated by
reference to Exhibit 10.32 of Data I/O's 1996 Annual
Report on Form 10-K (File No. 0-10394)).
10.9 Letter dated as of December 20, 1996, First Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.33 of Data I/O's
1996 Annual Report on Form 10-K (File No. 0-10394)).
10.10 Letter dated as of February 17, 1997, Second Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.34 of Data I/O's
1996 Annual Report on Form 10-K (File No. 0-10394)).
10.11 Third Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.35 of Data
I/O's 1996 Annual Report on Form 10-K (File No. 0-10394)).
10.12 Amended and Restated Management Incentive Compensation
Plan dated January 1, 1997 (Incorporated by reference to
Exhibit 10.25 of Data I/O's 1997 Annual Report on Form
10-K (File No. 0-10394)).
10.13 Amended and Restated Performance Bonus Plan dated January
1, 1997 (Incorporated by reference to Exhibit 10.26 of
Data I/O's 1997 Annual Report on Form 10-K (File No.
0-10394)).
10.14 Fourth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.27 of Data
I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).
10.15 Fifth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.28 of Data
I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).
10.16 Sixth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.29 of Data
I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).
10.17 Amended and Restated Data I/O Corporation 1996 Director
Fee Plan (Incorporated by reference to Exhibit 10.32 of
Data I/O's 1997 Annual Report on Form 10-K (File No.
0-10394)).
10.18 Amended and Restated Data I/O Corporation 1996 Director
Fee Plan (Incorporated by reference to Exhibit 10.32 of
Data I/O's 1997 Annual Report on 10-K (File No. 0-10394)).
10.19 Amended and Restated 1986 Stock Option Plan dated May 12,
1998 (Incorporated by reference to Exhibit 10.37 of Data
I/O's 1998 Annual Report on Form 10-K (File No. 0-10394)).
10.20 Sublease dated December 22, 1999 between Data I/O
Corporation and Imandi.com, Inc.
10.21 Letter Agreement with Fred R. Hume dated January 29, 1999.
10.22 Letter Agreement dated May 28, 1999, among
Data I/O Corporation, JTAG Technologies B.V.,
and JTAG Holding B.V.
10.23 Amended and Restated 2000 Stock Compensation Incentive
Plan dated May 19, 2000. (Incorporated by reference to
Data I/O's 2000 Proxy Statement dated March 27, 2000.)
10.24 Amended and Restated 1982 Employee Stock Purchase Plan
dated May 16,2001 (Incorporated by reference to Data I/O's
2001 Proxy Statement dated March 28, 2001.)
21.1 Subsidiaries of the Registrant 49
23.1 Consent of Grant Thornton LLP, Independent Certified
Public Accountants 50
23.2 Consent of Ernst & Young LLP, Independent Auditors 50
99.1 Certification by Chief Executive Officer 51
99.2 Certification by Chief Financial Officer 52
(b) Form 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATA I/O CORPORATION
(REGISTRANT)
DATED: March 28, 2003 By: //S//Frederick R. Hume
------------------------
Frederick R. Hume
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME & DATE TITLE
By: //S//Frederick R. Hume 3-28-2003 President and Chief Executive Officer
- ------------------------------------
Frederick R. Hume (Principal Executive Officer)
By: //S//Joel S. Hatlen 3-28-2003 Chief Financial Officer
- ------------------------------------
Joel S. Hatlen Vice President
Secretary, Treasurer
(Principal Financial and Accounting
Officer)
By: //S//Glen F. Ceiley 3-25-2003 Director
- ------------------------------------
Glen F. Ceiley
By: //S//Paul A. Gary 3-27-2003 Director
- ------------------------------------
Paul A. Gary
By: //S//Edward D. Lazowska 3-24-2003 Director
- -------------------------------------
Edward D. Lazowska
By: //S//Daniel A. DiLeo 3-26-2003 Director
- -------------------------------------
Daniel A. DiLeo
By: //S//Steven M. Quist 3-25-2003 Director
- -------------------------------------
Steven M. Quist
Certification by Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Frederick R. Hume, certify that:
1) I have reviewed this annual report on Form 10-K of Data I/O Corporation;
2) Based upon my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures within 90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and audit
committee of the registrant's board of directors (or persons of equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
/s/ Frederick R. Hume
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)
Certification by Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Joel S. Hatlen, certify that:
1) I have reviewed this annual report on Form 10-K of Data I/O Corporation;
2) Based upon my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures within 90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and audit
committee of the registrant's board of directors (or persons of equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
DATA I/O CORPORATION
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Charged/
(Credited)
Balance at to Costs Balance at
Beginning and Deductions- End of
of Period Expenses Describe Period
---------------- ---------------- --------------- --------------------
(in thousands)
Year Ended December 28, 2000:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $ 464 $ 24 ($ 138) (1) $ 350
Inventory reserves $4,569 $ 438 ($2,420) (2) $2,587
Year Ended December 31, 2001:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $ 350 $ 64 ($ 42) (1) $ 372
Inventory reserves $2,587 $1,122 ($1,240) (2) $2,469
Year Ended December 31, 2002:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $ 372 $ (162) $(23) (1) $ 187
Inventory reserves $2,469 $ 871 $(73) (2) $3,267
(1) Uncollectable accounts written off, net of recoveries.
(2) Obsolete inventories disposed of.
EXHIBIT 21.1
DATA I/O CORPORATION
SUBSIDIARIES OF THE REGISTRANT
The following table indicates the name, jurisdiction of incorporation and basis
of ownership of each of Data I/O's subsidiaries:
State or Percentage
Jurisdiction of Voting
of Securities
Name of Subsidiary Organization Owned
------------------- ------------------- ----------------
Data I/O International, Inc. Washington 100%
Data I/O FSC International, Inc. Territory of Guam 100%
Data I/O Canada Corporation Canada 100%
Data I/O China, Ltd China 100%
Data I/O GmbH Germany 100%
RTD, Inc. (formerly Reel-Tech, Inc.) Washington 100%
CONSENT OF GRANT THORNTON LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Data I/O Corporation
We have issued our report dated February 3, 2003, accompanying the consolidated
financial statements and schedule included in the Annual Report of Data I/O
Corporation on Form 10-K for the year ended December 31, 2002 and 2001. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of Data I/O on Form S-8 (File No. 333-20657 and No.
33-66824) pertaining to the Company's 1982 Employee Stock Purchase Plan and
Director Fee Plan, and Registration Statements Forms S-8 (File No. 33-95608, No.
33-54422, No. 333-55911, No. 33-02254, No. 33-03958 and No. 333-48595)
pertaining to the Company's 1986 Stock Option Plan.
//s//GRANT THORNTON LLP
Seattle, Washington
March 28, 2003
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Data I/O Corporation
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-81986, No. 333-20657 and No. 33-66824) pertaining to the 1982
Employee Stock Purchase Plan and Director Fee Plan, As Amended and 1996 Director
Fee Plan, and Registration Statements (Form S-8 No. 33-95608, No. 33-54422, No.
333-55911, No. 33-02254, and No. 33-03958) pertaining to the 1986 Stock Option
Plan, As Restated and Amended as of May 12, 1998 of Data I/O Corporation of our
report dated February 7, 2001, with respect to the consolidated statements of
operations, stockholders' equity, and cash flows and schedule of Data I/O
Corporation for the year ended December 28, 2000, included in the Annual Report
(Form 10-K) for the year ended December 31, 2002.
//S//ERNST & YOUNG LLP
ERNST & YOUNG LLP
Seattle, Washington
March 28, 2003
Exhibit 99.1
Certification by Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Data I/O Corporation (the "Company") on
Form 10-K for the period ended December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Frederick R. Hume,
Chief Executive Officer of the Company, certify, that pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Frederick R. Hume
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)
March 28, 2003
Exhibit 99.2
Certification by Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Data I/O Corporation (the "Company") on
Form 10-K for the period ended December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Joel S. Hatlen,
Chief Financial Officer of the Company, certify, that pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
March 28, 2003