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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File No. 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0864123
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10525 Willows Road N.E., Redmond, Washington, 98052
(address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (206) 881-6444
Securities registered pursuant to Section 12(b)of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (No Par)
Series A Junior Participating Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held
by non-affiliates of the registrant as of March 2, 1999
$10,214,778
7,238,311 shares of no par value Common Stock outstanding as of March 2, 1999
Documents incorporated by reference
Portions of the registrant's Proxy Statement relating to its May 11,
1999 Annual Meeting of Stockholders are incorporated into Part III of
this Annual Report on Form 10-K.
Page 1 of 179
Exhibit Index on Page 59
DATA I/O CORPORATION
FORM 10-K
For the Fiscal Year Ended December 31, 1998
INDEX
Part I Page
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Stockholders 15
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 16
Item 6. Selected Five-Year Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 48
Part III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners
and Management 48
Item 13. Certain Relationships and Related Transactions 48
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 49
Signatures 58
Exhibit Index 59
Page 2
PART I
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward Looking
Statements."
General
Data I/O(R) Corporation ("Data I/O" or the "Company") is engaged in the design,
manufacture, and sale of programming systems that are used by designers and
manufacturers of electronic products. The Company's programming system products
are used to program integrated circuits ("ICs" or "devices" or "semiconductors")
with the specific unique data for the product within which the ICs will be used,
and are an important tool for the electronics industry which is experiencing
growing use of programmable ICs. Data I/O markets and distributes its
programming systems worldwide, and is a global leader in this market. The
Company was incorporated in the state of Washington in 1969.
Strategic Initiatives
1998 was a turbulent year for Data I/O. During 1998, the Company engaged in an
extensive assessment of the overall market for device programming systems, the
strength of its product portfolio and product development programs, and the
strengths and vulnerabilities of competitors. This led to the conclusions that
the market for programming systems has become very fragmented and that the
overall market may be declining is size. In addition, with the increasing
emphasis in the market on low-cost, limited-purpose programming solutions, the
Company concluded that its product portfolio did not appear to be well matched
to the future requirements of the market. Also, the gross margins for products
in this market have eroded and are expected to continue to erode. As a result of
these assessments, continuing delays in and cancellations of product development
projects, the high costs associated with supporting aging products, declining
sales and other factors, the Board of Directors determined to commence a
significant restructuring of the Company's operations (described below),
discontinue certain products and development projects and investigate means to
improve the Company's competitive position. The transactions with SMS and
Unmanned Solutions, Inc. described below are intended to fill certain gaps on
the Company's product line and provide replacements for certain aging,
low-margin products, while the Company works on development of a next-generation
programming platform. The Company intends to continue to evaluate business
relationships or combinations in the programmer market or in parallel markets
and other strategic alternatives to enhance shareholder value. Also, the Company
is continuing efforts to reverse the decline in sales and to reduce expenses but
cannot predict when the Company might return to profitability. There can be no
assurance that these efforts will be successful.
Strategic Transactions
During 1998, the Company completed four strategic transactions aimed at
enhancing its corporate focus on programming systems technology.
In April 1998, the Company completed an Agreement with JTAG Technologies, a
Netherlands-based manufacturer and developer of Boundary Scan test and
programming solutions. The Agreement provides that the Company may resell JTAG
Technologies' Boundary Scan in-system programming products under the Data I/O
name to engineering and manufacturing markets. In addition, Data I/O acquired
one-third of the Common Stock of JTAG Technologies
In November 1998, the Company acquired SMS Holding GmbH ("SMS"), the largest
European-based programming equipment company. SMS, a privately held company
headquartered in Wangen, Germany, with revenues of approximately $5 million in
1997, specializes in device programmers for engineering and manufacturing. The
Company believes the addition of SMS's products will strengthen the Data I/O
product line, particularly in multi-site (gang) logic programmers and automated
programming systems. The SMS products have been incorporated into the Data I/O
family of products and will be sold through the Data I/O worldwide sales and
distribution channels starting in 1999. Some of Data I/O's own products, which
have experienced declining sales and low margins as they have aged, have been or
will be replaced in the Data I/O product line by SMS products. Also in November
1998, the Company acquired a license to the technology, manufacturing, and
worldwide distribution rights to the Unmanned Solutions, Inc. AH 400 robotic
handler. This handler is used in the SMS fine pitch automated programming system
and was acquired to ensure availability of the AH 400 in support of future sales
of this system.
Page 3
In October 1998, the Company acquired a license to the technology and
manufacturing rights for the CT-3000 robotic handler from AMTI/ESEC, after ESEC
announced plans to consolidate its AMTI operation into its North Carolina
facility. This robotic handler is used in the Company's ProMaster(R) 970
Automated Programming System. This agreement allows Data I/O the ability to
support existing ProMaster 970 customers.
Business Restructuring
During the third quarter of 1998, the Company began implementing a business
restructuring plan that included a downsizing of its work force by approximately
one-third, consolidation of Company operations in its headquarters facility onto
two floors, and other steps to reduce operations to a level more in line with
the lower sales it is experiencing. In the fourth quarter of 1998, the Company
announced and implemented further restructuring plans in tandem with the
acquisition of SMS (see "Strategic Transactions"). With this restructuring, the
Company has four principal objectives: (1) to reduce its corporate overhead; (2)
to reduce research and development expenses and to focus its on-going
development spending in the segments of the market that show the best potential
for growth and return on investment for the Company; (3) to create a more
variable cost operating structure including the out-sourcing of manufacturing
operations during 1999; and (4) to eliminate redundant products and operations
after the acquisition of SMS. Once this restructuring plan is fully implemented
through staff reductions, facility consolidation, reprioritization of research
and development efforts and outsourcing manufacturing, the Company intends to
focus much of its attention on identifying means to improve its competitive
position. The restructuring plan implementation is expected to be substantially
complete during the second or third quarter of 1999. During the third and fourth
quarters of 1998 the Company recorded charges aggregating $2.0 million for
in-process research and development related to the acquisition of SMS, $4.6
million of inventory write-downs and $4.4 million of other restructuring charges
related to the combination of the businesses and discontinuation of overlapping
and end-of-life products.
As part of the restructuring, the Company focused its research and development
efforts for the second half of 1998 on the ProMaster 970 and on sustaining
engineering for the Company's existing products, and discontinued development of
the ProMaster 870 and the application of the DataSite technology in the general
purpose programmer market. In manufacturing, the Company has discontinued
production of certain of its non-automated programming systems and is reviewing
the consolidation of its family of handlers. Together with consolidation of its
product offerings, the Company's outsourcing strategy is expected to result in a
lower, more flexible cost structure for the Company by reducing fixed overhead
costs and the infrastructure that is required for a manufacturing operation.
Industry Background
Data I/O Corporation operates in a narrow segment of the electronics equipment
industry that provides programming systems used to program specific design
information into programmable ICs. This business segment exists to support the
use of programmable ICs (an approximately $9 billion segment of the
semiconductor industry) by companies that design and manufacture electronic
products that utilize programmable ICs. These companies, who are Data I/O's
primary customers, design and manufacture a broad range of electronic products
for both consumer and industrial use.
Programmable ICs have grown more rapidly than the semiconductor industry as a
whole in recent years. They offer advantages to the electronic product designer
to bring products to market more quickly and inexpensively than using
fixed-function components, and can offer the advantage of simpler product
upgrades. They also offer additional functionality to the user of the product,
such as storing personal information or customizing product functionality. As a
result, use of programmable ICs is growing rapidly in both high-volume consumer
electronic products and more complex electronic systems.
Due to this growth, there are currently over 70 vendors of programmable ICs, and
there are thousands of different programmable ICs on the market. The technology
trends driving the programmable IC market result in a broad range of
requirements for programming design information into these devices. These trends
include complex and high pin-count programmable logic devices, smaller
chip-scale packages, lower-voltage operation, in-system programming protocols
designed into certain ICs, and multiple semiconductor technologies requiring
different programming methods.
These technology advances require advanced programming equipment to support this
broad range of programmable ICs. In addition, automated systems are increasingly
used to handle the miniaturized and fine-pitch IC packages for higher-volume
manufacturing. This automated handling equipment is critical for minimizing
damage to the delicate leads of the ICs and increasing the volume of programming
ICs. In certain types of electronic manufacturing, in-system programming of ICs
on printed circuit boards in manufacturing is being performed using Boundary
Scan systems or In-Circuit Test systems.
Page 4
Product Overview
In order to accommodate the expanding variety of programmable ICs being
manufactured today, programming systems must have the capability to program the
type of IC technology (how it electrically accepts the information), in addition
to the specific IC's set of features and functions, while also accommodating the
IC's package type, pin arrangement, and number of pins. The Company works
closely with major manufacturers of programmable ICs to develop its products in
accordance with these requirements. Many of these manufacturers endorse Data
I/O's programming systems as equipment they recommend for end-user applications,
as well as for use in their own environments. With their broad range of
capabilities, some of Data I/O's systems can program more than 7,000
programmable ICs, which accounts for the vast majority of the types of
programmable ICs currently available.
In November 1997, the Company disposed of its Semiconductor Equipment and
Synario Design Automation Divisions leaving the Company with operations in one
business segment, programming systems. Data I/O's line of programming systems
includes a broad range of products, systems, modules, and accessories, which the
Company groups into four general categories: non-automated programming systems,
automated programming systems, in-system programming systems, and software
support and service.
Non-Automated Programming Systems
The Company's line of non-automated programming systems provides solutions for
both engineering and low- to medium-volume manufacturing customers.
Non-automated programming systems require a user to physically handle the ICs
being programmed. 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 one programmable IC at a time. Data I/O
offers single-site programming systems from $995 for the ChipWriterTM up to
$17,000 for the UniSiteTM Programming System.
Low- to medium-volume manufacturing customers often use multi-site (or gang or
parallel) non-automated programming systems for increased volume. Multi-site
programming systems can program multiple devices simultaneously. Data I/O offers
multi-site programming systems from $1,195 for the ChipWriter Gang up to $15,000
for the MultiSyte gang systems.
The UniSite Universal Programming System supports over 7,000 devices, and has a
large installed base of customers who depend on regular software updates for
supporting new devices. The 3980 Programming System offers almost the same
breadth of device support at a lower price point, and is a mainstream product
for the Company. The LabSite Programming System is a lower-priced, single-site
programming system typically used for specific design projects. Under a
worldwide distribution agreement with ICE Technology, the Company sells a line
of low-priced programmers under the brand name ChipWriter. The ChipWriter,
ChipWriter Portable, and ChipWriter Gang offer very cost-effective programming
solutions.
Following the acquisition of SMS in November 1998, Data I/O incorporated the SMS
Sprint family of programmers and introduced them to the Data I/O distribution
channels in the first quarter of 1999. These Sprint products strengthen the
product offering with both single-site and multi-site models. The single-site
models start with the entry-level Plus48 programming system at $1,795. The
Optima line of products offers support for a broad range of programmable ICs and
a family of configurations including dual package support. The MultiSyte gang
programmer line has configurations including two-, four-, and eight-site
versions for low- to medium-volume manufacturing requirements with broad
programmable IC support including logic devices.
Automated Programming Systems
The Company offers a range of automated programming systems that provide
electronic equipment manufacturers with an automated pick and place method for
handling, programming, testing and marking programmable ICs. Automated
programmers are most frequently used by medium- to high-volume manufacturers to
automate the programming process, thereby reducing labor costs, to eliminate
potential damage to devices due to human handling, and to more accurately handle
more complex and delicate IC package types. The automated programming system
feeds the programmable IC out of its protective media (trays, tubes, or tape &
reel), places the IC into the socket of the programmer, completes programming,
applies a label or laser mark, rejects the ICs that could not be programmed
correctly, and loads correctly programmed ICs back into protective media (trays,
tubes or tape & reel). The IC is then ready to be assembled onto printed circuit
board using other automated production equipment. Data I/O offers automated
programming systems that range from approximately $50,000 for the ProMaster 2500
up to approximately $500,000 for the ProMaster 970.
Following the acquisition of SMS in November 1998, Data I/O incorporated the SMS
PP100 fine-pitch automated system into its product line and introduced it to the
Data I/O distribution channels in the first quarter of 1999. The PP100 offers a
Page 5
flexible range of programmer and device media options and requires only limited
floor space. The system can be configured with 4 to 12 programmer sites
utilizing the same programmer technology as the Sprint family of programmers to
support a wide range of programmable ICs including fine pitch logic devices. The
PP100 utilizes precise pick-and-place technology, has optional marking
capabilities, and can handle ICs in trays, tubes, or tape & reel media. System
pricing starts at under $200,000. This system is already in use among consumer,
medical and automotive electronics manufacturers, and is supporting contract
manufacturers and programming centers.
The Company also provides a complete line of labels for use with its automated
programming systems. These labels are custom manufactured by Data I/O for the
ProMaster 2500, the ProMaster 3000 and their predecessors, the ProMaster 2000
and the AutoLabel 1000. Labels are also manufactured for use with non-Data I/O
automated programming systems.
In-System Programming Products
Data I/O offers the BoundarySite family of In-System programming products that
allow electronic manufacturers to program programmable logic devices and flash
memory devices after they have been mounted on printed circuit boards. Complete
system configurations start at under $10,000. Data I/O offers these products
through a strategic alliance formed with JTAG Technologies in 1998, which
provides Data I/O distribution rights for certain JTAG Technology products under
the Data I/O name.
Software and Service Support
The Company offers software updates, which contain the necessary algorithms to
program new devices as they are introduced by the semiconductor manufacturers.
These periodic updates may also include enhancements to existing algorithms and
may add new features and functionality to the programmers. The software updates
are essential to the Company's customers to keep the programmers current so that
new devices can be programmed. Customers may purchase update contracts that
entitle them to receive periodic updates throughout the year. Software update
contracts have been a significant source of revenue for the Company.
The Company also offers out-of-warranty service and repair of its products.
Service contracts are offered for repair, preventative maintenance and
calibration of the systems. This additional support enables the Company's
customers to keep their programming products at current support levels, and have
been a significant source of revenue for the Company.
Customers
The Company markets programming systems to thousands of customers worldwide in a
broad range of industries including telecommunications, consumer electronics,
computers, test and measurement, medical, transportation, military, aerospace,
electronic contract manufacturing, and semiconductors. These customers design
and/or manufacture electronic products that incorporate programmable ICs or
manufacture and/or provide services for these ICs. The engineering department
typically utilizes non-automated programming systems to program ICs for
prototype designs to facilitate product testing and development. The
manufacturing department (either in-house or at a contract manufacturing
facility) may use non-automated and/or automated programming systems to produce
the volume of programmable ICs necessary to support their production. In
addition, some manufacturing departments choose to outsource the programming of
ICs to a programming service company, who can also be a customer for the
Company's products. The Company estimates that during 1998, it sold products to
over 3,000 customers throughout the world, none of whom accounted for more than
10% of the Company's net sales. None of the Company's independent distributors
or representatives accounted for more than 5% of the Company's net sales.
Geographic Markets and Distribution
The Company markets and sells its products through a combination of direct
sales, internal telesales, and indirect sales representatives and distributors.
The Company continually evaluates its sales channels against its evolving
markets and customers.
U.S. Sales
The Company markets its products throughout the U.S. using a variety of sales
channels including its own field sales management personnel, independent sales
representatives, and a direct telesales organization. The Company's U.S.
independent sales representatives obtain orders on an agency basis, with
shipments made directly to the customer by the Company. The Company recognizes
sales at the time of shipment.
Page 6
Foreign Sales
Foreign sales represented approximately 52% of net sales of programming systems
in each of 1998, 1997 and 1996 (see Note 16 of "Notes to Consolidated Financial
Statements"). Foreign sales are made through the Company's wholly owned
subsidiaries in Germany and Canada, as well as through independent distributors
and sales representatives located in 32 other countries. Sales made through
foreign subsidiaries are denominated in local currency and recognized when the
subsidiary ships to the end-user. The Company's independent foreign distributors
purchase Data I/O products in U.S. Dollars for resale; and the sale is
recognized at the time of shipment to the distributor. Distributors are allowed
to return a portion of their Data I/O product inventory for credit on future
purchases, subject to limitations. As with U.S. sales representatives, sales
made by international sales representatives are on an agency basis with
shipments made directly to the customer by the Company. These sales are
denominated in U.S. Dollars and are recognized at the time of shipment.
Total foreign sales are determined by the geographic area into which the
products are sold and delivered, and include not only sales by foreign
subsidiaries but also export sales from the U.S. to the Company's foreign
distributors and representatives' customers. Foreign sales do not include
transfers between the Company and its foreign subsidiaries. Export sales are
subject to U.S. Department of Commerce regulations. The Company has not,
however, experienced any difficulties to date as a result of these requirements.
Fluctuating exchange rates and other factors beyond the Company's control, such
as international monetary stability, tariff and trade policies, and U.S. and
foreign tax and economic policies, affect the level and profitability of foreign
sales. The Company is unable to predict the effect of such factors on its
business. The Company does hedge against certain currency exposures in order to
minimize their impact.
In February 1999, Data I/O sold its Japan sales and service subsidiary to
Synchro-Work Corporation, one of its sub-distributors in Japan. In connection
with this sale, the Company and Synchro-Work also entered into a new
distribution agreement under which Synchro-Work will continue to sell the
Company's products and assume and fulfill all warrantee, software update
contract, service contract and phone support obligations in Japan.
Competition
The competitors in the market for programming systems are highly fragmented,
consisting of a large number of companies in many regions of the world. The
Company believes that it has the leading market share for programming systems,
with approximately 25% of the total worldwide revenue. Although independent
market information is not available, this estimate is based on internal analysis
by the Company and supplemented with external research. Competitive factors
include product features, programmable IC support, brand awareness and
preference, price, ease of use, quality, reliability, throughput, distribution
channels, availability, post-sales support, and service. The Company's
competitiveness depends on offering the most effective combination of these
factors.
Many of the competitors in non-automated programming systems are small companies
that distribute their products in limited geographical regions, and compete
primarily on price, local support, and response to specific customer
programmable IC needs. Programmable IC companies who offer programming systems
for their own devices through their distribution channels hold a small portion
of the market. Data I/O competes in the non-automated programming systems area
primarily on the breadth of its product line and programmable IC support, the
strength of its worldwide distribution channels, brand awareness and preference,
post-sales support, and service. The Company competes against very low-price
products from many smaller companies with the ChipWriter product family. The
Company believes that the introduction of the programming products resulting
from the SMS acquisition will further enhance its competitive position. These
products offer competitive prices and the efficiency of a common operating
platform across all products, which is expected to allow more responsive support
for new devices.
There are fewer competitors in the automated programming systems category. This
category includes several companies that offer integrated systems, and other
companies that offer automated handling systems that require integration with a
programming system by the customer. The Company's largest competitor for
automated programming systems is BP Microsystems. The primary factors that the
competitors with integrated systems compete on include system price /
throughput, programmable IC support, post-sales support, and service. Data I/O
competes in this category primarily on the factors of breadth of product line,
brand awareness and preference, post-sales support, service, and distribution
channels. The Company believes that the PP 100 fine-pitch automated system will
significantly improve its competitive position in the factors of system price /
throughput, and device support.
Certain customers are using their in-circuit test equipment to also program ICs
after they have been assembled onto printed circuit boards. The Company believes
that the high cost of in-circuit test equipment may be a major disadvantage and,
Page 7
therefore, has introduced the lower-cost BoundarySite product family for
in-system programming. This product family has resulted from the strategic
relationship with JTAG Technologies (see "Strategic Transactions").
Revenue History by Segment
The table below details the contribution the Company's three principal business
segments made to total net sales for the last three fiscal years (in thousands
of Dollars):
Programming Systems Division Semiconductor Equipment Synario Design Automation
Division (1) (2) Division (3) Total Sales
---------------------------- ----------------------- ------------------------- --------------------
Percent Percent Percent Percent Percent Percent Percent
Year Amount Growth of Total Amount Growth of Total Amount Growth of Total Amount Growth
---- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
1998 $35,338 (23.6%) 100% $35,338 (42.2%)
1997 $46,284 (5.3%) 75.8% $7,640 104% 12.5% $7,172 (8.3%) 11.7% $61,096 1.1%
1996 $48,860 (15.0%) 80.9% $3,744 500% 6.2% $7,819 (1.2%) 12.9% $60,423 (8.5%)
(1) The Semiconductor Equipment Division was sold in November 1997 and has
been accounted for in the financial statements as discontinued operations.
(2) Excludes inter-segment sales to the Programming Systems Division of
$1,876,000 in 1996.
(3) The Company disposed of its Synario Design Automation Division in November
1997. The Synario Design Automation Division has been accounted for in the
financial statements as discontinued operations.
Manufacturing, Raw Materials, and Backlog
During 1998, Data I/O conducted manufacturing operations at its principal
facility in Redmond, Washington, where it manufactures automated and
non-automated programming systems. In its manufacturing processes, the Company
uses a combination of standard components, proprietary custom ICs and fabricated
parts manufactured to Data I/O specifications. Most components used are
available from a number of different suppliers and subcontractors but certain
items, such as some handler and programmer subassemblies, custom ICs, hybrid
circuits and connectors, are purchased from single sources. The Company believes
that additional sources can be developed for present single-source components
without significant difficulties in obtaining supplies. There can, however, be
no assurance that single-source components will continue to be readily
available.
The Company plans to outsource its Redmond manufacturing operations in the
second half of 1999. Together with consolidation of the product offerings, this
outsourcing strategy is expected to result in a lower, more flexible cost
structure for the Company by reducing fixed overhead costs and the
infrastructure that is required for a manufacturing operation.
Manufacturing of the SMS products is currently done by outside suppliers. This
practice will continue in 1999 and the Company will continue to search for
additional suppliers for these products.
Most orders are scheduled for delivery within one to 60 days after receipt of
order. The Company's backlog of pending orders was approximately $4.2 million,
$5.7 million, and $4.1 million as of December 31, 1998, December 25, 1997, and
December 26, 1996, respectively.
In accordance with industry practices, generally all orders are subject to
cancellation prior to shipment without penalty except for contracts calling for
custom configuration. To date, such cancellations have not had a material effect
on the Company's sales volume. To meet customers' fast delivery requirements,
Data I/O manufactures certain of its products based upon a combination of
backlog and anticipated orders. The size of backlog at any particular date is
not necessarily a meaningful indicator of the trend of the Company's business.
Research and Development
Because Data I/O's future growth is, to a large extent, dependent upon the
timely development and introduction of new products and its support of the
latest programmable ICs, the Company is committed to a substantial research and
development program. Research and development activities include design of new
products and continual enhancement and support of existing products. The Company
made expenditures for research and development of $9,109,000, $7,807,000, and
$8,121,000 in 1998, 1997 and 1996, respectively, representing 25.8%, 16.9%, and
16.6%, of net sales, respectively. The high level of research and development
spending in 1998 was due to continued spending to complete development of the
ProMaster 970, high levels of spending on new products, including products that
were cancelled, and lower revenue in 1998.
Page 8
During 1998, 1997, and 1996, the Company directed its primary product
development efforts toward a new generation programming technology and to new
automated programming and handling systems. The ProMaster 970, which
incorporates a version of the new DataSite programming system for automated
systems, was completed in the fourth quarter of 1998. However, development of
the DataSite new generation programming technology for the general purpose
programming market and the ProMaster 870 automated programming system were
cancelled during 1998. Substantial engineering resources were also devoted to
developing software updates for programming systems to provide support for new
programmable ICs from semiconductor manufacturers.
Patents, Copyrights, Trademarks, and Licenses
Intellectual property rights applicable to various Data I/O products include
patents, copyrights, trade secrets and trademarks. However, rather than depend
on patents and copyrights, which are frequently outdated by rapid technological
advancements in the electronics industry, Data I/O relies primarily on product
development, engineering, manufacturing and marketing skill to establish and
protect its market position.
The Company attempts to protect its rights in proprietary software products by
retaining the title to and copyright of the software and documentation, by
including appropriate contractual restrictions on use and disclosure in its
licenses, and by requiring its employees to execute non-disclosure agreements.
The Company's software products are typically shipped in sealed packages on
which notices are prominently displayed informing the end-user that, by breaking
the seal of the packaging, the end-user agrees to be bound by the license
agreement contained in the package. The license agreement includes limitations
on the end-user's authorized use of the product, as well as restrictions on
disclosure and transferability. The legal and practical enforceability and
extent of liability for violations of license agreements that purport to become
effective upon opening of a sealed package are unclear. The Company is not aware
of any situation where a license agreement restricting an end-user's authorized
use of a licensed product resulted in enforcement action.
Because of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, there is a possibility that portions of the
Company's products might infringe upon existing patents or copyrights, and the
Company may, therefore, be required to obtain licenses or discontinue the use of
the infringing technology. The Company believes that any exposure it may have
regarding possible infringement claims is a reasonable business risk similar to
that being assumed by other companies in the electronic equipment and software
industries. However, any claim of infringement, with or without merit, could be
costly and a diversion of management's attention, and an adverse determination
could adversely affect the Company's reputation, preclude it from offering
certain products, and subject it to substantial liability.
Employees
As of December 31, 1998, the Company had 270 total employees, of which 50 were
located outside the U.S. The Company anticipates additional headcount reductions
throughout 1999 in connection with its restructuring (see "Strategic
Initiatives"). Many of Data I/O's employees are highly skilled and the Company's
continued success will depend in part upon its ability to attract and retain
employees who are in great demand within the industry. At times, the Company,
along with most other electronic equipment manufacturers and software
developers, experiences difficulty in hiring and retaining experienced
personnel, particularly in technical areas. There is no assurance that the
Company will be able to attract and retain qualified personnel in the future.
None of the Company's employees are represented by a collective bargaining unit
and the Company believes relations with its employees are favorable.
Environmental Compliance
The Company's facilities are subject to numerous laws and regulations concerning
the discharge of materials or otherwise relating to the environment. Compliance
with environmental laws has not had, nor is it expected to have, a material
effect on capital expenditures, the financial position, the results of
operations or the competitive position of the Company.
Page 9
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of the
Company as of March 2, 1999:
Name Age Position
Frederick R. Hume 56 President and Chief Executive Officer
Helmut Adamski 38 Vice President
Marketing
Mark L. Edelsward 42 Vice President
Worldwide Sales
Joel S. Hatlen 40 Vice President
Finance
Chief Financial Officer
Secretary and Treasurer
Jim Rounds 50 Vice President
Engineering
Frederick R. Hume joined the Company as President and Chief Executive Officer in
February 1999. He was appointed to the Board of Directors of the Company in
January 1999. From 1988 until his retirement in 1998, Mr. Hume was Vice
President and General Manager of Keithley Instruments in Cleveland, Ohio. From
1972 to 1988, he held various management positions at Fluke Corporation,
including Group Vice President for Manufacturing and Research and Development.
Helmut Adamski joined the Company in November 1998 when the Company acquired SMS
GmbH. From 1994 until the acquisition, Mr. Adamski served as the Chief Executive
Officer of SMS GmbH. From 1991 to 1993, he was the Vice President of Operations
for Schnieder & Koch, a German manufacturer of networking products. Prior to
1991, he served in various management roles for Digital Equipment Corporation.
Mark L. Edelsward joined Data I/O Canada as Distribution Manager in 1987. He has
held a variety of sales-related positions with the Company, including European,
Pacific Region and USA Sales Management roles. In January 1998, he was promoted
to Vice President of Worldwide Sales. From 1978 until joining the Company, Mr.
Edelsward was employed by Allan Crawford Associates, a Canadian distributor of
test and measurement and scientific instrumentation.
Joel S. Hatlen joined the Company in September 1991 as a Senior Tax Accountant
and became Tax Manager in December 1992. He was promoted to Corporate Controller
in December 1993. In February 1997, he was named Chief Accounting Officer and
Corporate Controller. In January 1998, he was promoted to Vice President of
Finance and Chief Financial Officer, Secretary and Treasurer. From September
1981 until joining the Company, Mr. Hatlen was employed by Ernst & Young LLP,
where his most recent position was Senior Manager.
Jim Rounds joined the Company in September 1998. Prior to joining the Company,
Mr. Rounds spent 23 years at Hewlett-Packard Corporation, where he last served
as Research and Development Manager for one of the company's new business
initiatives from 1995 to 1998. Prior to that, he served as Research and
Development Manager for Hewlett-Packard's Lake Stevens Division from 1993 to
1995, which supported many product lines and introduced many new products.
Page 10
Cautionary Factors That May Affect Future Results
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You 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, out-sourcing of functions, Year 2000 remediation
activities, the outcome of contingencies, and financial results.
Any or all of our forward-looking statements in this report or in any other
public statement we make may turn out to be wrong. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors -- for example, product competition and our product
development -- will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may
materially vary.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any future disclosures we make on related subjects
in our 10-Q, 8-K and 10-K reports to the SEC and press releases. Also, note that
we provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business. These are factors that
we think could cause our actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect the Company. This discussion is permitted by the Private Securities
Litigation Reform Act of 1995.
Development, Introduction and Shipment of New Products
The Company currently is developing new engineering and automated programming
systems. Significant technological, supplier, manufacturing or other problems
may delay the development, introduction or production of these products.
For example, we may encounter these problems:
o technical problems in the development of a new programming system platform
or the robotics for new automated handing systems
o inability to hire qualified personnel
o delays or failures to perform by third parties involved in our development
projects
Our sales in the past two years have been significantly adversely affected by
delays in developing and releasing new products. Some customers waited for our
new products, while many others purchased products from our competitors. Delays
in the completion and shipment of new products, or failure of customers to
accept new products, including those acquired from SMS in late 1998, may result
in a decline in sales in 1999.
Variability in Quarterly Operating Results
Our operating results tend to vary from quarter to quarter. Our revenue in each
quarter is substantially dependent upon orders received within that quarter.
Conversely, our expenditures are based on investment plans and estimates of
future revenues. We may, therefore, be unable to quickly reduce our spending if
our revenues decline in a given quarter. As a result, operating results for that
quarter will suffer. Our results of operations for any one quarter are not
necessarily indicative of results for any future periods.
Other factors which may cause our quarterly operating results to fluctuate
include:
o increased competition
o timing of new product announcements
o product releases and pricing changes by us or our competitors
o market acceptance or delays in the introduction of new products
o production constraints
o the timing of significant orders
Page 11
o customers' budgets
o foreign currency exchange rates
Due to all of the foregoing factors, it is possible that in some future quarters
our operating results will be below expectations of analysts and investors.
Rapid Technological Change
Product technology in our industry evolves rapidly, making timely product
innovation essential to success in the marketplace. The introduction of products
with improved technologies or features may render our existing products obsolete
and unmarketable. Technological advances that may negatively impact our business
include:
o new IC package types requiring hardware and software changes in order to be
programmed by our products
o electronics equipment manufacturing practices, such as widespread use of
in-circuit programming
o customer software platform preferences different from those on which our
products operate
o more rigid industry standards, which would decrease the value-added
element of our products and support services
If we cannot develop products in a timely manner in response to industry
changes, or if our products do not perform well, our business and financial
condition will be adversely affected. Also, our new products may contain defects
or errors which give rise to product liability claims against us or cause them
to fail to gain market acceptance.
Economic and Market Conditions
Our business is impacted by capital spending plans and other economic cycles
that affect the users and manufacturers of ICs. These industries are highly
cyclical and are characterized by rapid technological change, short product life
cycles, fluctuations in manufacturing capacity and pricing and gross margin
pressures. Our operations may in the future reflect substantial fluctuations
from period-to-period as a consequence of such industry patterns, general
economic conditions affecting the timing of orders from major customers, and
other factors affecting capital spending. These factors could have a material
adverse effect on our business and financial condition.
Competition
Technological advances have reduced the barriers of entry into the programming
systems markets. We expect competition to increase from both established and
emerging companies. Certain competitors have recently increased their market
share in our business. We believe this is due in part to our product development
delays. If we fail to compete successfully against current and future sources of
competition, our profitability and financial performance will be adversely
impacted.
Dependence on IC Manufacturers
We work closely with most semiconductor manufacturers to ensure that our
programming systems comply with their requirements. In addition, many
semiconductor manufacturers recommend our programming system for use by users of
their programmable devices. These working relationships enable us to keep our
programming systems product line up-to-date and provide end-users with broad and
current programmable IC support. Our business may be adversely affected if our
relationships with semiconductor manufactures deteriorate.
Out-Sourcing of Functions
In the third and fourth quarters of 1998, the Company announced several steps to
restructure its operations to reduce its costs to a level more in line with
current sales levels. One of these steps is the out-sourcing of certain of the
Company's manufacturing. The Company may encounter added costs, quality problems
or production delays as this process occurs.
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 development
alternative sources of these components, or if we experience a deterioration in
our relationship with these suppliers, there may be delays or reductions in
product introductions or shipments, which may materially adversely effect our
operating results.
Page 12
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.
Reliance on Third-Party Distribution Channels
We have a small internal sales force. We depend heavily on third-party
representatives, OEMs, VARs and distributors. Therefore, the financial stability
of these distributors is important to us. Highly skilled professional engineers
use most of our products. To be effective, third-party distributors must possess
significant technical, marketing and sales resources and must devote their
resources to sales efforts, customer education, training and support. These
required qualities limit the number of potential third-party distributors. Our
business will suffer if we cannot attract and retain a sufficient number of
qualified third-party distributors to market our products.
International Operations
International sales represented approximately 52% of our net revenue for the
fiscal year ended December 31, 1998. We expect that international sales will
continue to be a significant portion of our net revenue.
International sales may fluctuate due to various factors, including:
o unexpected changes in regulatory requirements
o tariffs and taxes
o difficulties in staffing and managing foreign operations
o longer average payment cycles and difficulty in collecting accounts
receivable
o fluctuations in foreign currency exchange rates
o 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"). Certain of
our new products have not yet met 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 and Canada. Our business and financial
condition is, therefore, sensitive to currency exchange rates or any other
restrictions imposed on their currencies. Currency exchange fluctuations in
Canada and Germany may adversely effect our investment in our subsidiaries.
Protection of Intellectual Property
Refer to the section captioned "Patents, Copyrights, Trademarks and Licenses" in
Item 1 above.
Acquisitions
In November 1998, the Company acquired SMS GmbH of Wangen, Germany, a former
competitor and the largest European-based programming equipment company. This
was a step to expand the Company's product line and, in some cases, replace
aging or otherwise non-competitive or low margin products. We are currently
working to integrate the two companies' product offerings. Integrating the
products and operations of SMS with ours during 1999 will place significant
burdens on our management and operating teams, and may divert management's
attention from other business concerns. If we fail to successfully integrate
SMS's products and operations with our own, our business and financial condition
may suffer. The SMS products may not be accepted by the Company's sales channels
or customers. Also, SMS's products have been manufactured to SMS's
specifications by a third-party contract manufacturer. The Company may not be
able to obtain a sufficient quantity of these products if and when needed, which
may result in lost sales. The acquisition of the SMS product line also
introduces the need for the Company to provide device support to its customers
for an additional proprietary architecture, which involves costs and management
attention.
Page 13
We may pursue additional acquisitions of complementary technologies, product
lines or businesses. Future acquisitions may include risks like those involved
in our acquisition of SMS, as well as risks of entering markets where we have no
or limited prior experience, and the potential loss of key employees of the
acquired company. Future acquisitions may also impact our financial position.
For example, we may use significant cash or incur additional debt, which would
weaken our balance sheet. We may also amortize expenses related to the goodwill
and intangible assets acquired, which may reduce our profitability.
We cannot guarantee that future acquisitions will improve our business or
operating results.
Dependence on Key Personnel
Refer to the section captioned "Employees" above.
Potential Volatility of Stock Price
The stock prices of technology companies tend to fluctuate significantly. We
believe factors such as announcements of new products by us or our competitors
and quarterly variations in financial results may cause the market price of our
Common Stock to fluctuate substantially. In addition, overall volatility in the
stock market, particularly in the technology company sector, is often unrelated
to the operating performance of companies. If these market fluctuations continue
in the future, they may adversely affect the price of our Common Stock.
Risks of Year 2000 Non-compliance
Refer to the section captioned "Impact of Year 2000" in Item 7 below.
Page 14
Item 2. Properties
In May 1997, the Company completed the sale of the land and building comprising
its Redmond, Washington corporate headquarters and is currently leasing the
96,000 square foot building back on a 10-year lease-back agreement with an
option to renew the lease for an additional 10 years. This lease requires base
annual rental payments in 1999 of approximately $981,000. See Note 7 of "Notes
to Consolidated Financial Statements." As part of its restructuring plan
implementation, the Company has vacated one floor of the leased Redmond facility
(approximately 25,000 square feet) and is seeking a tenant to sublet this space.
As the restructuring plan is fully implemented during 1999, the Company may have
an opportunity to sublet additional space within this facility.
In addition to the Redmond facility, approximately 8,500 square feet is leased
at two foreign sales and service locations.
In November 1998, the Company completed its acquisition of SMS GmbH located in
Wangen, Germany. At the date of this report, this subsidiary occupied a 5,000
square foot leased facility. The lease for this facility will terminate in
September 1999, at which time the Company expects to relocate SMS's operations
into a new 11,000 square foot building in Wangen. The new lease, which has been
signed, runs until October 2009. See Note 3 and Note 11 of "Notes to
Consolidated Financial Statements."
Item 3. Legal Proceedings
Nothing to report.
Item 4. Submission of Matters to a Vote of Stockholders
No matters were submitted for a vote of stockholders of the Company during the
fourth quarter of the fiscal year ended December 31, 1998.
Page 15
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The following table shows, for the periods indicated, the market sales price
range for the Company's common stock as reported by the NASDAQ National Market
tier of The NASDAQ Stock Market (NASDAQ symbol is DAIO).
Period High Low
1998 Fourth Quarter $2.63 $1.44
Third Quarter 4.13 2.13
Second Quarter 5.63 3.00
First Quarter 6.50 4.88
1997 Fourth Quarter $8.00 $6.13
Third Quarter 7.63 4.63
Second Quarter 6.50 4.50
First Quarter 5.50 4.38
The approximate number of shareholders of record and approximate number of
beneficial shareholders of record on March 2, 1999 was 873 and 3,500,
respectively.
Except for a special cash dividend of $4.15 per share paid on March 8, 1989, the
Company has not paid cash dividends on its common stock and does not anticipate
paying regular cash dividends in the foreseeable future. The Company's U.S. line
of credit agreement, which is up for renewal in May 1999, restricts the payment
of cash dividends through a requirement for a minimum level of tangible net
worth of $15.0 million.
Page 16
Item 6. Selected Five-Year Financial Data
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained herein in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Historical results are not
necessarily indicative of future results.
Year Ended
- -----------------------------------------------------------------------------------------------------------------------------
Dec. 31, Dec. 25, Dec. 26, Dec. 28, Dec. 29,
(in thousands, except employee and per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
For The Year:
Net sales $35,338 $46,284 $48,860 $57,496 $53,456
Gross margin 10,405 23,536 22,926 30,110 27,772
Research and development 9,109 7,807 8,121 6,581 6,282
Selling, general and administrative 14,386 13,924 14,618 15,719 15,627
Write-off acquired in-process R&D (1) 1,959 - - - -
Provision for business restructuring (2) 4,370 - - - -
Operating income (loss) (19,418) 1,805 187 7,810 5,863
Non-operating income (expense) 952 2,757 (59) 125 (134)
Income (loss) from continuing operations before income
taxes (18,466) 4,562 128 7,935 5,729
Income tax expense (58) (176) (121) (892) (975)
Income (loss) from continuing operations (18,524) 4,386 7 7,043 4,754
Income (loss) from discontinued operations (3) 894 7,114 (1,108) (2,282) (2,028)
Net income (loss) ($17,630) $11,500 ($1,101) $4,761 $2,726
- -----------------------------------------------------------------------------------------------------------------------------
At Year-end:
Working capital $15,084 $33,226 $10,054 $12,005 $10,038
Total assets $40,089 $57,736 $39,319 $44,776 $43,487
Long-term debt $0 $0 $1,500 $1,500 $1,500
Total debt $564 $2,000 $1,605 $1,617 $1,940
Stockholders' equity $18,909 $34,614 $22,559 $25,929 $24,343
Number of employees from continuing operations 270 328 332 349 345
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock Data (4):
Basic earnings per share:
From continuing operations ($2.59) $0.63 $0.00 $0.94 $0.65
Net income (loss) ($2.46) $1.66 ($0.16) $0.64 $0.37
Diluted earnings per share:
From continuing operations ($2.59) $0.62 $0.00 $0.89 $0.64
Net income (loss) ($2.46) $1.62 ($0.16) $0.60 $0.37
Book value per share at year-end $2.63 $4.92 $3.33 $3.66 $3.28
Shares outstanding at year-end 7,187 7,039 6,778 7,084 7,432
Weighted-average shares outstanding 7,154 6,909 6,857 7,515 7,354
Weighted-average and potential shares outstanding 7,154 7,087 7,035 7,879 7,420
- -----------------------------------------------------------------------------------------------------------------------------
Key Ratios:
Current ratio 1.8 2.7 1.7 1.7 1.6
Gross margin to sales 29.4% 50.9% 46.9% 52.4% 52.0%
Operating income (loss) to sales (54.9%) 3.9% 0.4% 13.6% 11.0%
Income (loss) from continuing operations to sales (52.4%) 9.5% 0.0% 12.2% 8.9%
Return on average stockholders' equity (63.5%) 16.8% 0.0% 26.9% 21.4%
- -----------------------------------------------------------------------------------------------------------------------------
Footnotes:
(1) For further discussion, see Note 3 of "Notes to Consolidated Financial Statements."
(2) For further discussion, see Note 2 of "Notes to Consolidated Financial Statements."
(3) For further discussion, see Note 4 of "Notes to Consolidated Financial Statements."
(4) For further discussion, see Notes 1 and 13 of "Notes to Consolidated Financial Statements."
Page 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves as long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Annual Report on Form 10-K are forward looking. In particular,
statements herein regarding industry prospects; future results of operations or
financial position; integration of acquired products and operations; market
acceptance of the Company's reconstituted products; development, introduction
and shipment of new products; completion of outsourcing of manufacturing and
certain sustaining engineering functions on favorable terms and without
significant disruption and achievement of cost savings from such outsourcing;
the assessment of the Company's year 2000 exposure and completion of remediation
efforts; and any other guidance on future periods are forward-looking
statements. Forward-looking statements reflect management's current expectations
and are inherently uncertain. The Company's actual results may differ
significantly from management's expectations. The following discussions and the
section entitled "Business - Additional Factors That May Affect Future Results"
describes some, but not all, of the factors that could cause these differences.
Strategic initiatives
In November 1998 the Company completed the acquisition of all products and the
business of SMS Holding GmbH ("SMS"), the largest European-based programmer
company. SMS, a privately-held company headquartered in Wangen, Germany, with
revenues of approximately $3.0 million for the 10 months ended October 1998 and
$4.7 million in 1997, specializes in device programmers for engineering and
manufacturing. The Company paid approximately $5.2 million in cash for SMS and
assumed approximately $1.5 million of liabilities. The acquisition was made to
add to Data I/O's product offerings, especially in multi-site (or gang) logic
programmers and automated handlers where the Company has sought to strengthen
its product portfolio. Some of Data I/O's own products, which have experienced
declining sales and low margins as they have aged, will be replaced in the Data
I/O product line by SMS products.
Related to the acquisition of SMS, in November 1998 the Company acquired a
license from Unmanned Solutions, Inc. ("USI"), a California company, for the
technology, manufacturing and worldwide distribution rights to Unmanned
Solutions' AH 400 robotic handler. For this license the Company paid $300,000.
The Unmanned Solutions handler is used in the SMS fine pitch automated
programming system, and is a high-performance, low-cost handler. These rights
were obtained in order to insure availability of the AH 400 in support of future
sales of SMS's fine pitch automated programmer.
The Company pursued these strategic initiatives after assessing the overall
market for device programming systems, the strength of the Company's product
portfolio and product development programs, and the strengths and
vulnerabilities of its competitors. This assessment led to the conclusions that
the market for programming systems has become very fragmented and that the
overall market may be declining in size. In addition, with the increasing
emphasis in the market on low-cost, limited purpose programming solutions, the
Company's product portfolio did not appear to be well matched to the future
requirements of the market. Also, the gross margins for the Company's products
in this market have eroded and are expected to continue to erode. As a result of
these conclusions, continuing delays in and cancellation of product development
projects, the high costs associated with supporting aging products, declining
sales and other factors, the Board of Directors determined to commence a
significant restructuring of the Company's operations, discontinue certain
products and development projects and investigate means to improve the Company's
competitive position. The SMS and USI transactions were intended to fill certain
gaps in the Company's product lines and provide replacements for certain aging,
low-margin products while focusing on development of a next-generation
programming platform. The Company intends to continue to evaluate business
relationships or combinations in the programmer market or in parallel markets
and other strategic alternatives to enhance shareholder value. Also, the Company
is continuing efforts to reverse the decline in sales and to reduce expenses but
cannot predict when the Company might return to profitability. There can be no
assurance that these efforts will be successful.
In September 1998 the Company announced that it had obtained a license to the
technology and manufacturing rights from AMTI/ESEC Inc. for the CT 3000 handler
used in the Company's ProMaster 970(R) Automated Fine Pitch Programming System.
This became necessary due to the decision of AMTI/ESEC to discontinue production
of the CT 3000 after it has completed a limited number of units currently in
production. The steps taken by AMTI/ESEC caused the Company to incur additional
expenses and increased the risks associated with the 970. In the fourth quarter
of 1998 the Company was able to record revenue on six 970 units after successful
completion of certain configuration requirements and performance enhancements.
Page 18
Business Restructuring. During the third quarter of 1998 the Company began
implementing a business restructuring plan that included a downsizing of its
work force by approximately one-third, consolidation of Company operations in
its headquarters facility onto two floors, and other steps to reduce operations
to a level more in line with the lower sales it is experiencing. In the fourth
quarter 1998 the Company announced and implemented further restructuring plans
in tandem with the acquisition of SMS. With this restructuring, the Company has
four principal objectives: (1) to reduce its corporate overhead; (2) to reduce
research and development expenses and to focus its on-going development spending
in the segments of the market that show the best potential for growth and return
on investment for the Company; (3) to create in a more variable cost operating
structure including the out-sourcing of certain of its manufacturing operations
during the second or third quarter of 1999; and (4) to eliminate redundant
products and operations after the acquisition of SMS. Once this restructuring
plan is fully implemented through staff reductions, facility consolidation,
reprioritization of research and development efforts and outsourcing of
manufacturing, the Company intends to focus much of its attention on identifying
means to improve its competitive position. The restructuring plan implementation
is expected to be substantially complete by the end of the third quarter of
1999.
As part of the restructuring, the Company focused its research and development
efforts for the second half of 1998 on the ProMaster 970 and on sustaining
engineering for the Company's existing products, and discontinued development of
the ProMaster 870 and the application of the DataSite technology in the general
purpose programmer market. In manufacturing, the Company has discontinued
production of certain of its non-automated programming systems and is reviewing
the consolidation of its family of handlers. The Company is also planning to
outsource certain of its manufacturing operations during the second or third
quarter of 1999. Together with consolidation of its product offerings, this
outsourcing strategy is expected to result in a lower, more flexible cost
structure for the Company by reducing fixed overhead costs and the robust
infrastructure that is required for a manufacturing operation.
In February, the Company sold its Japan sales and service subsidiary to a former
sub-distributor who will now continue to distribute the Company's products in
Japan. Additionally, the Company continues to realign its operations in Germany
whereby SMS will become the German headquarters and Munich will continue as a
sales and service office.
Operating expenses for 1998 included restructuring charges of $4.4 million
related to these restructuring activities. Related primarily to its
restructuring plan, the Company recorded inventory reserves during 1998 of
approximately $4.6 million on products that will be discontinued as a result of
the business restructuring. These inventory reserves are included in cost of
goods sold for the third and fourth quarters. In addition, the Company incurred
operating expenses of approximately $220,000 related to facility consolidation
restructuring activities that were included in selling, general and
administrative expenses.
Cash payments related to this restructuring plan are estimated to be
approximately $3.9 million during the period from the third quarter 1998 through
1999. Approximately 80% of those cash payments will take place from the third
quarter of 1998 through the first quarter 1999.
Page 19
Results of Continuing Operations
For all periods presented in this section, results of operations reflect the
classification of the Company's Semiconductor Equipment and Synario Design
Automation Divisions as discontinued operations (see "Discontinued Operations").
Net Sales
(in thousands)
Net sales by product line: 1998 Change 1997 Change 1996
- ------------------------------------------------------------------------------------------------------------------------------
Non-automated programming systems $26,459 (13.2%) $30,498 (9.7%) $33,767
Automated programming systems 8,879 (43.8%) 15,786 4.6% 15,093
------------------ ----------------- ---------------
Total Programming Systems Division $35,338 (23.6%) $46,284 (5.3%) $48,860
================== ================= ===============
Net sales by location:
United States $16,900 (24.2%) $22,290 (5.4%) $23,554
% of total 47.8% 48.2% 48.2%
International $18,438 (23.2%) $23,994 (5.2%) $25,306
% of total 52.2% 51.8% 51.8%
- -----------------------------------------------------------------------------------------------------------------------------
1998 vs. 1997
Sales and orders decreased for the Company's programming system products during
1998 as compared to 1997. Orders during the year decreased approximately 35% to
$31.5 million, compared with $48.4 million in 1997. The sales and orders
declines during the year are attributable to both non-automated and automated
programming system products, but are primarily attributable to the decline in
automated programming systems sales. Sales of the Company's PM970 Fine Pitch
Automated Programming System, which was developed to replace the PM9500, were
negatively impacted during the year by delays in completion of certain
configuration requirements and performance enhancements. As a result, sales of
fine pitch automated programming systems declined $2.0 million from 1997. Sales
of the Company's other automated programming system products, accessories and
service contracts decreased by approximately $5.0 million compared to 1997 due
primarily to increased competition in areas where these products are nearing the
end of their product life cycles.
In November 1998 the Company completed two strategic transactions intended to
fill gaps in the Company's product lines and provide replacements for certain of
its aging, low-margin products while focusing on development of a
next-generation programming platform (see "Strategic Initiatives"). The
integration of the SMS products into the Company's product portfolio, combined
with the elimination of certain products, is expected to improve the Company's
competitive position in the market. This integration is expected to be largely
completed during the first half of 1999. However, there is no assurance that
this integration will be successful and will result in stabilized sales within
this timeframe.
During 1998 sales decreased in all geographic regions. These declines were
partially offset by exchange rate changes for the German Mark and the Japanese
Yen. The foreign currency exchange rate changes, primarily in the German Mark
and Japanese Yen, increased sales by approximately $480,000 during 1998 as
compared to 1997. When the U.S. Dollar is weaker, sales of the Company's
products in local currency translate into more U.S. Dollars. However, offsetting
the revenue translation impact is the translation of local currency costs and
expenses.
1997 vs. 1996
The Company experienced an overall decline in sales and orders for the Company's
Programming Systems Division products during 1997. Orders declined approximately
4.7% to $48.4 million in 1997, compared with $50.8 million in 1996.
Sales for the Programming Systems Division were negatively impacted due
primarily to delays in new product introductions by the Company. In addition,
the declines in non-automated programming systems also reflect the continuing
market shift away from the Company's traditional line of higher-price IC
programmers for the engineering market, toward lower-price programmers.
Page 20
During 1997 international sales were slightly lower as compared to 1996. Sales
decreased in Europe, Canada and Japan, but increased slightly in other parts of
the world. The foreign currency exchange rate changes reduced sales by
approximately $1.1 million during 1997 compared to 1996. These declines were due
primarily to exchange rate changes for the German Mark and the Japanese Yen.
Gross Margin
(in thousands) 1998 Change 1997 Change 1996
- -------------------------------------------------------------------------------------------------
Gross margin $10,405 (55.8%) $23,536 2.7% $22,926
Percentage of net sales 29.4% 50.9% 46.9%
- -------------------------------------------------------------------------------------------------
1998 vs. 1997
The gross margin decreased significantly in amount and as a percentage of sales
during 1998 compared to 1997. The decrease is primarily due to the 24% decrease
in sales volume and $4.6 million of inventory reserves for primarily dis-
continued products recorded during the year related to restructuring activities
(see "Strategic Initiatives"). The relatively high fixed component of cost of
goods sold causes any shift in total volume to have a significant impact on the
gross margin percentage. Also contributing to the decline in gross margins are
high costs associated with ProMaster 970 customer support during the year.
1997 vs. 1996
The gross margin increased in amount and as a percentage of sales during 1997
compared to 1996. The increase in gross margin is due primarily to less
inventory reserves recorded in 1997, offset by lower volumes and lower product
margins in 1997. The shift in mix of product revenues from higher-priced and
higher-margin non-automated programming systems to the lower-priced alternatives
has lowered the overall product gross margins. Also contributing to the decline
of gross margin was the strengthening of the U.S. Dollar in relation to the
Japanese Yen and the German Mark, in which approximately 21% of the Company's
1997 sales were denominated.
Research and Development
(in thousands) 1998 Change 1997 Change 1996
- -------------------------------------------------------------------------------------------------
Research and development $9,109 16.7% $7,807 (3.9%) $8,121
Percentage of net sales 25.8% 16.9% 16.6%
- -------------------------------------------------------------------------------------------------
1998 vs. 1997
Research and development spending increased both in amount and as a percentage
of sales. The increase in spending was primarily due to aggressive spending for
new product development through the first half of 1998 in engineering staff and
materials, and due to incentive programs that were implemented during the second
half of the year related to product development programs. Also, spending for
consultants used in new product development was increased during 1998, and a
Vice President of Engineering was hired in September 1998. As part of the
business restructuring plan that was implemented during the third and fourth
quarters of 1998, the Company shifted its focus to research and development
efforts on the ProMaster 970 and on sustaining engineering for the Company's
existing products, and discontinued development of the ProMaster 870 and the
application of the DataSite technology in the general purpose programmer market.
This restructuring plus the November 1998 acquisition of SMS has allowed the
Company to de-emphasis its support of certain old products that will be replaced
due to product overlap.
The Company believes it is essential to invest in research and development to
support its existing products and to create new products as markets develop and
technologies change. The Company is focusing its research and development
efforts in its strategic growth markets, namely new programming technology and
automated handling systems for the manufacturing environment. The Company
expects to continue this focus in the future and believes that it is essential
to invest in research and development to support its existing products and to
create new products as markets develop and technologies change. At the time of
the acquisition of SMS in 1998 the Company recognized a charge for in-process
research and development of $2.0 million. Based on the analysis performed of the
in-process research and development, the Company estimates that approximately
$1.5 million to $2.0 million will be spent over the next one to two years before
this development results in commercially viable products.
Page 21
1997 vs. 1996
Research and development spending decreased in amount but increased as a
percentage of sales in 1997 compared to 1996. The spending decrease is primarily
due to reduced spending on materials related to development projects and open
job positions. The increase as a percentage of sales is due to lower sales
volume.
Selling, General and Administrative
(in thousands) 1998 Change 1997 Change 1996
- -------------------------------------------------------------------------------------------------------
Selling, general and administrative $14,386 3.3% $13,924 (4.7%) $14,618
Percentage of net sales 40.7% 30.1% 29.9%
- -------------------------------------------------------------------------------------------------------
1998 vs. 1997
The increase in selling, general and administrative expenditures in 1998 as
compared to 1997 is due primarily to a first quarter charge in the amount of
$540,000 related to the modification of stock options of a former CEO of the
Company, additional spending in marketing related to new products and promotions
during the first half of the year, incremental professional services engaged to
assist in strategic planning, additional expenses related to facility
consolidation, and expenses related to the search for a new Chief Executive
Officer in the first quarter. This additional spending was partially offset by
lower sales commissions due to the lower sales volume during 1998, and by lower
spending following the Company's restructuring initiatives in the third and
fourth quarters of 1998 (see "Strategic Initiatives"). The Company believes that
selling, general and administrative expenditures will decrease in amount in 1999
due to the 1998 restructuring and the sale of the Company's Japan subsidiary in
February 1999.
1997 vs. 1996
The decrease in selling, general and administrative expenses during 1997 as
compared to 1996 is primarily due to decreased costs related to the 1996 closure
of the UK office, decreased travel costs and decreased Dollar costs in the
Company's foreign offices due to the strengthened US Dollar, offset by increased
commissions due to an increased number of sales representatives in the US and
Canada.
Interest
(in thousands) 1998 Change 1997 Change 1996
- --------------------------------------------------------------------------------
Interest income $1,513 99.1% $760 281.9% $199
Interest expense ($138) (37.0%) ($219) (14.5%) ($256)
- --------------------------------------------------------------------------------
1998 vs. 1997
The increases in interest income in 1998 as compared to 1997 are due to an
increase in cash, cash equivalents and marketable securities, due primarily to
the proceeds received from the Company's land sale and business dispositions
during 1997 (see "Discontinued Operations" and "Sale of Headquarters Property").
1997 vs. 1996
Interest income increased during 1997 compared with 1996, primarily due to an
increase in the average level of funds available for investment primarily due to
the sale of the Company's headquarters property in May 1997 (see "Sale of
Headquarters Property") and a decrease in the average investment interest rates.
Page 22
Income Taxes
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------
Income tax expense $58 $176 $121
Effective tax rate (0.3%) 3.9% 94.5%
- --------------------------------------------------------------------
1998 vs. 1997
The effective income tax rate for 1998 differed from the expected provision at
the statutory 34% tax rate primarily due to operating losses incurred in 1998
(see Note 15 of "Notes to Consolidated Financial Statements"). The Company had
valuation allowances of $5.9 million at December 31, 1998 compared to $164,000
at December 25, 1997 and $3.2 million at December 26, 1996. The valuation
reserves may increase should the Company incur future losses or reverse as the
Company generates taxable income.
1997 vs. 1996
The effective income tax rate for 1997 differed from the expected provision at
the statutory 35% tax rate primarily due to the reversal of tax valuation
reserves. The adjustments to the valuation reserves were due to an ability to
record a benefit for the offset of reversing temporary differences against 1997
taxable income.
Sale Of headquarters property
In May 1997 the Company completed the sale of the land and building comprising
its Redmond, Washington corporate headquarters and excess land that had been
held for resale for approximately $13.8 million, less net transaction related
expenses and reimbursements of approximately $400,000. The sale includes a 10
year lease-back of the building to the Company, with an option to renew the
lease for an additional 10 years. The Company realized approximately $12 million
in cash after payment of transaction fees and taxes. The sale resulted in an
overall pre-tax gain of approximately $5.6 million, of which approximately $2.3
million related to the excess land was recognized in the second quarter of 1997.
The remainder will be amortized over the life of the lease.
Income and Earnings Per Share
(in thousands, except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Income (loss) from continuing operations ($18,524) $4,386 $7
Percentage of net sales (52.4%) 9.5% 0.0%
Earnings (loss) per share from continuing operations
Basic earnings per share ($2.59) $0.63 $0.00
Diluted earnings per share ($2.59) $0.62 $0.00
- ----------------------------------------------------------------------------------------------
1998 vs. 1997
The decrease in income and earnings per share from continuing operations in 1998
compared with 1997 is primarily due to a combination of decreased sales volume,
the restructuring charges recorded during the year (see "Strategic
Initiatives"), a lower gross margin percentage attributable in part to large
inventory reserves related to discontinued products, and increased spending on
new development projects.
1997 vs. 1996
The increase in income and earnings per share from continuing operations in 1997
compared with 1996 is primarily due to the sale of the Company's headquarters
property (see "Sale of Headquarters Property"), increased gross margins and
lower operating expenses, offset by a decreased sales volume.
Page 23
Discontinued Operations
Semiconductor Equipment Division
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, ReelIn November 1997, the Company sold the assets of its Semiconductor
Equipment Division, Reel-Tech(TM) Inc., to General Scanning Inc., for $15.5
million, consisting of $12 million in cash, $2 million in common stock of
General Scanning Inc. and $1.5 million in assumed liabilities. The assets of
Reel-Tech, Inc. were purchased by the Company in August 1995. Operating results
of the Semiconductor Equipment Division and the gain on the sale of this segment
are as follows:
(in thousands) 1998 1997 1996
----------- ---------- -----------
Net sales (1) $ - $7,640 $3,744
=========== ========== ===========
Income from operations, net of income tax $ - $ 926 $ 116
Gain (loss) on disposal, net of income tax (265) 8,329 -
----------- ---------- -----------
Total income (loss) on discontinued segment ($265) $9,255 $ 116
=========== ========== ===========
(1) Excludes inter-segment sales to the Programming Systems Division of
$1,876,000 and $322,000 in 1996 and 1995, respectively.
Synario(R) Design Automation Division
Also in November 1997, the Company entered into a licensing agreement and an
agreement to sell certain assets of its Synario Design Automation Division.
Under this licensing agreement, the Company's Electronic Design Automation (EDA)
products are being integrated and sold with the EDA product line of MINC
Incorporated. This transaction discontinued the Synario Design Automation
Division operations of the Company. However, the Company is entitled to receive
and may realize certain licensing revenues related to its ABEL and ECS products
through December 31, 1999. Also, the Company negotiated a settlement to the OEM
Agreement with Synopsys Inc., which is reflected in the loss on disposal.
Operating results and the loss on the disposal of this segment are as follows:
(in thousands) 1998 1997 1996
----------- ---------- -----------
Net sales (1) $1,381 $7,172 $7,819
=========== ========== ===========
Gain (loss) from operations, net of income tax $1,344 ($1,358) ($1,224)
Loss on disposal, net of income tax (185) (783) -
----------- ---------- -----------
Total income (loss) on discontinued segment $1,159 ($2,141) ($1,224)
=========== ========== ===========
(1) Includes net sales3 of $851,000 in 1997 for retained licensing rights
recognized after the disposition in 1997. All 1998 net sales are for
retained licensing rights.
Inflation and changes in Foreign currency exchange rates
Historically, the Company has been able to offset the impact of inflation
through efficiency increases and price adjustments. Increasing price
competition, especially in IC programmers, is currently diminishing and may
continue to diminish the Company's ability to offset the impacts of inflation in
the future.
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. To date the foreign currency rate changes
have not significantly impacted the Company's profitability. This is because
approximately 25% of the Company's sales are made by foreign subsidiaries and
independent currency fluctuations tend to minimize the translation effect of any
individual currency exchange fluctuations, and the effect of individual rate
changes on sales and expenses tend to offset each other. Additionally, the
Company hedges its foreign currency exposure on sales of inventory and certain
loans to its foreign subsidiaries through the use of foreign exchange contracts.
See Note 1 of "Notes to Consolidated Financial Statements."
Page 24
Financial Condition
Liquidity and Capital Resources
(in thousands) 1998 Change 1997 Change 1996
- --------------------------------------------------------------------------------
Working capital $15,084 ($18,142) $33,226 $23,172 $10,054
Total debt $564 ($1,436) $2,000 $395 $1,605
- --------------------------------------------------------------------------------
Working capital decreased during 1998 primarily due to restructuring costs,
losses from operations, the early settlement of a long-term pension obligation,
spending on property, plant and equipment, the acquisition of SMS in the fourth
quarter and a minority interest investment in JTAG Technologies in the second
quarter. Cash, cash equivalents and marketable securities decreased by
approximately $14.1 million during the year funding these activities.
Inventory decreased by approximately $3.7 million due to $4.6 million of
inventory reserves primarily related to discontinued products, offset by an
increase in inventory primarily due to the acquisition of SMS. Recoverable
income taxes increased due to the 1998 loss carryback against 1997 income taxes
paid. Other current assets decreased $2.8 million in 1998 primarily due to the
collection of 1997 accounts receivable related to the Reel-Tech and Synario
Design Automation Divisions which were not sold as a part of the disposals of
these divisions in November 1997.
Accrued expenses increased by $2.5 million primarily due to accrual of
restructuring charges that will be paid out during 1999 as the restructuring
plan is fully implemented (see "Strategic Initiatives"). Income taxes payable
decreased during the year due to the payment of the income tax liability from
1997. Notes payable decreased due to the payment of a $1.5 million note paid in
the first quarter 1998.
As of December 31, 1998, the Company had total debt of $564,000 or approximately
3% of its $18.9 million in equity. This represented borrowings under its $1.0
million foreign line of credit which went away with the sale of the Company's
Japan subsidiary in February 1999. The Company also has another foreign line of
credit of $321,000 maturing March 31, 1999 with an interest rate of 8%.
At December 31, 1998, the Company had an unused $4.0 million U.S. secured line
of credit maturing in May 1999 under which borrowings would incur interest at
the bank's published prime rate or the LIBOR rate plus 250 basis points. This
line of credit has been structured as short-term and the Company expects to be
able to renew it on its maturity date under substantially the same terms as
those presently in place. No assurances can be made, however, in regard to the
renewal of this agreement.
The Company estimates that capital expenditures for property, plant and
equipment during 1999 will be approximately $1.8 million. Such expenditures are
expected to be funded from internally generated funds and, if necessary,
borrowings from the Company's existing credit lines. Although the Company fully
expects that such expenditures will be made, it has commitments for only a small
portion of these amounts.
At December 31, 1998, the Company's material short-term unused sources of
liquidity consisted of approximately $18.9 million in cash, cash equivalents and
marketable securities and available borrowings of $4.0 million under its U.S.
line of credit. The Company believes these sources and cash flow from operations
will be sufficient during 1999 to fund working capital needs, service existing
debt and finance planned capital acquisitions.
Share repurchase program
Under a previously announced share repurchase program, the Company is authorized
to repurchase up to 1,123,800 shares (approximately 15.6%) of its outstanding
common stock. These purchases may be executed through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and may commence or be discontinued at any time. As of December
31, 1998, the Company has repurchased 1,016,200 shares under this repurchase
program at a total cost of approximately $7.1 million. The Company has not
repurchased shares under this plan since the second quarter of 1997 although it
still has the authority to do so.
Page 25
General
Impact of Year 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities or failure of devices with imbedded
technology.
The Company has completed an assessment of its data processing systems and will
have to modify or replace portions of its software so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project budget was initially estimated and authorized for
approximately $1 million, which included approximately $200,000 for new hardware
to be capitalized and approximately $800,000 of costs to be expensed as
incurred. The Company has completed the most significant portion of this phase
of the Year 2000 project and currently estimates that the cost of this project
will be less than the initial budgeted amount. As of December 31, 1998, the
Company has incurred and expensed approximately $300,000 and capitalized
approximately $213,000 related to this project.
The Company believes, based on its current understanding of its systems, that
with modifications to the existing software and conversions to new software, the
Year 2000 issue should not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not
properly made, or are not completed timely, the Year 2000 issue could have a
material adverse impact on the operations of the Company. The cost of the
project and the date on which the Company believes it will complete the Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, cooperation of vendors and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in the area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
The Company has also mailed letters to its significant vendors and service
providers and has verbally communicated with many strategic customers to
determine the extent to which interfaces with such entities are vulnerable to
Year 2000 issues and whether the products and services purchased from or by such
entities are Year 2000 compliant. As of December 1998 the Company had received
responses from approximately one-third of such third parties and is currently in
the process of analyzing the responses. The Company is also in the process of
following up with those vendors and service providers which have not responded
that are deemed to be critical suppliers, or whose response was unsatisfactory.
This phase of the Year 2000 project is expected to be completed by the second
quarter of 1999.
The Company is also in the process of evaluating its internal systems with
imbedded technology that are subject to the Year 2000 issue. This evaluation and
any required remediation are expected to be completed by December 31, 1999.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.
The Company has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
Page 26
European monetary conversion
On January 1, 1999, the European Economic and Monetary Union (the "EMU")
introduced the Euro, which became a functional legal currency of the EMU
countries. During the next three years, business in the EMU member states will
be conducted in both the existing national currency, such as the Franc or
Deutsche Mark, and the Euro. As a result, companies operating in or conducting
business in the EMU member states will need to ensure that their financial and
other software systems are capable of processing transactions and properly
handling these currencies, including the Euro.
The Company is still assessing the impact the EMU formation will have on both
its internal systems and its products sold. The Company plans to take
appropriate corrective actions based on the results of such assessment. The
costs related to addressing this issue have not been determined, however,
management believes that this issue and its related costs will not have a
material adverse effect on the Company's business, financial condition and
operating results.
SHAREHOLDER RIGHTS PLAN
In March 1998, the Company adopted a Shareholder Rights Plan (the "Rights Plan")
that went into effect simultaneously with the expiration of its previously
existing Shareholder Rights Plan. Under the Rights Plan, a dividend of one Share
Purchase Right (a "Right") was declared for each share of Company Common Stock
outstanding at the close of business on April 4, 1998. In the event that a
person or group (the "Acquirer") acquires 15% or more of the Company's Common
Stock without advance approval by the Company's Board of Directors (20% or more
in the case of one group of shareholders), each Right will entitle the holder,
other than the Acquirer, to buy Common Stock with a market value of twice the
Right's then current exercise price (initially $30, subject to adjustment). In
addition, if Rights are triggered by such a non-approved acquisition and the
Company is thereafter acquired in a merger or other transaction in which the
shareholders of the Company are not treated equally, shareholders with
unexercised Rights will be entitled to purchase common stock of the Acquirer
with a value of twice the exercise price of the Rights. This Rights Plan is
intended to protect the Company's shareholders in the case of an unapproved
acquisition by allowing the holder of a Right to purchase the Company's Common
Stock at 50% of the market price, thereby diluting the ownership percentage of
the Acquirer. The Company's Board of Directors may redeem the Rights for a
nominal amount at any time prior to an event that causes the Rights to become
exercisable. The Rights trade automatically with the underlying Common Stock
(unless and until a distribution event occurs under the Rights Plan) and expire
on April 4, 2008 if not redeemed earlier.
Page 27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company currently uses only foreign currency hedge derivative instruments
which, at a given date, are not material. However, the Company is exposed to
interest rate risk. The Company generally invests in high-grade commercial paper
with original maturity dates of twelve months or less and conservative money
market funds to minimize its exposure to interest rate risk on its marketable
securities, which are classified as available-for-sale as of December 31, 1998.
The Company believes that the market risk arising from holdings of its financial
instruments is not material. The table below provides information about the
Company's marketable securities, including principal cash flows for 1999 and
2000 and the related weighted average interest rates (in thousands):
Estimated Fair
Value at
December 31,
1999 2000 Total 1998
---------------- ---------------- -------------- ----------------
Corporate bonds $4,913 $1,049 $5,962 $5,949
5.72% 5.65% 5.71%
Medium- and short-term notes 3,427 - 3,427 3,421
5.85% 5.85%
Euro-dollar bonds 4,276 798 5,074 5,063
5.77% 5.68% 5.75%
Zero coupon notes - 459 459 461
4.85% 4.85%
---------------- ---------------- -------------- ----------------
Total portfolio value $12,616 $2,306 $14,922 $14,894
================ ================ ============== ================
Item 8. Financial Statements and Supplementary Data
See pages 29 through 47.
Page 28
- --------------------------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Data I/O Corporation
We have audited the accompanying consolidated balance sheets of Data I/O
Corporation as of December 31, 1998 and December 25, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Data I/O
Corporation at December 31, 1998 and December 25, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Seattle, Washington //S// Ernst & young LLP
February 8, 1999 Ernst & young LLP
- --------------------------------------------------------------------------------
Report of Management
- --------------------------------------------------------------------------------
The Management of Data I/O Corporation is responsible for the preparation and
integrity of the Company's consolidated financial statements and related
information that appears in this Annual Report on Form 10-K. Management believes
that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of its operations, in conformity with generally accepted accounting
principles. Management has included in the Company's financial statements
amounts that are based on estimates and judgments, which it believes are
reasonable under the circumstances.
The Company maintains a system of internal control, which is designed to
safeguard the Company's assets and ensure that transactions are recorded in
accordance with Company policies.
The Board of Directors of the Company has an Audit Committee composed of
non-management Directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing and financial reporting matters.
//S//Frederick R. Hume //S//Joel S. Hatlen
FREDERICK R. HUME JOEL S. HATLEN
President and Chief Executive Officer Vice President Finance
Chief Financial Officer
Secretary and Treasurer
Page 29
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
Dec. 31, Dec. 25,
1998 1997
- -------------------------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,008 $ 8,113
Marketable securities 14,894 24,855
Trade accounts receivable, less allowance for
doubtful accounts of $445 and $394 5,352 5,678
Inventories 4,442 8,158
Recoverable income taxes 3,366 -
Deferred income taxes 331 1,990
Other current assets 1,117 3,910
------------- -------------
TOTAL CURRENT ASSETS 33,510 52,704
Property, plant and equipment - net 2,174 3,389
Other assets 4,345 532
Deferred income taxes 60 1,111
------------- -------------
TOTAL ASSETS $40,089 $57,736
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,781 $ 3,760
Accrued compensation 2,926 2,958
Deferred revenue 3,895 4,795
Other accrued liabilities 3,328 3,117
Accrued costs of business restructuring 2,339 -
Income taxes payable 1,593 2,848
Notes payable and current maturities of long-term debt 564 2,000
------------- -------------
TOTAL CURRENT LIABILITIES 18,426 19,478
Other long-term payables - 561
Deferred gain on sale of property 2,754 3,083
------------- -------------
TOTAL LIABILITIES 21,180 23,122
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, 7,186,851
and 7,038,786 shares 17,637 16,412
Retained earnings 715 18,345
Accumulated other comprehensive income (loss) 557 (143)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 18,909 34,614
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,089 $57,736
============= =============
See notes to consolidated financial statements.
Page 30
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Dec. 25, Dec. 26,
For the years ended 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $35,338 $46,284 $48,860
Cost of goods sold 24,933 22,748 25,934
------------ ------------ ------------
Gross margin 10,405 23,536 22,926
------------ ------------ ------------
Operating expenses:
Research and development 9,109 7,807 8,121
Selling, general and administrative 14,386 13,924 14,618
Write-off acquired in-process R&D 1,959 - -
Provision for business restructuring 4,370 - -
------------ ------------ ------------
Total operating expenses 29,823 21,731 22,739
------------ ------------ ------------
Operating income (loss) (19,418) 1,805 187
Non-operating income (expense):
Interest income 1,513 760 199
Interest expense (138) (219) (256)
Foreign currency exchange (3) (51) (2)
Gain (loss) on dispositions and other (420) 2,267 -
------------ ------------ ------------
Total non-operating income (expense) 952 2,757 (59)
------------ ------------ ------------
Income (loss) from continuing operations before income taxes (18,466) 4,562 128
Income tax expense (58) (176) (121)
------------ ------------ ------------
Income (loss) from continuing operations (18,524) 4,386 7
Discontinued operations net of income taxes (Note 4):
Income (loss) from operations, net of income tax 1,344 (432) (1,108)
Gain (loss) on disposals, net of income tax (450) 7,546 -
------------ ------------ ------------
Income (loss) from discontinued operations 894 7,114 (1,108)
------------ ------------ ------------
Net income (loss) ($17,630) $11,500 ($ 1,101)
============ ============ ============
Basic earnings (loss) per share:
From continuing operations ($2.59) $0.63 $0.00
From discontinued operations 0.13 1.03 (0.16)
------------ ------------ ------------
Total basic earnings (loss) per share ($2.46) $1.66 $(0.16)
============ ============ ============
Diluted earnings (loss) per share:
From continuing operations ($2.59) $0.62 $0.00
From discontinued operations 0.13 1.00 (0.16)
------------ ------------ ------------
Total diluted earnings (loss) per share ($2.46) $1.62 $(0.16)
============ ============ ============
Weighted-average shares outstanding 7,154 6,909 6,857
============ ============ ============
Weighted-average and potential shares outstanding 7,154 7,087 7,035
============ ============ ============
See notes to consolidated financial statements.
Page 31
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Dec. 25, Dec. 26,
For the years ended 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Income (loss) from continuing operations ($18,524) $ 4,386 $ 7
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 2,077 1,740 2,968
Write-off of acquired in-process R&D 1,959 - -
Net (gain) loss on dispositions 355 (2,267) -
Equity losses from investee 64 - -
Deferred income taxes 2,710 (459) (129)
Deferred revenue (900) 286 (60)
Amortization of deferred gain on sale (329) (213) -
Non-cash stock-based compensation expense 583 - -
Inventory write-downs due to business restructure 4,557 - -
Net change in:
Trade accounts receivable 315 1,547 3,993
Inventories (841) (618) 262
Recoverable income tax refund (3,366) - -
Other current assets 2,793 (3,277) (22)
Business restructure 2,339 (312) (653)
Accounts payable and accrued liabilities (1,632) 4,185 (1,481)
------------- -------------- -------------
Cash provided by (used in) operating activities of continuing operations (7,840) 4,998 4,885
Cash provided by (used in) operating activities of discontinued 894 (3,839) (761)
operations
-------------- ------------- -------------
Net cash provided by (used in) operating activities (6,946) 1,159 4,124
INVESTING ACTIVITIES:
Additions to property, plant and equipment (482) (1,197) (1,819)
Net proceeds on sale of property - 13,430 -
Acquisition of SMS GmbH and technology (5,224) - -
Investment in JTAG Technologies (979) - -
Additions to other assets - (14) -
Purchases of marketable securities (20,717) (45,687) -
Proceeds from sales of marketable securities 31,055 20,100 -
Proceeds from sale of discontinued operations - 15,525 -
Net investing activities of discontinued operations - - (492)
------------- -------------- -------------
Cash provided by (used in) investing activities 3,653 2,157 (2,311)
FINANCING ACTIVITIES:
Additions to (repayment of) notes payable (1,442) 412 (9)
Sale of common stock 259 344 321
Proceeds from exercise of stock options 383 824 426
Repurchase of common stock - (3) (3,028)
Net financing activities of discontinued operations - (854) -
------------- -------------- -------------
Cash provided by (used in) financing activities (800) 723 (2,290)
------------- -------------- -------------
Increase (decrease) in cash and cash equivalents (4,093) 4,039 (477)
Effects of exchange rate changes on cash (12) 26 29
Cash and cash equivalents at beginning of year 8,113 4,048 4,496
------------- -------------- -------------
Cash and cash equivalents at end of year $ 4,008 $ 8,113 $4,048
============= ============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 88 $ 152 $ 120
Income taxes $ 2,145 $ 1,748 $ 564
See notes to consolidated financial statements.
Page 32
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Other Total
--------------------------- Retained Comprehensive Stockholders'
Shares Amount Earnings Income (Loss) Equity
------------- ---------- ----------- ----------------- -----------------
(in thousands, except share data)
Balance at December 28, 1995 7,083,825 $17,528 $7,946 $455 $25,929
Stock options exercised 81,500 426 - - 426
Issuance of stock through
Employee Stock
Purchase Plan 65,695 321 - - 321
Purchase of common stock (453,300) (3,028) - - (3,028)
Comprehensive loss:
Net loss - - (1,101) - (1,101)
Cumulative translation
adjustment - - - 12 12
-----------------
Total comprehensive loss (1,089)
------------- ---------- ----------- ----------------- -----------------
Balance at December 26, 1996 6,777,720 15,247 6,845 467 22,559
Stock options exercised 168,125 735 - - 735
Issuance of stock through
Directors Fee Plan 13,508 89 - - 89
Issuance of stock through
Employee Stock
Purchase Plan 79,933 344 - - 344
Purchase of common stock (500) (3) - - (3)
Comprehensive income:
Net income - - 11,500 - 11,500
Cumulative translation
adjustment - - - 122 122
Unrealized loss on
marketable securities - - - (732) (732)
-----------------
Total comprehensive income 10,890
------------- ---------- ----------- ----------------- -----------------
Balance at December 25, 1997 7,038,786 16,412 18,345 (143) 34,614
Stock options exercised 55,000 276 - - 276
Issuance of stock through
Director Fee Plan 20,932 107 - - 107
Issuance of stock through
Employee Stock
Purchase Plan 72,133 259 - - 259
Stock-based compensation - 583 - - 583
Comprehensive loss:
Net loss - - (17,630) - (17,630)
Cumulative translation
adjustment - - - (32) (32)
Unrealized loss on
marketable securities - - - 732 732
-----------------
Total comprehensive loss (16,930)
------------- ---------- ----------- ----------------- -----------------
Balance at December 31, 1998 7,186,851 $17,637 $ 715 $557 $18,909
============= ========== =========== ================= =================
See notes to consolidated financial statements.
Page 33
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Data I/O Corporation (the "Company") manufactures hardware products for users of
programmable integrated circuits. The Company's principal customers use the
Company's programming systems to design and manufacture electronic equipment for
industrial, commercial and military applications. Customers for the Company's
programming system products are located around the world, primarily in the
United States, Europe and the Far East. All of the Company's manufacturing
operations are currently located in the United States, although the Company has
plans to outsource substantially all of its manufacturing to third parties in
future periods. See Note 2 - Provision for Business Restructuring.
During 1997, the Company disposed of its Semiconductor Equipment and Synario
Design Automation Divisions, which removed Electronic Design Software (EDA)
software products and semiconductor equipment products from the Company's
product offerings. See Note 4 - Discontinued Operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Data I/O
Corporation and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reporting Period
The Company reports on a fifty-two, fifty-three week basis. Results of
operations for 1998 are for a fifty-three week period, whereas results for 1997
and 1996 are for fifty-two week periods.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of the Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation. Accordingly, the Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation cost for stock options is measured as the excess,
if any, of the fair value of the Company's Common Stock at the date of the grant
over the stock option price.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenues, costs and expenses are
translated at average rates of exchange prevailing during the year. Translation
adjustments resulting from this process are charged or credited to stockholders'
equity, net of taxes. Realized and unrealized gains and losses on foreign
currency transactions are included in non-operating expense as Foreign Currency
Exchange.
In an effort to minimize the effect of exchange rate fluctuations on the results
of its operations, the Company hedges certain portions of its foreign currency
exposure through the use of forward exchange contracts, none of which are
speculative. At December 31, 1998, the Company had approximately $293,000 in
foreign exchange contracts outstanding, with the contract exchange rates being
approximately equal to the market exchange rates.
These contract terms range from 4 to 74 days.
Page 34
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with insignificant
interest rate risk. The Company generally invests in high-grade commercial paper
with original maturities of twelve months or less and conservative money market
funds. Interest earned is reported in non-operating income as interest income.
Marketable Securities
Marketable securities are primarily money market funds and high-grade commercial
paper, all of which are classified as available-for-sale and recorded at fair
value, as defined below. Unrealized holding gains and losses are recorded, net
of any tax effect, as a component of accumulated other comprehensive income
(loss) within stockholders' equity. Interest earned is reported in non-operating
income as interest income. Marketable securities are classified in the balance
sheet as current and noncurrent based on maturity dates and the Company's
expectation of sales and redemptions in the following year.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents and marketable securities
approximates fair value because of the short-term maturity of those instruments.
The fair value of the Company's marketable securities is based upon the quoted
market price on the last business day of the fiscal year plus accrued interest,
if any.
Inventories
Inventories are stated at the lower of cost or market with cost being the
currently adjusted standard cost, which approximates cost on a first-in,
first-out basis.
Property, Plant and Equipment
Property, plant and equipment, including leasehold improvements, are stated at
cost and depreciation is calculated over the estimated useful lives of the
related assets or lease terms on the straight-line basis.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment or customer
acceptance, if an acceptance clause is specified in the sales terms. Revenue
from software products licensed to original equipment manufacturers is
recognized when earned per the terms of the contracts. Revenue from the sale of
service and update contracts is recorded as deferred revenue and recognized on a
straight-line basis over the contractual period.
Research and Development
Research and development costs are expensed as incurred. No software development
costs have been capitalized due to immateriality.
Advertising Expense
The Company expenses advertising costs as incurred. Total advertising expenses
related to continuing operations were $1,121,000, $1,676,000 and $2,052,000 in
1998, 1997 and 1996, respectively.
Warranty Expense
The Company warrants its products against defects for periods ranging from
ninety days to one year. The Company provides for the estimated cost, which may
be incurred under its product warranties.
Income Taxes
Income tax expense includes U.S., state and foreign income taxes. Certain items
of income and expense are not reported in both the tax returns and financial
statements in the same year. The Company accounts for income taxes under the
liability method. Under the liability method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
Page 35
Earnings (Loss) Per Share
Basic earnings per share excludes any dilutive effects of stock options. Basic
earnings per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted-average number of common shares and common stock equivalent
shares outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is antidilutive.
Diversification of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of trade receivables. The Company's cash, cash
equivalents and marketable securities consist of high quality financial
instruments. The Company's trade receivables are geographically dispersed and
include customers in many different industries. Management believes that any
risk of loss is significantly reduced due to the diversity of its end-customers
and geographic sales areas. The Company performs on-going credit evaluations of
its customers' financial condition and requires collateral, such as letters of
credit and bank guarantees, whenever deemed necessary.
Other Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The only items of other
comprehensive income (loss) which the Company currently reports are unrealized
gains (losses) on available-for-sale securities and foreign currency translation
adjustments.
Business Segments
As of January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which establishes standards
for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. Information related to
segment disclosures is contained in Note 16.
Derivatives
In June 1998, the Company adopted SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. The Company currently uses only foreign currency hedge derivative
instruments which, at a given date, are not material. Therefore adoption of SFAS
No. 133 has not had a significant effect on earnings or the financial condition
of the Company.
Page 36
NOTE 2 - PROVISION FOR BUSINESS RESTRUCTURING
During the third quarter of 1998, the Company recorded a restructuring charge of
$2.0 million as the Company began the implementation of a plan to restructure
its Redmond and foreign subsidiary operations to a level more in line with the
lower sales it was experiencing. During the fourth quarter of 1998, the Company
recorded further restructuring charges of $2.4 million related to the continuing
restructure of the Company's Redmond operations and foreign subsidiaries and
related to activities directly associated with the fourth quarter acquisition of
SMS GmbH (see Note 3 - Acquisition of SMS GmbH). The acquisition of SMS created
certain redundancies in product offerings and in the operations of the combined
company. A restructuring plan was implemented after the acquisition was
completed to eliminate such redundant operations and to phase out overlapping
products.
With the implementation of the restructuring initiatives during 1998, the
Company had four objectives: (1) to reduce its corporate overhead costs; (2) to
reduce research and development expenses and to focus its on-going research and
development spending in the segments of the market that show the best potential
for growth and return on investment for the Company; (3) to create a more
variable cost operating structure including the out-sourcing of substantially
all of its manufacturing operations during 1999; and (4) to eliminate redundant
products and operations after the acquisition of SMS GmbH.
The total restructuring charge taken during 1998 consisted primarily of the
following activities shown below (in thousands):
Total Reserve Expected
Restructuring 1998 Balance at Total Cash
Description Charges Activity 12/31/98 Flow Impact
- ---------------- ---------------- ----------- -------------- --------------
Downsizing U.S. Operations:
Employee severances $1,997 $ 947 $1,050 $1,997
Employee accrued vacation cashed out - - - 511
Fixed asset write-offs 835 566 269 -
Redmond facility consolidation and abandonment 407 151 256 407
Supplier-related settlements 404 155 249 248
Consulting and legal expenses 177 155 22 177
Other 36 22 14 34
Downsizing foreign subsidiaries 514 35 479 476
---------------- ----------- -------------- --------------
Total $4,370 $2,031 $2,339 $3,850
================ =========== ============== ==============
The Company expects the plans associated with these costs to be substantially
completed by the second or third quarter of 1999. Many of the costs associated
with the reduction of work force were paid during the fourth quarter 1998 and
first quarter 1999. The total number of employees terminated due to the
restructure was 169 (approximately 50% of the total workforce), with 84 having
left as of December 31, 1998 and 50 expected to leave by the end of the first
quarter 1999 and the remainder expected to leave during the second and third
quarters 1999. Employees were terminated from almost all areas of the Company,
including manufacturing, engineering, selling, marketing and administration. The
Company expects to have substantially all of its manufacturing operations
outsourced by the third quarter 1999. The majority of the costs associated with
these outsourcing activities, including fixed asset write-offs and facility
consolidation and abandonment, will be incurred and paid by the third quarter
1999. In February, the Company sold its Japan sales and service subsidiary to a
former sub-distributor who will now continue to distribute the Company's
products in Japan. Additionally, the Company continues to realign its operations
in Germany whereby SMS will become the German headquarters and Munich will
continue as a sales and service office. The majority of the costs associated
with the foreign subsidiary downsizings will be incurred and paid during the
first half of 1999.
Related primarily to its restructuring plan, the Company recorded inventory
reserves during the third and fourth quarters of 1998 of approximately $4.6
million on products that will be discontinued as a result of the business
restructuring. These reserves are included in cost of goods sold for the third
and fourth quarters of 1998. In addition, the Company incurred operating
expenses of approximately $220,000 related to facility consolidation activities
that are not included in the restructuring charge because of the direct benefit
to future operations.
Page 37
NOTE 3 - ACQUISITION of SMS Holding GMHB
In November 1998, the Company acquired SMS Holding GmbH ("SMS"), a privately
held programming equipment company located in Wangen, Germany. The acquisition
was accounted for using the purchase method of accounting with the Company
paying approximately $5.2 million in cash, including $456,000 of direct
acquisition costs. The Company recorded a charge in the fourth quarter 1998 of
approximately $2.0 million for in-process R&D relating to the acquisition.
The purchase price was allocated as follows (in thousands):
Assets acquired $1,804
Liabilities assumed (1,510)
Technology purchased 2,840
Other intangible assets 131
In-process R&D 1,959
-------------
$5,224
=============
Values assigned to acquired in-process research and development, developed
technology and non-compete agreements were determined using a discounted cash
flow analysis. The value assigned to the acquired workforce was based on
replacement cost. To determine the value of the in-process research and
development, the Company considered, among other factors, the state of
development of each project, the time and cost needed to complete each project,
the reliance of the new technology being developed on the existing technology,
expected income, and associated risks. Such risks included the inherent
difficulties and uncertainties in completing the project and thereby achieving
technological feasibility, and risks related to the viability of the potential
changes to future target markets. Based on the analysis performed of the
in-process research and development, the Company estimates that approximately
$1.5 million to $2.0 million will be spent over the next one to two years before
this development results in commercially viable products. To determine the value
of the developed technology, the expected future cash flows of the existing
technology products were discounted taking into account risks related to the
characteristics and applications of each product, existing and future markets,
and assessments of the life cycle stage of each product. Based on this analysis,
the existing technology that had reached technological feasibility was
capitalized. Amounts attributable to the capitalized technology and other
intangible assets will be amortized over their estimated useful lives of 3 to 5
years on a straight-line basis.
The unaudited pro forma combined historical results of operations, as if SMS had
been acquired on December 27, 1996, including incremental amortization of
purchased intangibles of $952,000 and $1,039,000 for the years 1998 and 1997,
respectively, and excluding the $1,959,000 one-time charge in 1998 for acquired
in-process technology, are as follows (in thousands, except per share data):
Year Ended Year Ended
December 31, 1998 December 25, 1997
Actual Pro Forma Actual Pro Forma
------------ ------------- ------------ -------------
(unaudited) (unaudited)
Revenues $35,338 $38,288 $46,284 $51,028
Income (loss) from continuing operations ($18,524) ($18,534) $4,386 $4,028
Diluted earnings (loss) per share from
continuing operations ($ 2.59) ($ 2.59) $ 0.62 $ 0.57
The pro forma information does not purport to be indicative of the results that
would have been attained had these events occurred at the beginning of the
period presented and is not necessarily indicative of future results.
Page 38
NOTE 4 - DISCONTINUED OPERATIONS
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc., for $15.5 million,
consisting of $12 million in cash, $2 million in stock and $1.5 million in
assumed liabilities. The consolidated financial statements include the results
of operations of Reel-Tech, Inc. since the acquisition of this business on
August 31, 1995. Also in November 1997, the Company entered into a licensing
agreement and an agreement to sell certain assets of its Synario(R) Design
Automation Division. Under this licensing agreement, the Company's Electronic
Design Automation (EDA) products are being integrated and sold with the EDA
product line of MINC Incorporated. This transaction discontinues the Synario
Design Automation Division operations of the Company. However, the Company is
entitled to receive and may realize certain licensing revenues related to its
ABEL and ECS products through December 31, 1999.
The income from operations of these discontinued segments has been accounted for
as discontinued operations, and accordingly, their operations are segregated in
the accompanying statements of operations. Operating results of the discontinued
segments and the gain on the sale of these segments are as follows:
Semiconductor Equipment Division Year Ended December
--------------------------------------- ----------------------------------------------
(in thousands) 1998 1997 1996
----------- ----------- ------------
Net sales (1) $ - $7,640 $3,744
=========== =========== ============
Income from operations before income taxes $ - $ 926 $ 225
Income tax expense - - (109)
----------- ----------- ------------
Income from operations - 926 116
----------- ----------- ------------
Gain (loss) on disposal before income taxes (25) 10,422 -
Income tax expense (240) (2,093) -
----------- ----------- ------------
Gain (loss) on disposal (265) 8,329 -
----------- ----------- ------------
Total income (loss) from discontinued segment ($265) $9,255 $ 116
=========== =========== ============
-----------------------------
(1) Excludes inter-segment sales to the Programming Systems Division of $1,876,000 in 1996.
Synario Design Automation Division Year Ended December
---------------------------------------- ----------------------------------------------
(in thousands) 1998 1997 1996 (3)
----------- ----------- ------------
Net sales (2) $1,381 $7,172 $7,819
=========== =========== ============
Income (loss) from operations before income taxes $1,344 ($ 2,088) ($1,224)
Income tax benefit - 730 -
----------- ----------- ------------
Income (loss) from operations 1,344 (1,358) (1,224)
----------- ----------- ------------
Loss on disposal before income taxes (185) (1,205) -
Income tax benefit - 422 -
----------- ----------- ------------
Loss on disposal (185) (783) -
----------- ----------- ------------
Total income (loss) from discontinued segment $1,159 ($ 2,141) ($1,224)
=========== =========== ============
-----------------------------
(2)Includes net sales of $851,000 in 1997 for retained licensing rights
recognized after the disposition in 1997. All 1998 net sales are for
retained licensing rights.
(3)Includes sales and operations of the ABEL product, which was previously
reported as part of the Programming Systems Division.
The disposition transactions of these segments were completed prior to December
25, 1997.
Page 39
NOTE 5 - MARKETABLE SECURITIES
The estimated fair value of marketable securities consisted of the following (in
thousands):
Dec. 31, Dec. 25,
1998 1997
------------- -------------
Corporate bonds $5,949 $2,774
Medium- and short-term notes 3,421 2,934
Euro-dollar bonds 5,063 16,629
Zero coupon bonds 461 -
Taxable auction securities - 500
General Scanning Inc. common stock - 1,268
Cash held in escrow - 750
------------- -------------
$14,894 $24,855
============= =============
Certain of the bonds, notes and securities held have maturity dates beyond one
year. However, the Company does not anticipate holding these investments for
more than one year and have, therefore, classified them all as short-term,
available-for-sale investments as of December 31, 1998. At December 31, 1998,
cost approximated market value for the Company's portfolio of marketable
securities and there were no significant unrealized gains or losses. At December
25, 1997, the marketable security which had declined in value was the investment
in General Scanning common stock for which the Company recorded an unrealized
loss of $732,000 in 1997. In 1998, these securities were sold.
NOTE 6 - INVENTORIES
Net inventories consisted of the following components (in thousands):
Dec. 31, Dec. 25,
1998 1997
-------------- --------------
Raw material $1,357 $2,965
Work-in-process 877 2,470
Finished goods 2,208 2,723
------------- --------------
$4,442 $8,158
============== ==============
NOTE 7 - SALE OF LAND
In May 1997, the completed the sale of the land and building comprising its
Redmond, Washington, corporate headquarters for $13.8 million, less net
transaction-related expenses and reimbursements of approximately $400,000. The
sale includes a 10-year lease-back of the building to the Company, with an
option to renew the lease for an additional 10 years. The Company realized $12
million in cash after payment of transaction fees and taxes. The sale
represented an overall pre-tax gain to the Company of $5.6 million. Of this
amount, $2.3 million was recognized in 1997, with the remainder to be amortized
over the life of the lease.
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Dec. 31, Dec. 25,
1998 1997
-------------- --------------
Building and improvements $ 181 $ 83
Equipment 15,155 21,493
-------------- --------------
15,336 21,576
Less accumulated depreciation 13,162 18,187
-------------- --------------
Property, plant and equipment - net $2,174 $3,389
============== ==============
Page 40
NOTE 9 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
Dec. 31, Dec. 25,
1998 1997
-------------- --------------
Long-term lease deposits $ 245 $ 220
Investment in product lines: Quality Automation 3,749 3,749
Investment in product lines: SMS 3,271 -
Investment in JTAG Technologies 915 -
-------------- --------------
8,180 3,969
Less accumulated amortization 3,835 3,437
-------------- --------------
Other assets - net $4,345 $ 532
============== ==============
Total amortization recorded for 1998, 1997 and 1996 was $399,000, $470,000 and
$475,000, respectively.
Investment in Product Lines: Quality Automation
In September 1992, the Company exercised options acquired in 1990 to purchase
the assets, technology and rights in the products of Quality Automation Inc.,
and Q.A. Engineering, Inc. (both herein combined and referred to as "Quality
Automation" or "QA"). Of the total acquisition cost, approximately $3.8 million
of various identifiable intangible assets were reported as Other Assets in the
accompanying balance sheets and are being amortized ratably over the economic
life of the specific assets acquired (three to five years). The net book value
of the assets capitalized in Other Assets related to this acquisition is $0 and
$310,000 at December 31, 1998, and December 25, 1997, respectively.
Investment in Product Lines: SMS
In November 1998, the Company acquired SMS Holding GmbH (see Note 3 -
Acquisition of SMS Holding GmbH). In related transactions, the Company acquired
a license to the technology, manufacturing and worldwide distribution rights to
Unmanned Solutions' AH 400 robotic handler, which is used in the SMS fine pitch
automated programming system. Of the total acquisition costs of these
transactions, approximately $3.3 million of developed technology and other
various intangible assets were reported as Other Assets in the accompanying
balance sheets and are being amortized ratably over the economic life of the
specific assets acquired (three to five years). The net book value of the assets
capitalized in Other Assets related to this acquisition is $3.2 million at
December 31, 1998.
Investment in JTAG Technologies
In April 1998, the Company signed an agreement for a strategic alliance with
JTAG Technologies, a Netherlands-based manufacturer and developer of boundary
scan test and programming solutions. Under the terms of the agreement, the
Company purchased a one-third interest in JTAG Technologies for approximately
$979,000, and began selling in-system programming products under the Data I/O
name. The investment in JTAG Technologies is being accounted for under the
equity method. The Company recorded net losses of $64,000 from this investment
in 1998, including amortization of intangible assets.
NOTE 10 - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable as of December 31, 1998 and December 25, 1997 consisted of
borrowings under a $1.0 million unsecured foreign revolving line of credit with
balances outstanding of $564,000 and $500,000 at December 31, 1998 and December
25, 1997, respectively. This line of credit was assumed by the purchaser of the
Company's Japan sales and service subsidiary in February 1999. This line of
credit had weighted-average interest rates of 2.2% and 2.4% for the years ended
December 31, 1998 and December 25, 1997, respectively.
The Company had an unsecured note payable for $1.5 million as of December 25,
1997, which matured and was repaid on January 19, 1998, with variable interest
rates of 5.4% at December 25, 1997.
The Company also has another foreign line of credit of $321,000 maturing March
31, 1999 with a rate of 8% and has a U.S. revolving line of credit of $4 million
maturing May 31, 1999 with variable interest rates of the lender's prime rate or
LIBOR plus 2.5% at the Company's option. This U.S. line of credit is secured by
Page 41
the assets of the Company and is subject to certain affirmative and negative
financial covenants. The Company was in compliance with all financial covenants
at December 31, 1998.
The Company anticipates renewing these lines of credit in 1999 under
substantially the same terms. No assurance can be made, however, in regard to
the renewal of these agreements if the Company again experiences losses.
NOTE 11 - COMMITMENTS
The Company has commitments under non-cancelable operating leases and other
agreements, primarily for factory and office space, with initial or remaining
terms of one year or more are as follows (in thousands):
1999 $1,256
2000 1,256
2001 1,234
2002 1,306
2003 1,323
Thereafter 4,332
-------------
Total $10,707
=============
Lease and rental expense was $1,069,000, $1,060,000, and $809,000 in 1998, 1997
and 1996, respectively. The Company has renewal options on substantially all of
its major leases.
NOTE 12 - STOCK AND RETIREMENT PLANS
Stock Option Plans
At December 31, 1998, there were 1,296,375 shares of common stock reserved for
issuance and 46,625 shares available for future grant under the Company's
employee stock option plans. Pursuant to these plans, options are granted to
officers and key employees of the Company with exercise prices equal to the fair
market value of the common stock at the date of grant and generally vest over
four years. Certain options granted during 1998 vest over two years. Options
granted under the plans have a maximum termination date of six years from the
date of grant.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, eligible employees may purchase shares
of the Company's common stock at six-month intervals at 85% of the lower of the
fair market value on the first or the last day of each six-month period.
Employees may purchase shares having a value not exceeding 10% of their gross
compensation during an offering period. During 1998, 1997 and 1996, a total of
72,133, 79,933 and 65,695 shares, respectively, were purchased under the plan at
average prices of $3.58, $4.30 and $4.88 per share, respectively. At December
31, 1998, a total of 332,679 shares were reserved for future issuance.
Stock Appreciation Rights Plan
The Company has a Stock Appreciation Rights Plan ("SAR") under which each
director, executive officer or holder of 10% or more of the Company's common
stock has a SAR with respect to each exercisable stock option. The SAR entitles
the SAR holder to receive cash from the Company for the difference between the
market value of the stock and the exercise price of the option in lieu of
exercising the related option. SARs are only exercisable following a tender
offer or exchange offer for the Company's stock, or following approval by
stockholders of the Company of any merger, consolidation, reorganization or
other transaction providing for the conversion or exchange of more than 50% of
the common shares outstanding. As no event has occurred which would make the
SARs exercisable, no compensation expense has been recorded under this plan.
Retirement Savings Plan
The Company has a savings plan that qualifies as a cash or deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the plan,
participating U.S. employees may defer up to 17% of their pre-tax salary,
subject to the annual IRS limitation. In fiscal years 1998, 1997 and 1996, the
Company contributed one Dollar for each Dollar contributed by a participant,
with a maximum contribution of 4% of a participant's earnings. The Company's
matching contribution expense for the savings plan was approximately $315,000,
$432,000 and $478,000 in 1998, 1997 and 1996, respectively.
Page 42
Share Repurchase Program
Under a previously announced share repurchase program, the Company is authorized
to repurchase up to 1,123,800 shares (approximately 15.5%) of its outstanding
common stock. These purchases may be executed through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and may commence or be discontinued at any time. As of December
31, 1998, the Company has repurchased 1,016,200 shares under this repurchase
program at a total cost of approximately $7.1 million. The Company has not
repurchased shares under this plan since the second quarter of 1997, although it
still has the authority to do so.
NOTE 13 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share data):
Year Ended December
----------------------------------------------
1998 1997 1996
------------ ------------- -------------
Numerator for basic and diluted earnings per share:
Income (loss) from continuing operations ($18,524) $ 4,386 $ 7
Income (loss) from discontinued operations 894 7,114 (1,108)
------------ ------------- -------------
Net income (loss) ($17,630) $11,500 ($1,101)
============ ============= =============
Denominator:
Denominator for basic earnings per share -
weighted-average shares 7,154 6,909 6,857
Employee stock options (1) - 178 178
------------ ------------- -------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 7,154 7,087 7,035
============ ============= =============
Basic earnings (loss) per share
From continuing operations ($2.59) $0.63 $0.00
From discontinued operations 0.13 1.03 (0.16)
------------ ------------- -------------
Total basic earnings per share ($2.46) $1.66 ($0.16)
============ ============= =============
Diluted earnings (loss) per share
From continuing operations ($2.59) $0.62 $0.00
From discontinued operations 0.13 1.00 (0.16)
------------ ------------- -------------
Total diluted earnings per share ($2.46) $1.62 ($0.16)
============ ============= =============
(1)Excludes employee stock options, which were antidilutive of 70,489, 71,000, and 374,000 in 1998, 1997
and 1996, respectively.
NOTE 14 - STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options, employee stock purchase plan options and directors' fee
shares under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
Employee Stock Employee Stock Director
Options Purchase Plan Options Fee Plan
------------------------------- -------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------- --------- --------- ---------
Risk-free interest rates 4.90% 6.23% 6.40% 5.48% 5.58% 5.39% 5.52% 5.98% 5.33%
Volatility factors 1.86 1.28 0.49 1.86 1.28 0.49 1.86 1.28 0.49
Expected life of the option
in years 5.02 5.06 4.75 0.50 0.50 0.50 5.13 1.00 1.00
Expected dividend yield None None None None None None None None None
Page 43
For purposes of pro forma disclosures, the estimated fair value of the options
granted, which is estimated to be $1.86, $2.75 and $2.68 per share for 1998,
1997 and 1996, respectively, is amortized to expense over the options' vesting
period. During the phase in period of Statement 123, which has been applied only
for options granted after 1994, the effects of applying the Statement for
providing pro forma disclosure are not indicative of future amounts until the
new rules are applied to all outstanding nonvested awards. The Company's pro
forma information follows (in thousands, except per share data):
Year Ended December
-------------------------------------------------
1998 1997 1996
--------------- -------------- ----------------
Net income (loss) - as reported ($17,630) $11,500 ($1,101)
Net income (loss) - pro forma ($18,856) $10,144 ($1,582)
Diluted earnings (loss) per share - as reported ($2.46) $1.62 ($0.16)
Diluted earnings (loss) per share - pro forma ($2.64) $1.43 ($0.22)
A summary of the Company's stock option activity, and related information
follows:
December 31, 1998 December 25, 1997 December 26, 1996
--------------------------- -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------- -------------- -------------- -------------- -------------- --------------
Outstanding - beginning of year 917,000 $4.82 912,000 $5.22 859,125 $5.03
Granted 1,307,975 3.90 542,000 5.01 246,250 5.42
Exercised (55,000) 4.41 (168,125) 3.46 (81,500) 4.03
Expired or forfeited (920,225) 5.31 (368,875) 6.70 (111,875) 5.15
-------------- -------------- --------------
Outstanding - end of year 1,249,750 $3.51 917,000 $4.82 912,000 $5.22
============== ============== ==============
Exercisable at end of year 420,938 $3.86 433,313 $4.74 349,875 $4.13
Options granted and expired include options which were repriced during the year.
In August 1998, the Company cancelled and regranted at a lower exercise price
469,125 options, which included most options that had an exercise price greater
than $3.60 at that time. The exercise price of those options regranted was
$3.48. In addition, in May 1998, the Company cancelled and regranted 214,000
options granted to the CEO at the time of his hiring.
In May 1998, the shareholders approved an amendment to the Company's 1986 Stock
Option Plan whereby the number of shares of the Company's Common Stock reserved
for reissuance under the Plan was increased by 300,000 shares.
These shares were registered on June 3, 1998.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------ -----------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices 12/31/98 Life in Years Price 12/31/98 Price
----------------- ------------------ ------------------ ---------------- ------------------
$1.59 - $3.19 252,875 3.92 $2.23 106,125 $2.62
$3.48 - $3.48 660,000 4.98 3.48 51,688 3.48
$3.50 - $5.00 321,250 2.92 4.51 258,750 4.42
$5.18 - $5.19 15,625 5.36 5.19 4,375 5.19
----------------- ----------------
$1.59 - $5.19 1,249,750 4.24 $3.51 420,938 $3.86
================= ================
During the first quarter of 1998, the Company recorded a stock-based
compensation charge of $540,000 related to the modification of stock options of
a former CEO of the Company. Additionally, during the second quarter of 1998,
the Company recorded an additional charge of $43,000 related to stock option
modifications.
Page 44
NOTE 15 - INCOME TAXES
Components of income (loss) from continuing operations before taxes:
Year Ended December
-----------------------------------------------------
(in thousands) 1998 1997 1996
--------------- --------------- ----------------
U.S. operations ($16,750) $4,034 ($842)
Foreign operations (1,716) 528 970
--------------- --------------- ----------------
($18,466) $4,562 $128
=============== =============== ================
Income tax expense (benefit) consists of:
Current tax expense (benefit):
U.S. federal ($ 2,719) $ 506 $247
State 28 58 (11)
Foreign 58 71 14
--------------- ---------------- ----------------
(2,633) 635 250
Deferred tax expense (benefit) - U.S. federal 2,691 (459) (129)
--------------- --------------- ----------------
Total income tax expense $ 58 $ 176 $121
=============== =============== ================
For federal income tax purposes, a deduction is received for stock option compensation gains.
The benefit of this deduction, which is recorded in common stock, was $35,000, $158,000, and $98,000
in 1998, 1997 and 1996, respectively.
A reconciliation of the Company's effective income tax rate and the U.S. federal
tax rate is as follows:
Year Ended December
----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Statutory rate (34.0%) 35.0% 34.0%
Foreign Sales Corporation tax benefit (0.7) (3.6) (139.9)
State and foreign income tax, net of
federal income tax benefit 2.0 1.5 (57.8)
Valuation allowance for deferred tax assets 32.9 (26.0) 443.5
Other (0.5) (3.0) (185.3)
--------------- --------------- ----------------
(0.3%) 3.9% 94.5%
=============== =============== ================
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. 25,
1998 1997
--------------- ----------------
Deferred income tax assets:
Allowance for doubtful accounts $ 124 $ 113
Inventory and product return reserves 3,027 1,298
Compensation accruals 409 235
Accrued liabilities 1,949 1,308
Book-over-tax depreciation and amortization 621 157
Other, net 206 154
--------------- ----------------
6,336 3,265
Valuation allowance (5,945) (164)
--------------- ----------------
Total deferred income tax assets $ 391 $3,101
=============== ================
Balance sheet classification:
Current assets $ 331 $1,990
Noncurrent assets 60 1,111
--------------- ----------------
$ 391 $3,101
=============== ================
The valuation allowance for deferred tax assets increased $5,781,000 during the year ended
December 31, 1998, due primarily to the loss generated in 1998, and decreased $3,074,000 during
the year ended December 25, 1997, due primarily tothe taxable income generated in 1997.
The net deferred tax assets recorded were limited to the estimated carryback benefit available
from temporary differences at the time of their expected reversal while the remaining net
deferred tax assets have a full valuation allowance provided due to uncertainty regarding the
Company's ability to utilize such assets.
Page 45
NOTE 16 - SEGMENT AND GEOGRAPHIC INFORMATION
Prior to 1998, Data I/O Corporation and its subsidiaries operated within three
major divisions: (1) electronic programming systems used by customers to handle,
program, test and mark programmable ICs; (2) semiconductor equipment used to
handle, transport and mark integrated circuits (Reel-Tech); and (3) electronic
design automation software used to create designs for programmable ICs (Synario
Design Automation). The Reel-Tech and Synario Design Automation Divisions were
discontinued during 1997. See Note 4 - Discontinued Operations for further
discussion of these discontinued operations including results of these
operations and related balance sheet accounts.
No one customer accounted for more than 10% of the Company's revenues in 1998,
1997 and 1996. Major operations outside the U.S. include sales and service
support subsidiaries in Japan, Germany, Canada and, through the end of 1996, the
United Kingdom.
Geographic information of the continuing operations for the three years ended
December 31, 1998 is presented in the table that follows. Net sales, as shown in
the table below, are based upon the geographic area into which the products were
sold and delivered. As such, U.S. export sales of $14,905,000, $21,207,000 and
$20,214,000 in 1998, 1997 and 1996, respectively, have been excluded from U.S.
reported net sales. Transfers between geographic areas are made at prices
consistent with rules and regulations of governing tax authorities. The profit
on transfers between geographic areas is not recognized until sales are made to
non-affiliated customers. For purposes of the table below, the profit on the
transfers between geographic areas has been shown in operating income in the
geographic area where the final sale to non-affiliated customers took place.
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.
Year Ended December
------------------------------------------------------------------
(in thousands) 1998 1997 1996
--------------- -------------- ----------------
Net sales:
U.S. $16,900 $22,290 $23,554
Europe 9,533 11,548 12,963
Other 8,905 12,446 12,343
--------------- -------------- ----------------
$35,338 $46,284 $48,860
=============== ============== ================
Operating income (loss) from continuing operations:
U.S. ($14,839) ($ 219) ($ 2,254)
Europe (2,838) 1,323 1,279
Other (1,741) 701 1,162
--------------- -------------- ----------------
($19,418) $ 1,805 $ 187
=============== ============== ================
Identifiable assets of the continuing operations:
U.S. $31,097 $51,539 $26,039
Europe 5,702 2,737 2,852
Other 3,290 3,460 4,050
--------------- -------------- ----------------
$40,089 $57,736 $32,941
=============== ============== ================
Page 46
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth unaudited selected quarterly financial data for
the Company for 1998 and 1997. Although the Company's business is not seasonal,
growth rates of sales and earnings have varied from quarter to quarter as a
result of factors such as stocking orders from international distributors, the
timing of new product introductions, business acquisitions, and short-term
industry and general U.S. and international economic conditions. Information as
to any one or more quarters is, therefore, not necessarily indicative of trends
in the Company's business or profitability.
(in thousands except per share data) Year Ended December 1998
-----------------------------------------------------------------
For the quarters ended: Mar. 26 June 25 Sept. 24 (1) Dec. 31 (1)
------------- ------------- ------------- ------------
Net sales $8,426 $8,782 $8,028 $10,102
Gross margin 3,656 3,528 1,103 2,118
Loss from continuing operations (2,233) (2,625) (6,378) (7,288)
Income from discontinued operations 180 527 158 29
Net loss (2,053) (2,098) (6,220) (7,259)
Diluted loss per share from continuing
operations (4) ($0.32) ($0.36) ($0.89) ($1.01)
Diluted loss per share ($0.29) ($0.29) ($0.87) ($1.01)
(in thousands except per share data) Year Ended December 1997
-----------------------------------------------------------------
For the quarters ended: Mar. 27 June 26 (2) Sept. 25 Dec. 25 (3)
------------- ------------- ------------- -------------
Net sales $11,867 $11,398 $11,762 $11,257
Gross margin 5,958 5,596 6,320 5,662
Income from continuing operations 432 2,018 1,436 500
Gain (loss) from discontinued operations (384) (639) (452) 8,589
Net income 48 1,379 984 9,089
Diluted earnings per share from continuing
operations (4) $0.06 $0.29 $0.20 $0.07
Diluted earnings per share $0.01 $0.20 $0.14 $1.26
(1)During the third and fourth quarters of 1998, the Company recorded
restructuring charges of $2.0 million and $2.3 million, respectively. See
Note 2 - Provision for Business Restructuring. Related to the restructuring
activities, the Company also recorded inventory reserves during the third and
fourth quarters of $2.3 million and $2.3 million, respectively. These
inventory reserves are included in cost of goods sold.
(2)The Company completed the sale of its headquarters property resulting in a
$2.3 million pre-tax gain recognized during the second quarter of 1997.
(3)The Company disposed of its Semiconductor Equipment and Synario Design
Automation Divisions resulting in a gain from discontinued operations of $7.5
million net of tax during the fourth quarter of 1997.
(4)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.
Page 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the Registrant's directors is set forth under "Election of
Directors" in the Company's Proxy Statement relating to the Company's annual
meeting of shareholders to be held on May 11, 1999 and is incorporated herein by
reference. Such Proxy Statement will be filed within 120 days of the Company's
year end. Information regarding the Registrant's executive officers is set forth
in Item 1 of Part I herein under the caption "Executive Officers of the
Registrant."
Item 11. Executive Compensation
Information called for by Part III, Item 11, is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
May 11, 1999 and is incorporated herein by reference. The information appears in
the Proxy Statement under the caption "Executive Compensation." Such Proxy
Statement will be filed within 120 days of the Company's year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by Part III, Item 12, is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
May 11, 1999 and is incorporated herein by reference. The information appears in
the Proxy Statement under the caption "Voting Securities and Principal Holders."
Such Proxy Statement will be filed within 120 days of the Company's year end.
Item 13. Certain Relationships and Related Transactions
None.
Page 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Executive Compensation Plans and Arrangements
The following list is a subset of the list of exhibits described below and
contains all compensatory plans, contracts or arrangements in which any director
or executive officer of the Company is a participant, unless the method of
allocation of benefits thereunder is the same for management and non-management
participants:
(1) Amended and Restated 1982 Employee Stock Purchase Plan.
See Exhibit 10.9.
(2) Retirement Plan and Trust Agreement. See Exhibit 10.4, 10.5, 10.6,
10.15, 10.20, 10.21, and 10.22.
(3) 1985 Stock Option Plan. See Exhibit 10.1.
(4) 1984 FutureNet Employee Stock Option Plan. See Exhibit 10.2.
(5) Summary of Management Incentive Compensation Plan. See Exhibit 10.18.
(6) Amended and Restated 1983 Stock Appreciation Rights Plan.
See Exhibit 10.3.
(7) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.23.
(8) Form of Change in Control Agreements. See Exhibit 10.51.
(9) 1996 Director Fee Plan. See Exhibit 10.17 and 10.25.
(11) Letter Agreement with William J. Haydamack. See Exhibit 10.8.
(12) Agreement and General Release with William J. Haydamack.
See Exhibit 10.26.
(13) Separation Agreement with William C. Erxleben. See Exhibit 10.27.
(14) Consulting Agreement with William C. Erxleben. See Exhibit 10.28.
(15) Service Agreement with Helmut Adamski. See Exhibit 10.38.
(16) Employment Agreement with Helmut Adamski. See Exhibit 10.39.
(17) Letter Agreement with Jim Rounds. See Exhibit 10.41.
(18) Letter Agreement with David C. Bullis as amended and supplemented.
See Exhibit 10.42.
(a) List of Documents Filed as a Part of This Report: Page
(1) Index to Financial Statements:
Report of Ernst & Young LLP, Independent Auditors 29
Report of Management 29
Consolidated Balance Sheets as of December 31, 1998 and December 25, 1997 30
Consolidated Statements of Operations for each of the three years ended December 31, 1998 31
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1998 32
Page 49
Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 1998 33
Notes to Consolidated Financial Statements 34
(2) Index to Financial Statement Schedules:
Schedule II - Consolidated Valuation and Qualifying Accounts 55
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:
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1 Subsidiary Technology Purchase Agreement dated as of
November 19, 1998 between SMS-Mikrocomputer-Systeme GmbH
and Data I/O Corporation. 64
2.2 Excalibur Technology Purchase Agreement dated as of November 19,
1998 between SMS Holding GmbH and Data I/O Corporation. 70
2.3 Agreement Of Purchase And Transfer Of GmbH Shares dated as of
November 19, 1998 among Data I/O Corporation, Data I/O European
Operations GmbH and Shareholders of SMS Holding GmbH. 76
2.4 Amended and restated OEM Agreement dated December 16, 1998
between Data I/O Corporation and Unmanned Solutions, Inc. 103
2.5 Support Agreement dated December 16, 1998 between Data I/O
Corporation and Unmanned Solutions, Inc. 110
3 Articles of Incorporation:
3.1 The Company's restated Articles of Incorporation filed
November 2, 1987 (Incorporated by reference to Exhibit 3.1
of the Company's 1987 Annual
Report on Form 10-K (File No. 0-10394)). N/A
3.2 The Company's Bylaws as amended and restated as of February 7, 1999. 116
3.3 Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 1 of the Company's
Registration Statement on Form 8-A filed March 13, 1998
(File No. 0-10394)). N/A
4 Instruments Defining the Rights of Security Holders, Including Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between Data I/O Corporation
and ChaseMellon Shareholder Services, L.L.C. as Rights Agent, which
includes: as Exhibit A thereto, the Form of Right Certificate; and, as
Exhibit B thereto, the Summary of Rights to Purchase Series A Junior
Participating Preferred Stock (Incorporated by reference to the Company's
Current Report on Form 8-K filed on March 13, 1998). N/A
4.2 Rights Agreement, dated as of March 31, 1988, between Data
I/O Corporation and First Jersey National Bank, as Rights
Agent, as amended by Amendment No. 1 thereto, dated as of
Page 50
May 28, 1992 and Amendment No. 2 thereto, dated as of July
16, 1997 (Incorporated by reference to the Company's
current Report on Form 8-K filed on
March 13, 1998). N/A
4.3 Amendment No. 1, dated as of February 10, 1999, to Rights
Agreement, dated as of April 4, 1998, between Data I/O
Corporation and ChaseMellon Shareholder Services, L.L.C. as
Rights Agent (Incorporated by reference to Exhibit 4.1 of the
Company's Form 8-A/A dated February 10, 1999). N/A
10 Material Contracts:
10.1 1985 Stock Option Plan (Incorporated by reference to Exhibit 10.22 of the
Company's 1984 Annual Report on Form 10-K (File No. 0-10394)). N/A
10.2 1984 FutureNet Employee Stock Option Plan (Incorporated by
reference to Exhibit 10.23 of the Company's 1984 Annual
Report on Form 10-K (File No.
0-10394)). N/A
10.3 Amended and Restated 1983 Stock Appreciation Rights Plan
dated February 3, 1993 (Incorporated by reference to
Exhibit 10.23 of the
Company's 1992 Annual Report on Form 10-K (File No. 0-10394)). N/A
10.4 Amended and Restated Retirement Plan and Trust Agreement.
(Incorporated by reference to Exhibit 10.26 of the Company's 1993
Annual Report on Form 10K (File No. O-10394)). N/A
10.5 First Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.21 of the
Company's 1994
Annual Report on Form 10K (File No. 0-10394)). N/A
10.6 Second Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.26 of the
Company's 1995
Annual Report on Form 10K (File No. 0-10394)). N/A
10.7 Data I/O Corporation 1996 Director Fee Plan (Incorporated
by reference to Exhibit 10.27 of the Company's 1995 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.8 Letter Agreement with William J. Haydamack (Confidential
treatment has been requested for certain portions of this
exhibit) (Incorporated by reference to Exhibit 10.29 of
the Company's 1995 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.9 Data I/O Corporation 1982 Employee Stock Purchase Plan
Amended and Restated December 11, 1996 (Incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement of Form S-8
(File No. 333-20657, filed January 29, 1997)). N/A
10.10 Business Loan Agreement dated April 24, 1996, with Seattle
First National Bank for $8.0 million (Incorporated by
reference to Exhibit 10.30 of the Company's 1996 Annual
Report on Form 10K
(File No. 0-10394)). N/A
10.11 OEM Agreement between Synopsys, Inc. and Synario Design
Automation a Division of Data I/O Corporation. (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 10.31 of
the Company's 1996 Annual Report on Form 10K
(File No. 0-10394)). N/A
Page 51
10.12 Purchase and Sale Agreement dated as of July 9, 1996
(Relating to the sale of Data I/O Corporation's
headquarters property in Redmond, Washington consisting of
approximately 79 acres of land and an approximately 96,000
square foot building. (Portions of this exhibit have been
omitted pursuant to an application for an order granting
confidential treatment. The omitted portions have been
separately filed with the Commission) (Incorporated by
reference to Exhibit 10.32 of the Company's 1996 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.13 Letter dated as of December 20, 1996, First Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.33 of the
Company's 1996 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.14 Letter dated as of February 17, 1997, Second Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.34 of the
Company's 1996 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.15 Third Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.35 of the
Company's 1996 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.16 Asset Purchase Agreement, by and between Data I/O
Corporation, a Washington corporation, Reel-Tech Inc., a
Washington corporation, and General Scanning Inc., a
Massachusetts corporation, dated November 28, 1997
(Incorporated by reference to Exhibit 2.1 of
the Company's Form 8-K Report dated November 28, 1997). N/A
10.17 Master Agreement, by and between Data I/O Corporation, a
Washington corporation, Minc, Incorporated, a Colorado
corporation, and Minc Washington Corp., a Colorado
corporation, dated November 12, 1997 (Incorporated by
reference to Exhibit 2.1 of the Company's Form 8-K Report
dated November 12, 1997). N/A
10.18 Amended and Restated Management Incentive Compensation
Plan dated January 1, 1997 (Incorporated by reference to
Exhibit 10.25 of the Company's 1997 Annual Report on
Form 10K (File No. 0-10394). N/A
10.19 Amended and Restated Performance Bonus Plan dated January
1, 1997 (Incorporated by reference to Exhibit 10.26 of the
Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
10.20 Fourth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.27 of the
Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
10.21 Fifth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.28 of the
Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
Page 52
10.22 Sixth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.29 of the
Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
10.23 Amended and Restated 1986 Stock Option Plan dated May 13,
1997 (Incorporated by reference to Exhibit 10.30 of the
Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
10.24 Amendment, dated May 13, 1997, to the business loan
agreement dated April 24, 1996, with Seattle First
National Bank (Incorporated by reference to Exhibit 10.31
of the Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
10.25 Amended and Restated Data I/O Corporation 1996 Director
Fee Plan (Incorporated by reference to Exhibit 10.32 of
the Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
10.26 Agreement and General Release with William J. Haydamack
(Incorporated by reference to Exhibit 10.32 of the
Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
10.27 Separation Agreement with William C. Erxleben
(Incorporated by reference to Exhibit 10.33 of the
Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
10.28 Consulting Agreement with William C. Erxleben
(Incorporated by reference to Exhibit 10.35 of the
Company's 1997 Annual Report on Form 10K
(File No. 0-10394). N/A
10.29 First Amendment to the Asset Purchase Agreement dated as
of August 31, 1995, among Reel-Tech, Inc., an Indiana
corporation, Norris R. Hall, Douglas R. Hall, and
Reel-Tech, Inc., a Washington corporation, a wholly owned
subsidiary of Data I/O Corporation (Incorporated by
reference to Exhibit 10.36 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394). N/A
10.30 Second Amendment to the Asset Purchase Agreement dated as
of August 31, 1995, among Reel-Tech, Inc., an Indiana
corporation, Norris R. Hall, Douglas R. Hall, and
Reel-Tech, Inc., a Washington corporation, a wholly owned
subsidiary of Data I/O Corporation (Incorporated by
reference to Exhibit 10.37 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394). N/A
10.31 Third Amendment to the Asset Purchase Agreement dated as
of August 31, 1995, among Reel-Tech, Inc., an Indiana
corporation, Norris R. Hall, Douglas R. Hall, and
Reel-Tech, Inc., a Washington corporation, a wholly owned
subsidiary of Data I/O Corporation (Incorporated by
reference to Exhibit 10.38 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394). N/A
10.32 Fourth Amendment to the Asset Purchase Agreement dated as
of August 31, 1995, among Reel-Tech, Inc., an Indiana
corporation, Norris R. Hall, Douglas R. Hall, and
Reel-Tech, Inc., a Washington corporation, a wholly owned
subsidiary of Data I/O Corporation (Incorporated by
reference to Exhibit 10.39 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394). N/A
Page 53
10.33 Standstill Agreement, dated as of February 10, 1999, among
Data I/O Corporation, Bisco Industries, Inc., Bisco
Industries, Inc. Profit Sharing and Savings Plan, and Glen
F. Ceiley (Incorporated by reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K dated
February 12, 1999). N/A
10.34 Shareholders Agreement dated April 15, 1998 among JTAG
Technologies B.V., Data I/O Corporation, Harry Bleeker and
Peter Van Den Eijnden (Incorporated by reference to
Exhibit 2.1 of the Company's quarterly report on
Form 10Q/A dated February 16, 1999). N/A
10.35 Amendment, dated December 31, 1998, to the business loan
agreement and promissory note dated April 24, 1996, with
Seattle First National Bank. 131
10.36 Security Agreement dated December 31, 1998, related to the
business loan agreement dated April 24, 1996 and amended
December 31, 1998, with Seattle First National Bank. 133
10.37 Amended and Restated 1986 Stock Option Plan dated
May 12, 1998. 138
10.38 Service Agreement dated November 19, 1998 between SMS Holding
GmbH and Helmut Adamski. 148
10.39 Employment Agreement dated November 19, 1998 between SMS Holding
GmbH and Helmut Adamski. 154
10.40 Lease Agreement between Dipl. Ing. Hans Walter Ott GmbH and SMS
Holding GmbH. 161
10.41 Letter Agreement with Jim Rounds dated August 7, 1998. 171
10.42 Letter Agreement with David C. Bullis dated March 25, 1998
amended and supplemented by the letter agreement dated
August 19, 1998. 172
21 Subsidiaries of the Registrant 56
23 Consent of Ernst & Young LLP, Independent Auditors 57
(b) Form 8-K:
A report on Form 8-K dated February 12, 1999 was filed relating to a press
release that the Company issued reporting, among other things, that (1) on
February 10, 1999 the Company entered into a Standstill Agreement with Bisco
Industries, Inc., Bisco Industries, Inc. Profit Sharing and Savings Plan and
Glen F. Ceiley (the "Bisco Parties"); (2) Mr. Ceiley has been added to the Board
of Directors of Data I/O; and (3) the Bisco Parties will be permitted to
increase their ownership of Data I/O's Common Stock from approximately 14% to up
to 19.99% pursuant to an amendment to the Company's Shareholder Rights Plan, a
copy of which amendment has been filed with the Securities and Exchange
Commission.
A report on Form 8-K dated February 8, 1999 was filed related to the selection
of Fred R. Hume as President and Chief Executive Officer as of February 23,
1999, and his addition to the Board of Directors effective January 29, 1999.
A report on Form 8-K dated December 4, 1998 was filed relating to a press
release announcing the Company's completion of its acquisition of SMS, the
leading European-based programming equipment company.
Page 54
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 26, 1996:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $ 311 $ 101 ($ 50) (1) $ 362
Inventory reserves $1,421 $ 998 ($148) (2) $2,271
Year Ended December 25, 1997:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $ 362 $ 53 ($ 21) (1) $ 394
Inventory reserves $2,271 ($ 225) ($398) (2) $1,648
Year Ended December 31, 1998:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $ 394 $ 94 ($ 43) (1) $ 445
Inventory reserves $1,648 $4,529 (3) ($209) (2) $5,968
(1) Uncollectable accounts written off, net of recoveries.
(2) Obsolete inventories disposed of.
(3) Primarily related to products which will be discontinued as a result of the
business restructuring implemented in 1998.
Page 55
EXHIBIT 21
DATA I/O CORPORATION
SUBSIDIARIES OF THE REGISTRANT
The following table indicates the name, jurisdiction of incorporation and basis
of ownership of each of the Company's subsidiaries:
State or Percentage
Jurisdiction of Voting
of Securities
Name of Subsidiary Organization Owned
------------------ ------------ ----------
Data I/O International, Inc. Washington 100%
Data I/O European Operations GmbH Germany 100%
Data I/O FSC International, Inc. Territory of Guam 100%
Data I/O Canada Corporation Canada 100%
Data I/O GmbH Germany 100%
Reel-Tech, Inc. Washington 100%
Reel-Tech Singapore Pte, Ltd. Singapore 100%
SMS Holding GmbH Germany 100%
SMS Mikrokomputer-Systeme GmbH Germany 100%
Page 56
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Stockholders
Data I/O Corporation
We consent to the incorporation by reference in the: (a) Registration
Statements (Form S-8 No. 333-20657 and No. No. 33-66824) pertaining to the
Company's 1982 Employee Stock Purchase Plan and Director Fee Plan, (b)
Registration Statements (Form S-8 No. 33-95608, No. 33-54422, and No. 333-55911)
pertaining to the Company's 1986 Stock Option Plan, (c) Registration Statement
(Form S-8 No. 33-03958) pertaining to the Company's 1985 Stock Option Plan, and
(d) Registration Statement (Form S-8 No. 33-02254) pertaining to the Company's
1984 FutureNet Employee Stock Option Plan, of our report dated February 8, 1999,
with respect to the consolidated financial statements and schedule of Data I/O
Corporation included in its Annual Report (Form 10-K) for the year ended
December 31, 1998.
//S//ERNST & YOUNG LLP
ERNST & YOUNG LLP
Seattle, Washington
March 29, 1999
Page 57
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 29, 1999 By: //S//Frederick R. Hume
------------------------
Frederick R. Hume
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 29, 1999 by the following persons on behalf of
the Registrant and in the capacities indicated.
NAME TITLE
By: //S//Frederick R. Hume President and Chief Executive Officer
Frederick R. Hume (Principal Executive Officer)
By: //S//Joel S. Hatlen Chief Financial Officer
Joel S. Hatlen Vice President of Finance
Secretary, Treasurer
(Principal Financial and Accounting Officer)
By: //S//Keith L. Barnes Director
Keith L. Barnes
By: //S//David C. Bullis Director
David C. Bullis
By: //S//Glen F. Ceiley Director
Glen F. Ceiley
By: //S//Paul A. Gary Director
Paul A. Gary
By: //S//Edward D. Lazowska Director
Edward D. Lazowska
Page 58
EXHIBITS INDEX
Exhibit Number Title Page Number
- -------------------- ---------------------------------------------------------------------------- -----------------
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1 Subsidiary Technology Purchase Agreement dated as of
November 19, 1998 between SMS-Mikrocomputer-Systeme GmbH
and Data I/O Corporation 64
2.2 Excalibur Technology Purchase Agreement dated as of November 19,
1998 between SMS Holding GmbH and Data I/O Corporation 70
2.3 Agreement Of Purchase And Transfer Of GmbH Shares dated as of
November 19, 1998 among Data I/O Corporation, Data I/O European
Operations GmbH and Shareholders of SMS Holding GmbH 76
2.4 Amended and restated OEM Agreement dated December 16, 1998
between Data I/O Corporation and Unmanned Solutions, Inc. 103
2.5 Support Agreement dated December 16, 1998 between Data I/O
Corporation and Unmanned Solutions, Inc. 110
3 Articles of Incorporation:
3.1 The Company's restated Articles of Incorporation filed
November 2, 1987 (Incorporated by reference to Exhibit 3.1
of the Company's 1987 Annual Report on Form 10-K (File No. 0-10394)). N/A
3.2 The Company's Bylaws as amended and restated as of February 7, 1999. 116
3.3 Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 1 of the Company's
Registration Statement on Form 8-A filed March 13, 1998
(File No. 0-10394)). N/A
4 Instruments Defining the Rights of Security Holders, Including Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between Data I/O Corporation
and ChaseMellon Shareholder Services, L.L.C. as Rights Agent, which
includes: as Exhibit A thereto, the Form of Right Certificate; and, as
Exhibit B thereto, the Summary of Rights to Purchase Series A Junior
Participating Preferred Stock (Incorporated by reference to the Company's
Current Report on Form 8-K filed on March 13, 1998). N/A
4.2 Rights Agreement, dated as of March 31, 1988, between Data
I/O Corporation and First Jersey National Bank, as Rights
Agent, as amended by Amendment No. 1 thereto, dated as of
May 28, 1992 and Amendment No. 2 thereto, dated as of July
16, 1997 (Incorporated by reference to the Company's
current Report on Form 8-K filed on March 13, 1998). N/A
4.3 Amendment No. 1, dated as of February 10, 1999, to Rights
Agreement, dated as of April 4, 1998, between Data I/O
Corporation and ChaseMellon Shareholder Services, L.L.C. as
Rights Agent (Incorporated by reference to Exhibit 4.1 of the
Company's Form 8-A/A dated February 10, 1999). N/A
Page 59
10 Material Contracts:
10.1 1985 Stock Option Plan (Incorporated by reference to Exhibit 10.22 of the
Company's 1984 Annual Report on Form 10-K (File No. 0-10394)). N/A
10.2 1984 FutureNet Employee Stock Option Plan (Incorporated by
reference to Exhibit 10.23 of the Company's 1984 Annual
Report on Form 10-K (File No. 0-10394)). N/A
10.3 Amended and Restated 1983 Stock Appreciation Rights Plan
dated February 3, 1993 (Incorporated by reference to
Exhibit 10.23 of the Company's 1992 Annual Report on Form 10-K
(File No. 0-10394)). N/A
10.4 Amended and Restated Retirement Plan and Trust Agreement.
(Incorporated by reference to Exhibit 10.26 of the Company's 1993
Annual Report on Form 10K (File No. O-10394)). N/A
10.5 First Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.21 of the
Company's 1994 Annual Report on Form 10K (File No. 0-10394)). N/A
10.6 Second Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.26 of the
Company's 1995 Annual Report on Form 10K (File No. 0-10394)). N/A
10.7 Data I/O Corporation 1996 Director Fee Plan (Incorporated
by reference to Exhibit 10.27 of the Company's 1995 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.8 Letter Agreement with William J. Haydamack (Confidential
treatment has been requested for certain portions of this
exhibit) (Incorporated by reference to Exhibit 10.29 of
the Company's 1995 Annual Report on Form 10K (File No. 0-10394)). N/A
10.9 Data I/O Corporation 1982 Employee Stock Purchase Plan
Amended and Restated December 11, 1996 (Incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement of Form S-8 (File No. 333-20657, filed January 29, 1997)). N/A
10.10 Business Loan Agreement dated April 24, 1996, with Seattle
First National Bank for $8.0 million (Incorporated by
reference to Exhibit 10.30 of the Company's 1996 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.11 OEM Agreement between Synopsys, Inc. and Synario Design
Automation a Division of Data I/O Corporation. (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 10.31 of
the Company's 1996 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.12 Purchase and Sale Agreement dated as of July 9, 1996
(Relating to the sale of Data I/O Corporation's
headquarters property in Redmond, Washington consisting of
approximately 79 acres of land and an approximately 96,000
square foot building. (Portions of this exhibit have been
omitted pursuant to an application for an order granting
confidential treatment. The omitted portions have been
separately filed with the Commission) (Incorporated by
reference to Exhibit 10.32 of the Company's 1996 Annual
Report on Form 10K (File No. 0-10394)). N/A
Page 60
10.13 Letter dated as of December 20, 1996, First Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.33 of the
Company's 1996 Annual Report on Form 10K (File No.
0-10394)). N/A
10.14 Letter dated as of February 17, 1997, Second Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.34 of the
Company's 1996 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.15 Third Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.35 of the
Company's 1996 Annual Report on Form 10K (File No. 0-10394)). N/A
10.16 Asset Purchase Agreement, by and between Data I/O
Corporation, a Washington corporation, Reel-Tech Inc., a
Washington corporation, and General Scanning Inc., a
Massachusetts corporation, dated November 28, 1997
(Incorporated by reference to Exhibit 2.1 of
the Company's Form 8-K Report dated November 28, 1997). N/A
10.17 Master Agreement, by and between Data I/O Corporation, a
Washington corporation, Minc, Incorporated, a Colorado
corporation, and Minc Washington Corp., a Colorado
corporation, dated November 12, 1997 (Incorporated by
reference to Exhibit 2.1 of the Company's Form 8-K Report dated
November 12, 1997). N/A
10.18 Amended and Restated Management Incentive Compensation
Plan dated January 1, 1997 (Incorporated by reference to
Exhibit 10.25 of the Company's 1997 Annual Report on
Form 10K (File No. 0-10394). N/A
10.19 Amended and Restated Performance Bonus Plan dated January
1, 1997 (Incorporated by reference to Exhibit 10.26 of the
Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
10.20 Fourth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.27 of the
Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
10.21 Fifth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.28 of the
Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
10.22 Sixth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.29 of the
Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
Page 61
10.23 Amended and Restated 1986 Stock Option Plan dated May 13,
1997 (Incorporated by reference to Exhibit 10.30 of the
Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
10.24 Amendment, dated May 13, 1997, to the business loan
agreement dated April 24, 1996, with Seattle First
National Bank (Incorporated by reference to Exhibit 10.31
of the Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
10.25 Amended and Restated Data I/O Corporation 1996 Director
Fee Plan (Incorporated by reference to Exhibit 10.32 of
the Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
10.26 Agreement and General Release with William J. Haydamack
(Incorporated by reference to Exhibit 10.32 of the
Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
10.27 Separation Agreement with William C. Erxleben
(Incorporated by reference to Exhibit 10.33 of the
Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
10.28 Consulting Agreement with William C. Erxleben
(Incorporated by reference to Exhibit 10.35 of the
Company's 1997 Annual Report on Form 10K (File No. 0-10394). N/A
10.29 First Amendment to the Asset Purchase Agreement dated as
of August 31, 1995, among Reel-Tech, Inc., an Indiana
corporation, Norris R. Hall, Douglas R. Hall, and
Reel-Tech, Inc., a Washington corporation, a wholly owned
subsidiary of Data I/O Corporation (Incorporated by
reference to Exhibit 10.36 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394). N/A
10.30 Second Amendment to the Asset Purchase Agreement dated as
of August 31, 1995, among Reel-Tech, Inc., an Indiana
corporation, Norris R. Hall, Douglas R. Hall, and
Reel-Tech, Inc., a Washington corporation, a wholly owned
subsidiary of Data I/O Corporation (Incorporated by
reference to Exhibit 10.37 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394). N/A
10.31 Third Amendment to the Asset Purchase Agreement dated as
of August 31, 1995, among Reel-Tech, Inc., an Indiana
corporation, Norris R. Hall, Douglas R. Hall, and
Reel-Tech, Inc., a Washington corporation, a wholly owned
subsidiary of Data I/O Corporation (Incorporated by
reference to Exhibit 10.38 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394). N/A
Page 62
10.32 Fourth Amendment to the Asset Purchase Agreement dated as
of August 31, 1995, among Reel-Tech, Inc., an Indiana
corporation, Norris R. Hall, Douglas R. Hall, and
Reel-Tech, Inc., a Washington corporation, a wholly owned
subsidiary of Data I/O Corporation (Incorporated by
reference to Exhibit 10.39 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394). N/A
10.33 Standstill Agreement, dated as of February 10, 1999, among
Data I/O Corporation, Bisco Industries, Inc., Bisco
Industries, Inc. Profit Sharing and Savings Plan, and Glen
F. Ceiley (Incorporated by reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K dated February 12, 1999). N/A
10.34 Shareholders Agreement dated April 15, 1998 among JTAG
Technologies B.V., Data I/O Corporation, Harry Bleeker and
Peter Van Den Eijnden (Incorporated by reference to
Exhibit 2.1 of the Company's quarterly report on Form 10Q/A
dated February 16, 1999). N/A
10.35 Amendment, dated December 31, 1998, to the business loan
agreement dated April 24, 1996, with Seattle First National Bank. 131
10.36 Security Agreement dated December 31, 1998, related to the
business loan agreement dated April 24, 1996 and amended
December 31, 1998, with Seattle First National Bank. 133
10.37 Amended and Restated 1986 Stock Option Plan dated May 12, 1998. 138
10.38 Service Agreement dated November 19, 1998 between SMS Holding
GmbH and Helmut Adamski. 148
10.39 Employment Agreement dated November 19, 1998 between SMS Holding
GmbH and Helmut Adamski. 154
10.40 Lease Agreement between Dipl. Ing. Hans Walter Ott GmbH and SMS
Holding GmbH. 161
10.41 Letter Agreement with Jim Rounds dated August 7, 1998. 171
10.42 Letter Agreement with David C. Bullis dated March 25, 1998
amended and supplemented by the letter agreement dated
August 19, 1998. 172
Page 63