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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 28, 1995 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:
Title of each class Name of each exchange on
which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (No Par)
Series A Junior Participating Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held
by non-affiliates of the registrant as of March 1, 1996
$51,515,716
7,105,616 shares of no par value Common Stock outstanding as of March 1, 1996
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Proxy Statement relating to its May 14,
1996, Annual Meeting of Stockholders are incorporated into Part III of
this annual report on Form 10-K.
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Page 1 of 113
Exhibit Index on Page 58
DATA I/O CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1995
INDEX
Part I PAGE
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Item 1. Business 3
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Stockholders 20
Part II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters 21
Item 6. Selected Five-Year Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 47
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 57
Exhibits Index 58
Page 2
PART I
ITEM 1. BUSINESS
GENERAL
Data I/O-C- Corporation ("Data I/O" or the "Company") was incorporated in the
State of Washington in 1969. The Company manufactures hardware and software
products for semiconductor manufacturers and users of programmable integrated
circuits ("IC" or "ICs"). Within this one predominant business segment, the
Company offers three major product groups: (1) programming systems used by
customers to handle, program, test and mark programmable ICs; (2) semiconductor
equipment used to handle, transport and mark integrated circuits; and (3)
Electronic Design Automation ("EDA") software used to create designs for
programmable ICs. These three product groups are organized respectively under
the Company's three divisions: (1) Programming Systems, (2) Semiconductor
Equipment, and (3) Synario-Registered Mark- Design Automation-TM-.
The Company is the world's leading provider of programming systems for
programmable ICs. It markets products to more than 15,000 customers worldwide
in a broad range of industries including computers, communications, test and
measurement, medical, consumer electronics, military, transportation, aerospace
and semiconductors. All of these customers either manufacture ICs or design or
manufacture products which incorporate programmable ICs.
FORWARD-LOOKING STATEMENTS
Although most of the information contained in this report is historical, certain
of the statements contain forward-looking information. To the extent these
statements involve, without limitation, product development and introduction
plans, the Company's expectations for growth, estimates of future revenue,
expenses, profit, cash flow, balance sheet items, sell-through or backlog,
forecasts of demand or market trends for the Company's various product
categories and for the industries in which the Company operates or any other
guidance on future periods, these statements are forward-looking and involve
matters which are subject to a number of risks and uncertainties that could
cause actual results to differ materially from those expressed in such forward-
looking statements. Readers of this report should consider, along with other
relevant information, the risk factors identified by the Company under the
caption "Risk Factors" in Item 1 and elsewhere in this report, and other risks
identified from time to time in the Company's filings with the Securities and
Exchange Commission, press releases and other communications.
INDUSTRY OVERVIEW
GLOSSARY OF TERMS
Throughout this document industry-specific terminology and acronyms are used to
facilitate the reader's understanding of the industries in which the Company
operates. Below certain terms and acronyms are defined for the benefit of the
reader.
IC INTEGRATED CIRCUITS produced by semiconductor manufacturers
including those which are programmable and those which are
supplied by the manufacturer with a predetermined fixed
function.
PLD A PROGRAMMABLE LOGIC DEVICE is a programmable logic IC that
can be configured or programmed by a system designer.
CPLD A COMPLEX PROGRAMMABLE LOGIC DEVICE is a programmable logic IC
that contains multiple programmable logic cells and a
programmable interconnect structure between the cells.
FPGA A FIELD PROGRAMMABLE GATE ARRAY is a sophisticated high-
capacity PLD.
PROM A PROGRAMMABLE READ ONLY MEMORY is a programmable memory IC
that is a non-volatile data storage IC meaning it can retain
data when the power is shut off.
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EPROM An ERASABLE PROM is a programmable memory IC, which can be
erased and reused.
EEPROM An ELECTRICALLY ERASABLE PROM is a programmable memory IC that
can be electronically erased and reused.
Micro- A microcontroller is an IC that is a processor containing
controller programmable memory within the IC.
Device Refers to any of the various ICs referred to herein.
Package Package refers to the physical shape, size and number and
arrangement of pins of an IC.
Pins Pins are the leads from the IC that connect the IC to the
circuitry on the printed circuit board.
PCB PRINTED CIRCUIT BOARDS are the boards on which ICs and other
electronic components are mounted in electronic products.
Conventional An IC package where the pins are inserted through holes
Throughhole IC drilled in a PCB. An example is a DIP (dual in line
pin)package.
Surface- An IC package where the pins from the IC connect to
Mount IC (plastic leaded chip carrier), SOIC (small outlines IC) and
TSOP (thin small outline package).
PROGRAMMABLE INTEGRATED CIRCUITS AND PROGRAMMING SYSTEMS
During the last 20 years, the semiconductor industry developed processes which
continually increased the number of functions and memory on a single chip of
silicon. These chips, called integrated circuits, are a tiny complex of
electronic components and connections which come in two types: fixed or
programmable. The fixed type have a specific design incorporated during the
manufacture of the circuit that cannot be changed. This type can only perform
its specific predetermined fixed function.
A programmable IC is manufactured without a specific function incorporated into
it and allows the electronics design engineer to specify how it is to perform.
Programmable ICs are analogous to a blank cassette tape in that the programmable
IC can record and store a set of instructions similar to the way a blank
cassette tape can record and store music. Programmable ICs consist of either
memory or logic circuits. Programmable memory ICs are for non-volatile data
storage, meaning they retain data when the power supply to the circuit is off.
Memory ICs include PROMs, EPROMs and EEPROMs. Programmable logic ICs contain
logic elements by which the entire function of the IC can be changed by
programming changes to these elements. This means a given programmable logic IC
can perform a variety of functions in an electronic design. Types of
programmable logic ICs include PLDs, CPLDs and FPGAs.
Today, some combination of programmable memory and logic ICs are found in
virtually all electronic equipment. Programmable memory ICs are used most
extensively for the permanent storage of software programs in instruments,
control systems, consumer electronic equipment, computers and computer
peripherals. Most microprocessor and microcomputer-based systems use some form
of programmable memory IC. These systems are increasingly using programmable
logic ICs as well. Programmable logic ICs and, specifically FPGAs, are one of
the fastest growing categories of ICs in the semiconductor industry, according
to industry sources.
Programmable memory and logic ICs are housed in several different types of
packages with a wide variety of sizes, shapes and number and arrangement of pins
to connect the IC to the circuit board. These numerous packages are combined
into two distinct groups: conventional throughhole and surface-mount.
Conventional throughhole ICs have pins which are inserted through holes in a
circuit board and are soldered to the bottom of the board. Surface-mount ICs
are very small and delicate packages that can be mounted onto the surface of a
circuit board without drilling holes through the circuit board for the IC pins.
This allows ICs to be mounted to both sides of the board, doubling the board's
"real estate" for ICs and circuitry.
The development of programmable ICs created the need for programming equipment
to load the instructions into the physical IC. To accommodate the expanding
variety of programmable ICs, programming equipment must have the capability to
program the type of IC technology (how it physically accepts the information),
the specific IC's set of features and functions,
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while also accommodating the IC's package type, including its specific size, pin
arrangement and number of pins. Data I/O's programming equipment supports the
vast majority of the thousands of different programmable ICs presently on the
market. Additionally, as the number of programmable IC types and their
applications expanded, and as programmable ICs became increasingly miniaturized,
the demand for automated methods of handling, programming, and marking of
programmable ICs increased. These programmable ICs are increasingly being used
in high-volume manufacturing situations as the cost of programmable ICs has
declined relative to fixed ICs and the competitive environment has caused the
time-to-market to be increasingly critical. The ability of manufacturers to
shorten their product's time-to-market is improved with programmable ICs, as
once the design for the programmable IC is finished it can be programmed
immediately into the programmable IC and changes can be readily made. This
avoids the expensive and time consuming process of setting up and fabricating
the fixed type of ICs where any changes require that the process be restarted.
Data I/O's automated programming and handling systems allow manufacturers to
program numerous types of programmable ICs in a variety of packages in very high
volumes.
SEMICONDUCTOR EQUIPMENT
IC manufacturers have responded to the market demand for more powerful ICs and
increased miniaturization by producing smaller devices with an increased number
of more delicate pins. This trend has increased the need for automated
equipment used to handle these smaller, more delicate device packages during the
IC manufacturing process as well as after the ICs are completed and sold to
electronic equipment manufacturers. Such automated handling equipment is
critical for minimizing damage of the delicate pins of the ICs and increases the
speed of transferring ICs into and out of the protective media used for
transporting ICs (tubes, trays, and tape and reel).
ELECTRONIC DESIGN AUTOMATION ("EDA") SOFTWARE TOOLS
The evolution of programmable logic IC technology enabled engineers to fit an
increasing number of large, complex functions into a single programmable IC.
This higher level of integration reduced the size and cost, and increased the
quality and reliability, of the electronic systems using these programmable
ICs. With the adoption rate and complexity of programmable logic ICs growing
rapidly, design engineers need software tools to speed up and lower the cost of
the design process. EDA tools span the entire electronic design process from
initial design through final test simulation. Data I/O's EDA software tools
allow the design engineer to describe their design's behavior using concise,
easy-to-understand expressions. The software then "prepares" the design for
implementation in a particular programmable IC and stores the design in a
standard format that can be used by a programmer. The programmer records the
design into the programmable IC, and the programmed IC can then be used in the
particular product or system for which it was designed.
PRODUCTS
The table below details the contribution the Company's three principal divisions
made to total net sales for the last three fiscal years (in thousands of
Dollars):
PROGRAMMING SYSTEMS SEMICONDUCTOR EQUIPMENT SYNARIO DESIGN AUTOMATION
DIVISION (1) DIVISION (2) DIVISION (1) TOTAL SALES
-------------------------- -------------------------- -------------------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
YEAR AMOUNT GROWTH OF TOTAL AMOUNT GROWTH OF TOTAL AMOUNT GROWTH OF TOTAL AMOUNT GROWTH
- ---- ------ ------ -------- ------ ------ -------- ------ ------- -------- ------ -------
1995 $61,005 4.6% 92.4% $625 N/A 0.9% $4,401 40.0% 6.7% $66,031 7.4%
1994 58,335 (6.3%) 94.9% N/A N/A N/A 3,143 235.1% 5.1% 61,478 (2.7%)
1993 62,248 (10.2%) 98.5% N/A N/A N/A 938 N/A 1.5% 63,186 (8.9%)
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(1) Prior year's figures have been restated for comparability.
(2) The purchase of the assets of Reel-Tech-TM-, Inc. in August 1995 added
semiconductor equipment to the Company's existing product lines.
PROGRAMMING SYSTEMS
Data I/O's broad line of programming systems includes a wide variety of systems,
modules and accessories, which can be grouped into three general categories:
non-automated programming systems, non-automated parallel programming systems,
Page 5
and automated programming and handling systems. Its non-automated programming
systems are single IC programmers. Its non-automated parallel programming
systems program multiple ICs at the same time, providing higher throughput. Its
automated programming and handling systems program ICs, and also handle, test
and mark the ICs in high volumes. With this broad range of capabilities,
Data I/O's systems can program more than 6,000 programmable ICs, which is the
vast majority of the different types of programmable ICs currently on the market
for both engineering (prototyping) and manufacturing applications.
Because semiconductor manufacturers continually develop new programmable ICs,
the Company continually updates its programming systems line to provide support
for the newest programmable ICs. In addition to incorporating new programmable
IC support into the latest versions of its products, the Company packages and
sells programmable IC support updates to allow customers to keep their existing
products current.
Data I/O works closely with all major semiconductor manufacturers of
programmable ICs to ensure that the Company's programming systems use
programming methodology that complies with the manufacturers' specifications.
Many of these manufacturers perform some testing of Data I/O programming systems
and issue a letter of certification indicating that the Data I/O programming
system is able to program their programmable IC. In addition, many
semiconductor manufacturers endorse Data I/O programming systems as equipment
they recommend for end-user applications as well as for use in their own
development and production environments. These relationships enable Data I/O to
keep its product line up-to-date with the latest technology and to provide
end-users with broad and current programmable IC support.
NON-AUTOMATED PROGRAMMING SYSTEMS
The UniSite-TM- Universal Programmer, introduced in July 1986, is the Company's
top-of-the-line non-automated programming system. The UniSite, based on
Data I/O's proprietary pin-driver technology, allows any pin of any
programmable IC to perform any programming function. This gives the
programming system its universality, allowing programming of each programmable
IC according to its unique specifications. In 1990, the Company enhanced the
UniSite by adding its proprietary universal socketing technology, which permits
the programming of the programmable ICs in small and delicate surface-mount
packages. This socketing technology significantly reduces the need for costly
and less-efficient adapters for every different type of programmable IC, and
at the same time, reduces costly programming errors and IC damage.
The 2900 and 3900 Programming Systems, introduced in April 1990 and October
1991, respectively, use the same operating system as the UniSite and incorporate
the Company's proprietary universal socketing technology. Both can program the
most complex programmable ICs. The 2900 is a highly-advanced mid-priced
programming system that can program and test programmable memory and logic ICs
with up to 44 pins. The 3900 programs ICs with as many as 88 pins and provides
added capability at a price between the mid-priced 2900 and the top-of-the-line
UniSite. The introductions of the 2900 and 3900 represented the first two steps
of the Company's strategy of broadening its product line to provide engineering
and manufacturing solutions at a variety of price points.
The third step in broadening the product line was the ChipLab-Registered
MarkC- Project Programmer, introduced in August 1993. ChipLab is a
programming system designed and priced for individual engineers purchasing a
programmer for a specific project. This contrasts with the 2900/3900 and
UniSite which are intended for groups or departments. ChipLab runs directly
from an engineer's personal computer as a peripheral, and is designed to be
intuitive and easy to use.
In 1995 the Company introduced the 2700 Programming System which was designed
specifically for smaller engineering facilities. The 2700 is a lower-priced
member of the 2900/3900 product family using the same proprietary universal
socketing technology. Unlike the 2900 and 3900, but like the ChipLab, the 2700
runs directly from an engineer's personal computer as a peripheral. The 2700
also features a user-friendly graphical Windows-Registered Trademark--based
interface for fast device selection and programming.
The UniSite, 3900, 2900, 2700 and ChipLab share a similar software architecture
and are supported by Data I/O's proprietary algorithm development tool. This
tool, licensed by Data I/O to leading semiconductor manufacturers, allows
Data I/O and the manufacturers to work together efficiently and effectively to
develop support for new programmable ICs as quickly as possible. The
semiconductor manufacturers use this tool to develop programming instructions
for Data I/O programmers, enhancing both the time-to-market of their
programmable ICs, and Data I/O's support and enhancement efforts.
Page 6
NON-AUTOMATED PARALLEL PROGRAMMING SYSTEMS
Data I/O's PSX1000-TM- and PSX500-TM- non-automated parallel programming systems
were introduced in 1992 to serve the needs of mid- and high-volume manufacturing
users of programmable memory and microcontroller ICs. The PSX1000 and PSX500
can duplicate twenty or ten programmable ICs at a time, respectively, and
support numerous package types using Data I/O's proprietary socketing technology
of low-cost interchangeable modules. A large number of the major electronic
manufacturers and semiconductor manufacturers, who develop programmable memory
or microcontrollers, use this product line because of its durability and high
throughput.
The PSX400-TM- introduced in December 1994 is the Company's low-cost
non-automated parallel programming system able to program eight ICs at a time.
This product replaced the 288A Multi Programmer. The PSX400 addresses
low-volume manufacturing and engineering applications in which designers use
several ICs on a single board and want to program them all in a single
operation.
The BoardSite-Registered Mark- In-Circuit Programmer, introduced in November
1988, is a unique product that is designed to program or reprogram an entire
circuit board full of programmable ICs while they are mounted on the board.
This allows circuitry to be updated in the field, and also provides an
alternative way for manufacturing operations to deal with programmable ICs.
The product is available as a bench-top workstation or as a portable
programmer for field applications.
AUTOMATED PROGRAMMING AND HANDLING SYSTEMS
Data I/O's ProMaster-Registered Mark- line of equipment provides
manufacturers with an automated method for handling, programming, testing and
marking programmable ICs whether the ICs are housed in conventional through
hole or surface-mount packages. During manufacturing, the ProMaster's
"pick-and-place" technology feeds the programmable ICs out of their
protective media (trays or tubes); places them into the socket of the
programmer; triggers programming; applies a label or marks the IC with a
laser; sorts out the ICs which could not be programmed correctly; and loads
correctly programmed ICs back into trays, tubes or onto special tape which is
rolled onto reels. The ICs are then ready to be attached to printed circuit
boards using other automated equipment.
The ProMaster 3000, introduced in January 1990, and the ProMaster 7000,
introduced in July 1991, both address high throughput needs (a combination of
volume and yield of correctly programmed ICs) for programming, testing and
marking programmable ICs. They both support conventional throughhole and
surface-mount packages with proprietary socketing technology that offers
customers highly reliable production capacity at a relatively low-cost per IC.
The ProMaster 3000 applies printed labels, while the ProMaster 7000 marks ICs
with a laser. The ProMaster 7500, introduced in the fall of 1994, offers even
higher speed and capacity by extending the ProMaster 7000 to include a second
programmer allowing it to program two ICs at a time.
The ProMaster 2500, introduced in September 1993, was the world's first
fully-integrated system for programming, handling, testing and marking
programmable ICs. Designed for medium-volume manufacturing applications,
the ProMaster 2500 supports both conventional throughhole and popular
surface-mount IC packages. The ProMaster 2500 internalized and integrated the
programmer inside the system unlike the ProMaster 3000, 7000, and 7500 models
that connect an AutoSite-TM- programmer. It uses labels to mark the ICs and
is the Company's entry-level priced automated programming and handling system.
The ProMaster 9500, introduced in February 1995, is a highly flexible automated
programming and handling system for programming, testing and marking fine-pitch
programmable ICs. The ProMaster 9500 was created to address extremely
high-volume manufacturing of the new generation of highly miniaturized and
fragile programmable ICs. The Company's handling technology results in the
ProMaster 9500 touching the delicate pins of each IC only once, thereby greatly
reducing the risk of damage that can be caused by even moderate handling. Its
programming module features Data I/O's PSX-TM- parallel programming technology
and can program up to 16 ICs simultaneously. The ProMaster 9500's flexible,
modular design allows the user to create the configuration needed for the
specific manufacturing operation.
The AutoSite Production Programmer, based on the Company's latest programming
architecture, was introduced in April 1992. It was the Company's first IC
programmer specifically designed to be connected to and integrated with
automated programming and handling systems. This programmer is connected to the
ProMaster 3000, 7000 and 7500 and performs the programming function within these
automated programming and handling systems.
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The Company also provides a complete line of labels for use with its automated
programming and handling 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.
SOFTWARE
ABEL-Registered Mark- (Advanced Boolean Expression Language), first released
in March 1984, is an industry standard behavioral design entry software tool
for PLDs and CPLDs. The Company also licenses, as options to ABEL, IC
"fitters," which can further optimize or "fit" the design for the specific IC
selected. The narrow focus of ABEL contrasts with the Company's
Synario-Registered Mark- software product, which is a full-featured
integrated design tool that encompasses schematic design, behavioral design,
simulation and synthesis for PLDs, CPLDs, FPGAs and printed circuit board
designs.
PROGRAMMING SYSTEMS PRICING
The U.S. manufacturer's suggested list prices for Data I/O's non-automated
programming systems range from approximately $1,000 for the ChipLab to $27,000
for a fully configured UniSite Universal Programmer. The ProMaster 2500
automated programming and handling system sells for approximately $42,000, while
the ProMaster 7500 with tape and reel option, can sell for as much as $230,000.
The new ProMaster 9500 sells for approximately $500,000. The U.S.
manufacturer's suggested retail price for the Company's ABEL software ranges
from $500 for an entry-level version to $2,000 for the latest Windows version.
SEMICONDUCTOR EQUIPMENT
In acquiring the assets of Reel-Tech, Inc. in August 1995, Data I/O increased
its range of products to include equipment used by semiconductor manufacturers
in the handling, marking and transporting of ICs during the latter stage of the
manufacturing process. Such automated equipment is critical when working with
fine-pitch parts which have many fine pins extending from the IC package that
can be easily damaged by improper handling. The Company's semiconductor
equipment products are designed to utilize standard product components that can
be configured to meet the specific needs of the customer. The technology used
in the Semiconductor Equipment Division is highly compatible with the technology
used in the Company's automated programming and handling system products.
The LM6000 is a high-volume in-tray laser marking system that marks all types
of surface-mount ICs without removing them from the input tray, providing
maximum utilization of the laser and handling system and eliminating pin damage
caused by handling.
The MT7000 is a media transfer system for surface-mount ICs. This
pick-and-place IC handler picks up, precises and transports the IC from one
media type to another media type (trays, tubes or tape and reel) and can be
customized to include other value-added processes such as programming and
marking. The MT7000 is custom configured for each customer's specific
manufacturing process.
Both the TR3000 and TR3000MT series accommodate virtually all surface-mount ICs
with tape widths of 8 to 56 mm. The TR3000 transfers ICs from tubes to tape and
reel. The TR3000MT transfers fine-pitch ICs from trays to tape and reel.
SEMICONDUCTOR EQUIPMENT PRICING
Due to the wide range of individual requirements and the degree of customization
for each system sold, prices are generally quoted individually for each specific
system. The manufacturer's suggested list prices for systems vary but range
from $40,000 for a TR3000 to as much as $250,000 for an LM6000.
SYNARIO DESIGN AUTOMATION
In November 1995 the Company announced the formation of a new autonomous
division, Synario Design Automation, to focus solely on the Windows-based EDA
market. This newly formed Division's flagship product family, Synario, was
originally introduced by the Company in 1993. Synario is a suite of
Windows-based EDA tools used for programming PLDs through board-level design.
The Synario Design Automation Division will continue to target the "mainstream"
designers, many of whom are transitioning to new "top-down" design
methodologies required for the new generation CPLDs and FPGAs.
Page 8
The Synario system is an automated EDA design tool set used by engineers to
customize complex FPGAs and CPLDs, which are becoming increasingly popular. The
driving philosophy behind the Synario design system is to offer the best of each
class of specific design application tools operating in a seamless design flow.
The Synario system embodies a commitment to standards and to Windows-based
personal computers ("PCs"). As a native Windows-based application, the Synario
environment taps the power of today's 32-bit microprocessors, and provides users
an intuitive, graphical interface and superior inter-tool communication.
Synario features include:
- - PROJECT NAVIGATOR which builds into the Synario environment an understanding
of the proper design flow for most major PLD, CPLD and FPGA architectures,
automatically reconfiguring the design flow each time a designer changes
architectures;
- - FLEXIBLE HDL (HARDWARE DESCRIPTION LANGUAGE) AND SCHEMATIC DESIGN ENTRY which
provides unsurpassed support for mixed-entry, allowing designers to start with
high-level block diagrams, then select the design entry method most appropriate
for each block, whether it's schematics, ABEL-HDL, VHDL (Very high-speed IC
HDL), equations, truth tables or state diagrams, or any combination thereof;
- - HDL-BASED SIMULATION OPTIONS which allow designers to select either Verilog or
VHDL simulators from independent EDA tool developers, both of which are tightly
integrated components of the Synario environment;
- - DEVICE KITS for programmable IC architectures usually including: schematic
symbols, simulation models, logic synthesis and IC-fitting technology, and
place-and-route software, providing support from the major programmable IC
suppliers, including Actel, Altera-Registered Trademark-, AMD-Registered
Trademark-, Atmel-Registered Trademark-, Lattice-Registered Trademark-,
Philips-Registered Trademark-, QuickLogic-Registered Trademark- and
Xilinx-Registered Trademark-;
- - SYNARIO ENGINEERING CAPTURE SYSTEM ("Synario ECS") which is a design capture
system used in the front-end design of schematic diagrams for specific
programmable ICs or an entire PCB, including a collection of on-line analysis
and productivity tools as well as integration with and interfaces to other
design and simulation tools and PCB packages;
- - PCB INTERFACE OPTIONS which support forward and backward annotation for the
most popular PCB design packages, with utilities for automatic packaging, gate
swapping, reference designation, creation of bill-of-materials and engineering
change notices.
The Company continually updates and upgrades Synario to support new ICs offered
by semiconductor manufacturers and to ensure compatibility with both new and
existing computer systems. The Company offers software updates and upgrades to
enable customers to take advantage of many of the latest ICs as they become
available.
SYNARIO PRICING
The U.S. manufacturer's suggested list price for Synario starts at $1,900 for
the single vendor version and $3,400 for the universal version. A typical price
for an advanced VHDL-based Synario design system including mixed-entry,
simulation and synthesis, and one vendor's device-specific software products,
sells for approximately $13,000. The U.S. manufacturer's suggested list price
for Synario ECS is $1,000. In addition, the Synario Design Automation Division
licenses products to other EDA and semiconductor companies as Original Equipment
Manufacturers ("OEMs") or distributors who bundle them with their product
offerings.
MARKETS AND CUSTOMERS
The Company's programming systems and EDA software products are used primarily
by electronic equipment manufacturers in the design and manufacturing of
equipment for industrial, commercial and military applications, and its
semiconductor equipment products are used by semiconductor manufacturers in
manufacturing semiconductors. The Company estimates that during 1995, it sold
products to approximately 4,000 customers throughout the world, none of which
accounted for more than 10% of the Company's net sales. None of the Company's
independent distributors, resellers or OEMs accounted for more than 5% of the
Company's net sales.
Page 9
PROGRAMMING SYSTEMS
In terms of total revenue, the Company believes that the worldwide market for
conventional non-automated programming systems for engineering applications has
been slightly declining or flat over the last several years due to a decline in
average selling prices offset by a slow growth in the number of units sold.
Over the last several years, advances in semiconductor processing technology
have lowered the barriers to entry in the IC programmer business. New
competitors enter the market regularly, each trying to carve out a niche,
causing downward price pressure and lowering the customers' perception of an
acceptable price for a conventional non-automated programming system.
Technological improvements in personal computers and design software tools have
caused engineering design teams to shift away from hardware tools to software
design tools. Further, within the remaining hardware tools market, economic
pressures are shifting demand away from higher-priced, full-featured universal
programming systems (designed to program the vast majority of programmable ICs
on the market) toward lower-priced, project-specific programming systems and
single-point solutions. These industry changes are adversely affecting the
Company, especially because in the past, Data I/O's product line has been
heavily oriented toward hardware tools and, within hardware tools, toward the
higher-priced universal programming systems. The Company expects these trends
in the conventional programming systems for the engineering market will continue
for the foreseeable future. In response to these market developments, the
Company developed and released low-cost product lines (ChipLab and 2700); added
an entry level non-automated parallel programming system (PSX400); reorganized
the Company's distribution channels; and significantly reduced its overall cost
structure.
The Company believes that the market for automated programming and handling
systems in the manufacturing environment is growing. The Company believes this
growth is due to a trend toward the expanded use of programmable ICs in
high-volume manufacturing situations caused by a reduction in the cost of
programmable ICs compared to fixed ICs, manufacturers' desire to improve the
time-to-market for new and improved products, and increased functionality and
miniaturization of programmable ICs. Because this is a newer market for the
Company, the Company's participation in this growth depends upon the market's
acceptance of its new products, its ability to understand and meet the changing
needs of this market, and its response to and development of changes in
technology. In addition, service, corporate reputation and product reliability
are considered key decision making factors for customers considering automated
systems. Data I/O believes its line of non-automated parallel programming
systems and automated programming and handling systems is well positioned to
capitalize on these trends.
SEMICONDUCTOR EQUIPMENT
According to VLSI Research, from 1991 to 1995 the semiconductor manufacturing
equipment industry grew at an average annual rate of approximately 23% in terms
of sales and will grow at an average annual rate of 25% from 1996 to 2000. The
Company's semiconductor equipment products are used in the latter stage of the
semiconductor manufacturing process, after the IC packages are virtually
complete. The Company does not have independent market data on the specific
industry niche markets in which it operates. However, the broader market for
material handling equipment in the semiconductor industry is projected to grow
at a compounded annual rate of 15% according to VLSI Research.
The Company's laser marking products are used primarily by memory IC
manufacturers to mark ICs after the test stage of the manufacturing process.
The Company's media transfer products are sold primarily to semiconductor
manufacturers and are designed to be utilized in instances where there is a
need to switch between media transport types (e.g., tubes to trays) within the
manufacturing process. The Company's tape and reel products are used by
semiconductor manufacturers for transferring high volumes of ICs from either
tubes or trays to tape and reel. The Company believes that it has positioned
itself well to take advantage of growth in the semiconductor industry by
providing semiconductor manufacturers with high-quality, specialized equipment.
SYNARIO DESIGN AUTOMATION
The EDA industry experienced 17% growth in sales in 1995 and is projected to
grow 20% in 1996, according to DataQuest. DataQuest projects the Windows
NT-based EDA segment of the industry to grow at over 150% compounded annually
over the next five years. A major factor contributing to this growth is the
advent of higher performance microprocessors, such as the Intel-Registered
Trademark-Pentium-Registered Mark- processor family, and dramatically
increased memory capacity. These advancements have made personal computers
powerful enough to handle process intensive tasks such as simulation and
synthesis. With these advancements in personal computers, Windows-based EDA
tools are attractive, less expensive options for design engineers.
Page 10
Another significant factor contributing to the growth of the Windows-based EDA
market is the migration of FPGA and CPLD design engineers to higher levels of
design abstraction. FPGAs and CPLDs are growing more complex, requiring
designers to move away from schematic only based design to speed up the
programmable IC design process. These new demands have created a so-called "new
generation" of designers who require more sophisticated design tools.
The Company believes that the quality and relative ease of use of Synario
position it well in what the Company expects to be a growing market for
Windows-based EDA products. Anticipating growth, the Company has made
significant investments in new product development over the last few years,
and has created the Synario Design Automation Division to better focus its
efforts in this market.
SALES
The Company restructured its sales operations in late 1993 and 1994 to better
align the Company with its evolving markets and customers, and to better
position itself for the future. During 1995 the Company continued this process
by increasing its utilization of lower-cost telesales channels and value-added
resellers ("VARs") while reducing its direct sales force.
A key element of the Company's distribution strategy for Synario is to partner
with semiconductor vendors. The Company has entered into distribution or OEM
agreements with several major semiconductor vendors whereby vendor-specific
Synario products are bundled with the semiconductor vendor's devices for resale
through their sales channels.
U.S. SALES
The Company markets its products throughout the U.S. using a variety of sales
channels including its own direct field sales organization, direct telesales
organization, independent sales representatives, OEMs, distributors and VARs.
The Company's U.S. independent sales representatives obtain orders on an agency
basis, with shipments made directly to the customer by the Company. OEMs,
distributors and VARs purchase products directly from the Company for resale to
customers. Sales are recognized by the Company at the time of shipment.
FOREIGN SALES
Foreign sales represented approximately 47% of net sales in 1995, 46% of net
sales in 1994, and 47% of net sales in 1993. Foreign sales are made through the
Company's wholly owned subsidiaries in Japan, Germany, Canada and the United
Kingdom, as well as independent distributors, VARs and sales representatives
located in 32 other countries (see Note 11 of "Notes to Consolidated Financial
Statements"). Sales made through foreign subsidiaries are denominated in local
currency and recognized when the subsidiary ships to the end-user. The
Company's independent foreign distributors and VARs purchase Data I/O products
in U.S. Dollars for resale; and the sale is recognized at the time of shipment
to the distributor or VAR. Distributors and VARs are allowed to return a
portion of their Data I/O product inventory for credit on future purchases,
subject to limitations. As with U.S. sales representatives, sales made by
international sales representatives are on an agency basis with shipments made
directly to the customer by the Company. These sales are denominated in U.S.
Dollars and are recognized at the time of shipment.
Total foreign sales are determined by the geographic area into which the
products are sold and delivered, and include not only sales by foreign
subsidiaries but also export sales from the U.S. to the Company's foreign
distributors, VARs and representatives' customers. Foreign sales do not include
transfers between the Company and its foreign subsidiaries. Export sales are
subject to U.S. Department of Commerce regulations. The Company has not,
however, experienced any difficulties to date as a result of these requirements.
Fluctuating exchange rates and other factors beyond the Company's control, such
as international monetary stability, tariff and trade policies, and U.S. and
foreign tax and economic policies, affect the level and profitability of foreign
sales. The Company is unable to predict the effect of such factors on its
business. The Company does hedge against certain currency exposures in order to
minimize their impact.
Page 11
COMPETITION
GENERAL
The programming systems, semiconductor equipment and EDA software markets are
highly competitive. Important competitive factors include product features,
price, quality, reliability, throughput, distribution channels, availability, IC
support, post sales support, service and the timely response to rapid
technological change with new and improved products. The Company believes its
competitiveness depends on offering the most effective combination of these
capabilities.
PROGRAMMING SYSTEMS
The Company believes that maintaining close relationships with programmable IC
manufacturers, superior service, broad programmable IC support and the critical
mass of a large installed base will enable Data I/O to maintain its leading
position in the market for non-automated programming systems. However, the
Company does not expect its share of this market to grow significantly, because
much of the remaining market is fragmented both geographically and
technologically. This situation will always allow smaller niche suppliers to
exist and, in some markets, to thrive.
Although independent market information is not available, the Company believes
that, based on information from studies performed each year internally by the
Company, brand awareness and brand preference studies published by Electronic
Design Marketing Research and ECN Marketing, and market statistical information
published by ELECTRONIC ENGINEERING TIMES, it has approximately 45% of the
worldwide market share of revenue for non-automated programming systems in the
design engineering segment. Based on information gathered internally, the
Company believes approximately 15% to 20% of this market is served by vendor-
specific non-automated programming systems supplied by the semiconductor
manufacturers themselves. The remainder of the market is divided among several
dozen, mostly regional, competitors. The most significant of these competitors
are BP Microsystems, Logical Devices, Stag Microsystems, System General, Hi-Lo
and Minato. Today, the competition for programming business is based primarily
on the breadth of programmable IC support and price. Most new entrants compete
based on price alone, because competing against the more established companies'
IC support is quite expensive. The Company believes that its move into the low-
cost portion of the market with ChipLab has increased market share for Data I/O
because this moved the Company into a new market segment in which the Company's
previous product line did not compete well.
The Company does not have independent market information but did commission
studies to obtain limited market data for the non-automated parallel programming
systems market. Principal competitors in the non-automated parallel programming
systems market are BP Microsystems, Elan, Minato, Hi-Lo, Bytek, System General,
Needham Electronics and SMS. The Company believes that other firms,
particularly in specific geographic regions, hold the dominant share of this
market. The Company believes this is primarily due to the Company historically
not having competitive products at the low-cost end of the market. The Company
believes that it has the largest market share in the high-volume end of the
non-automated parallel programming system market.
The market for automated programming and handling systems used in automated
manufacturing operations is shared primarily by Data I/O and Exatron, although a
joint venture between BP Microsystems and Quad Systems Corporation to produce an
automated handler with logic device programming capabilities competes directly
with the Company's high-end ProMaster line. Exatron does not offer complete
programming and handling system solutions, however, its partnerships with other
IC programming system companies enable it to offer systems which can be
configured by the customer. Even Data I/O programming systems can be mated to
Exatron automated handling systems. The most important competitive criteria for
this market segment are product reliability, service, IC and package support,
throughput, ease of use and cost of ownership. The expanded use of programmable
ICs in high-volume manufacturing situations is fueling growth of this market,
and the Company believes that its share of this market has grown significantly
over the last few years.
ABEL, the Company's software for designing PLDs, is an industry standard. The
Company believes this reflects the fact that ABEL is the most "universal" tool
in its market with support for the architectures of most major programmable
logic manufacturers. Competitors of ABEL are products from MINC and Logical
Devices.
Page 12
SEMICONDUCTOR EQUIPMENT
In the semiconductor equipment industry market niche there are four primary
competitive factors: throughput, changeover time, availability and size of
footprint. The Company believes that its semiconductor equipment is superior to
its primary competition with respect to availability and footprint. In terms of
throughput and changeover time, the Company believes that its products compete
well.
For all of its semiconductor equipment products, the Company competes with
custom system integrators who are often smaller, local companies. The Company
is not currently aware of any significant competitors for its media transfer
system. The Company believes that other firms hold the dominant market share
for the laser marking and tape and reel markets. For laser marking equipment,
the Company competes with NEC, Toshiba, Lumonics, and Rofin Sinar. For tape and
reel equipment, the Company competes with Ismeca and Systemation.
SYNARIO DESIGN AUTOMATION
In the Windows-based EDA industry market niche key competitive factors include
the universality of the tools, semiconductor manufacturer relationships and
endorsements, integration with other tools and ease of use. The Company
believes Synario Design Automation has advantages over its competitors in value,
embedded expertise resulting in ease-of-use, distribution channels, tighter tool
integration and relationships with semiconductor companies. Synario products
provide a universal, easy-to-use, workstation-class design environment at a
fraction of the cost of UNIX-TM--based EDA tools. Most Windows-based EDA
suppliers provide limited tools at a comparable price or comparable tools at a
much higher price.
The Company developed the Synario products to address the industry's increasing
demand for broad-based integrated EDA software tools for the PC-based designer.
Until recently, there has been a limited list of PC-based EDA tool suppliers
with limited capabilities. Principal competitors to the Synario product family
have been Viewlogic-TM- Systems, Inc., semiconductor vendor-specific software
design systems for their device-specific applications, and, to a lesser extent,
OrCAD-Registered Trademark- and ALDEC. However, the introduction of
higher-performance, Pentium-class microprocessors has blurred the distinction
between workstation-class and PC-class machines. This has fueled new
Windows-based product introductions and new players in the market place.
Late in 1995, the Windows-based EDA market was further validated with product
development announcements from major EDA players including Cadence-TM- Design
Systems ("Cadence") and Mentor Graphics-Registered Trademark-. Cadence has
released their PCB layout product, Allegro, on Windows, and Mentor Graphics
announced a new subsidiary, Antares, which will focus on the Windows-based EDA
market. Synario products complement both the Cadence and Antares offerings:
Synario has extended its PCB interface options to include Cadence's Allegro; and
Synario currently resells the Model Technology VHDL simulator which is a product
of Antares. The Company believes neither Cadence nor Antares offer the critical
integration links that create the complete broad-based design environment
offered by Synario.
MANUFACTURING AND BACKLOG
During 1995, Data I/O operated three principal manufacturing operations. Its
principal facility in Redmond, Washington manufactures non-automated programming
systems including component parts assembly, final assembly and testing. The
Company's automated programming and handling systems are produced in Redmond as
well as at the Company's manufacturing facility in Anaheim, California. The
Company was in the process of moving and consolidating its Anaheim facility into
its Redmond facility. This move, which began in 1995, was completed in the
first quarter of 1996. The cost of this move and consolidation was provided for
as part of a restructuring charge recorded by the Company in 1993. The
Company's third manufacturing facility, located in Indianapolis, Indiana,
manufactures semiconductor equipment.
During 1993, the Company decided to consolidate and out-source certain
manufacturing processes. Implementation of these manufacturing process changes
began in 1994 and is expected to be completed in 1997. The cost of these
manufacturing changes was provided for as part of the Company's 1993
restructuring charge.
Page 13
In its manufacturing processes, the Company uses a combination of standard
components, proprietary custom ICs and fabricated parts manufactured to Data I/O
specifications. Most components used are available from a number of different
suppliers and subcontractors but certain items, such as some handler and
programmer subassemblies, custom ICs, hybrid circuits and connectors, are
purchased from single sources. The Company's policy is to maintain substantial
inventories of most single-source components. It believes that additional
sources could be developed for present single-source components without
significant difficulties in obtaining supplies. There can, however, be no
assurance that single-source components will continue to be readily available.
Most programming systems and software product orders are scheduled for delivery
within one to 60 days after receipt of order. The ProMaster 9500, which
experienced some production delays after its introduction in 1995 due to
production constraints, is generally scheduled for delivery within 90 to 120
days after receipt of order. The transfer of production of this product from
Indianapolis to Redmond during the fourth quarter of 1995 is expected to help
increase capacity. Deliveries of semiconductor equipment are generally
scheduled within 90 to 120 days from date of order.
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 extensive support of
the latest programmable ICs, the Company is committed to a substantial research
and development program. Research and development activities include applied
research, design of new products and continual enhancement and support of
existing products. Data I/O has focused its efforts on applied rather than
basic research, concentrating on technical innovation for long-term product
requirements. The Company made expenditures for research and development of
$9,069,000, $9,227,000 and $9,700,000 in 1995, 1994 and 1993, respectively,
representing 13.7%, 15.0% and 15.4% of net sales, respectively.
The Company has currently directed its main product development efforts toward
new programming technology for its existing automated programming and handling
system products, enhancements to its semiconductor equipment products, and
enhancements for its new EDA software products. Substantial engineering
resources are also being devoted to developing updates and upgrades for both
programming systems and software products and providing IC support for new
programmable ICs as they are introduced by semiconductor manufacturers.
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 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.
Page 14
Because of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, there is a possibility that portions of the
Company's products might infringe upon existing patents or copyrights, and the
Company may therefore be required to obtain licenses or discontinue the use of
the infringing technology. The Company believes that any exposure it may have
regarding possible infringement claims is a reasonable business risk similar to
that being assumed by other companies in the electronic equipment and software
industries. However, any claim of infringement, with or without merit, could be
costly and a diversion of management's attention, and an adverse determination
could adversely affect the Company's reputation, preclude it from offering
certain products, and subject it to substantial liability.
EMPLOYEES
As of December 28, 1995, the Company had 401 total employees, of which 43 were
located outside the U.S. Many of Data I/O's employees are highly skilled and
the Company's continued success will depend in part upon its ability to attract
and retain employees who are in great demand within the industry. At times, the
Company, along with most other electronic equipment manufacturers and software
developers, experiences difficulty in hiring and retaining experienced
personnel. To date, the Company believes it has been successful in its efforts
to recruit qualified employees, but there is no assurance that it will continue
to be as successful in the future. None of the Company's employees are
represented by a collective bargaining unit and the Company believes relations
with its employees are favorable.
ENVIRONMENTAL COMPLIANCE
The Company's facilities are subject to numerous laws and regulations concerning
the discharge of materials or otherwise relating to the environment. Compliance
with environmental laws has not had, nor is it expected to have, a material
effect on capital expenditures, the financial position, the results of
operations or the competitive position of the Company.
Page 15
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the executive officers of the
Company as of March 1, 1996:
NAME AGE POSITION
---- --- --------
William C. Erxleben 53 President
Chief Executive Officer
Steven M. Gordon 36 Vice President
Finance and Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurer
William J. Haydamack 53 Senior Vice President
General Manager
Synario Design Automation
Division
Susan S. Webber 41 Vice President
Quality and Human Resources
Larry D. Vandendriessche 38 Vice President
General Manager
Programming Systems Division
William C. Erxleben became President and Chief Executive Officer of the Company
on October 29, 1993. He has been a member of the Board of Directors of Data I/O
since 1979. Mr. Erxleben was a partner with the Seattle-based law firm of Lane
Powell Spears Lubersky from March 1991 until joining the Company. From March
1985 to March 1991 he was a partner with the Seattle law firm of Foster Pepper &
Shefelman. Prior to 1985, he was a member of the faculty of the University of
Washington Graduate School of Business and a Regional Director of the Federal
Trade Commission.
Steven M. Gordon was named Chief Financial Officer, Secretary and Treasurer on
October 29, 1993. Mr. Gordon first joined Data I/O in April 1989 as Corporate
Controller and Chief Accounting Officer. He was promoted to Vice President of
Finance in May 1992. From May 1988 until joining Data I/O, Mr. Gordon served as
Treasurer for Concept Health Group. Prior to that time Mr. Gordon held various
management positions at American Health Group International and Ernst & Young.
William J. Haydamack joined the Company in August 1993 as Vice President and
General Manager of the Design Software Division. In December 1995 he was
promoted to Senior Vice President and General Manager of the Synario Design
Automation Division. From 1986 until joining the Company, Mr. Haydamack served
in various senior management positions with Cadence Design Systems, an EDA
software company. Prior to Cadence Design Systems, Mr. Haydamack served in
management positions with Waferscale Integration, Inc., Hewlett Packard and
General Dynamics.
Susan S. Webber joined the Company in April 1994 as Director of Quality and was
given the responsibility for Human Resources in November of 1994. In December
1995, Ms. Webber was promoted to Vice President of Quality and Human Resources.
From 1985 until joining the Company, Ms. Webber was employed by AG Communication
Systems, a designer and manufacturer of telecommunications systems. Her most
recent position was Quality Director. Prior to AG Communication Systems, Ms.
Webber was with Motorola and was an Assistant Professor with the University of
Nebraska.
Larry D. Vandendriessche joined the Company in January 1996 as Vice President
and General Manager of the Programming Systems Division. From 1994 until
joining the Company, Mr. Vandendriessche served as Vice President of Product
Development for Plasti-Line, Inc., a producer of electronic and
electromechanical display systems. From 1984 to 1994 Mr. Vandendriessche held
various management positions at AT&T, most recently as the Director of Graphic
Products in their NCR Microelectronic Products Division.
Page 16
RISK FACTORS
Certain risk factors related to the Company's business are described in this
section. (See the sections captioned "Forward-Looking Statements" in Item 1 and
Item 7.)
VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past varied and may in the
future vary significantly depending on factors such as increased competition,
timing of new product announcements, releases and pricing changes by the Company
or its competitors, market acceptance or delays in the introduction of new
products, production lead times, production constraints, timing of significant
orders, seasonal factors, capital budgets of customers, foreign currency
exchange rates, and economic conditions, as well as all of the other risk
factors discussed in this report. Historically, a substantial portion of the
Company's revenue in each quarter results from orders booked in that quarter.
The Company's expense levels are based, in part, on its expectations as to
future revenue. If anticipated shipments in any quarter do not occur or are
delayed, expenditure levels could be disproportionately high, and the Company's
operating results for that quarter would be adversely affected. Although the
Company has recently experienced growth in revenue and profitability, there can
be no assurance that the Company will be able to grow in future periods, that it
will be able to sustain its recent or historical rate of revenue growth, or that
its operations will remain profitable. As a result, the Company's results of
operations for any quarter are not necessarily indicative of results for any
future period. Due to all of the foregoing factors, it is possible that in some
future quarter the Company's operating results will be below expectations of
analysts and investors.
TECHNOLOGICAL CHANGE
The markets for the Company's Programming Systems, Semiconductor Equipment and
Synario Design Automation products are characterized by rapid technological
change and evolving industry standards, and are highly competitive with respect
to timely product innovation. The introduction of products embodying new
technology and the emergence of new industry standards can render existing
products obsolete and unmarketable. New and changed technologies may result in
products that contain defects or errors which may give rise to product liability
claims or be detrimental to market acceptance of such products. The Company's
success depends on its ability to anticipate changes in technology, IC package
types and industry standards and to develop and introduce successfully new and
enhanced products on a timely basis. Also, to the extent that more rigid
standards are established in the programmable IC industry, the value-added
element of the Company's products and support services could be decreased. If
such decreases occur, or if the Company is unable, for technological or other
reasons, to develop products in a timely manner in response to changes in the
industry or if products or product enhancements that the Company develops
contain defects or errors or do not achieve market acceptance, the Company's
business, financial condition and results of operations will be materially and
adversely affected.
DEPENDENCE ON BROAD ACCEPTANCE OF MS WINDOWS OPERATING SYSTEM IN THE DESKTOP EDA
MARKET
The Company believes that the desktop EDA market is at the beginning of a trend
toward the use of the Microsoft-Registered Trademark- Windows operating systems,
and anticipates that the use of Windows-based products in the EDA market will
continue to expand. Accordingly, all of the new EDA software products
introduced by the Company during 1995, and all of the EDA software products the
Company is currently developing, are designed for use on Microsoft's Windows 3.1
and 3.11, Windows NT and Windows 95 operating systems. Any factor adversely
affecting the demand for, or use of, the Microsoft Windows operating systems for
EDA applications or in general, could have a material adverse effect on the
Company. Further, any changes to the underlying components of the Microsoft
Windows operating systems that would require changes to the Company's products
would have a material adverse effect on the Company's business if the Company
were unable to successfully develop and implement such changes in a timely
fashion, or if the Company's products, as changed, failed to gain market
acceptance.
ECONOMIC AND MARKET CONDITIONS
The Company's business depends on capital spending and other economic cycles
that affect the users and manufacturers of ICs. This industry is highly
cyclical and characterized by rapid technological change, short product life
cycles, fluctuations in manufacturing capacity and pricing and gross margin
pressures. Segments of this industry, in each of the United States, Europe and
Japan, have from time to time experienced significant economic downturns
characterized by decreased product demand, reductions in capital expenditures,
production over-capacity, price erosion, work slowdowns and layoffs. In
addition, portions of this industry have experienced downturns at different
times. Over the past few years, this industry has
Page 17
experienced an extended period of significant growth. There can be
no assurance that such economic growth will continue, and if it does not, any
downturn could be especially severe. The Company believes that capital spending
has been showing signs of slowing in North America during the past few months.
The Company's 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. There can be no assurance that such factors
will not have a material adverse effect upon the Company's business, financial
condition and results of operations.
COMPETITION
The markets for the Company's products are highly competitive. Competitors for
the Company's semiconductor equipment and Synario Design Automation products
include a number of established companies that may have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
The Company's competitors may have well established relationships or strategic
affiliations which give them certain competitive advantages. Advances in
technology have reduced the barriers of entry into the programming systems
markets, resulting in new competitors who compete for certain market niches.
The Company expects competition to increase from both established and emerging
companies. There can be no assurance that the Company will be able to compete
successfully against current and future sources of competition or that the
competitive pressures faced by the Company will not adversely affect its
profitability or financial performance.
DEPENDENCE ON IC MANUFACTURERS
The Company maintains close working relationships with semiconductor
manufacturers to ensure that the Company's programming systems use programming
methodology that complies with each semiconductor manufacturer's specifications.
In addition, many semiconductor manufacturers endorse Data I/O programming
systems as equipment that they recommend for end-user applications as well as
for use in their own development and production environments. These
relationships enable Data I/O to keep its Programming Systems product line up
to-date with the latest technology and to provide end-users with broad and
current programmable IC support. Any adverse change in the relationships that
the Company maintains with semiconductor manufacturers could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON SUPPLIERS
Certain components used in the Company's products, including but not limited to
robotics and certain other custom components, are currently available only from
single sources, and other components are available from only a limited number of
sources. To date the Company has been able to obtain adequate supplies of these
components and maintain inventories of its more critical components, in certain
instances through negotiated contractual relationships or parts allocations from
suppliers. However, the Company's inability in the future to develop
alternative sources or to obtain sufficient single- or limited-source components
could result in delays or reductions in product introductions or shipments,
which could have a material adverse effect on the Company's operating results.
The Company has limited ability to avoid or offset future price increases by
suppliers of key components. Accurate production forecasts are required to
ensure that adequate component supplies are available in a timely manner,
particularly in those instances where component suppliers require long lead
times. There can be no assurance that the Company will be able to accurately
forecast its production schedule in the future. If the Company were to
experience significant delays, interruptions or reductions in its supply of key
components, or unfavorable price terms, its business, financial condition and
results of operations could be materially adversely affected.
RELIANCE ON THIRD PARTY DISTRIBUTION CHANNELS
The Company has limited internal sales personnel. The Company is dependent on
third party manufacturers' representatives, OEMs, value-added retailers and
international distributors (collectively, "Third Party Distributors") for the
majority of its domestic and international sales. Accordingly, the Company is
dependent upon the continued viability and financial stability of these Third
Party Distributors. Because most of the Company's products are used by highly
skilled professional engineers, effective Third Party Distributors must possess
sufficient technical, marketing and sales resources and must devote their
resources to sales efforts, customer education, training and support. Only a
limited number of potential Third Party Distributors meet these criteria. In
addition, the Company's relationship with its Third Party Distributors is
usually established through a formal contractual agreement, which generally may
be terminated by either party without cause upon minimal notice. There can be
no assurance that the Company will be able to attract and retain a sufficient
number of
Page 18
qualified Third Party Distributors to successfully market the Company's
products, and the failure to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.
INTERNATIONAL OPERATIONS
International sales represented approximately 47% of the Company's total revenue
for the fiscal year ending December 28, 1995, and the Company expects that
international sales will continue to account for a significant portion of its
net revenue in future periods. International sales are subject to inherent
risks, including unexpected changes in regulatory requirements, tariffs and
taxes, difficulties in staffing and managing foreign operations, longer payment
cycles, greater difficulty in accounts receivable collection, compliance with
any applicable export licensing requirements and other trade barriers, as well
as political and economic instability. The European Community and European Free
Trade Association have established certain electronic emission and product
safety requirements ("CE"). Certain of the Company's products have not yet met
these requirements. Failure to obtain either a CE mark or a waiver for any
products may prevent the Company from marketing such products in Europe.
Moreover, gains and losses on the conversion to U.S. Dollars of receivables and
payables arising from international operations may contribute to fluctuations in
the Company's results of operations. For example, the Company estimates that
favorable currency fluctuations affecting sales by the Company accounted for
approximately $1.3 million of the increase in the Company's net sales in 1995.
In addition, if for any reason exchange or price controls or other restrictions
on their currencies were imposed, the Company's business, financial condition
and results of operations could be adversely affected. Moreover, currency
exchange fluctuations in countries in which the Company has wholly owned
subsidiaries may have a material adverse effect on the Company's investment in
those subsidiaries.
PROTECTION OF INTELLECTUAL PROPERTY
Refer to the section captioned "Patents, Copyrights, Trademarks and Licenses"
above.
MANAGEMENT OF GROWTH
The Company plans to continue to expand its product lines, invest in marketing
and distribution and pursue strategic acquisitions and relationships, all of
which could further accelerate the growth that the Company experienced during
1995. The Company's growth plans will present management, competitive and other
challenges to the Company's executive management and employees. There can be no
assurance that the Company will be able to achieve its planned expansion goals
or manage its growth effectively. The Company's failure to manage growth
effectively could have a material adverse effect on its business, financial
condition and results of operations.
RECENT AND FUTURE ACQUISITIONS
The Company has recently acquired Reel-Tech, Inc. ("Reel-Tech"), formerly the
Company's OEM partner in developing the ProMaster 9500. In connection with this
acquisition, the activities and employees of Reel-Tech must be successfully
integrated into the Company's operations. To date, the Company has made
progress toward integrating the activities and employees of Reel-Tech. However,
there can be no assurance that such integration, and change in status from that
of OEM partner to that of a wholly owned subsidiary, will be smooth or
ultimately successful. In addition, there can be no assurance that such
integration or change in status can be accomplished without incurring
substantial additional costs or diverting management's attention and resources.
If the integration of Reel-Tech into the Company's operations is unsuccessful,
it could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company may in the future pursue
acquisition of complementary technologies, product lines or businesses. Future
acquisitions by the Company may result in potentially dilutive issuances of
equity securities, the incurrence of additional debt and amortization expenses
related to goodwill and intangible assets that could adversely affect the
Company's profitability. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations and products of the
acquired company, the diversion of management's attention from other business
concerns, risks of entering markets in which the Company has no or limited
direct prior experience, and the potential loss of key employees of the acquired
company. In the event that such an acquisition does occur, there can be no
assurance as to the effect thereof on the Company's business or operating
results.
DEPENDENCE ON KEY PERSONNEL
Refer to the section captioned "Employees" above.
Page 19
POTENTIAL VOLATILITY OF STOCK PRICE
There has been significant volatility in the market price of securities of
technology companies. The Company believes factors such as announcements of new
products by the Company or its competitors and quarterly variations in financial
results could cause the market price of the Company's Common Stock to fluctuate
substantially. In addition, the stock market has experienced volatility that
has particularly affected the market prices for many technology companies' stock
and that often has been unrelated to the operating performance of such
companies. These market fluctuations may continue in the future and may
adversely affect the price of the Company's Common Stock.
ITEM 2. PROPERTIES
Data I/O's headquarters and principal facility is a 100,000 square foot building
on approximately 79 acres of land, which is owned by the Company and located in
Redmond, Washington. In September 1991, the Company engaged the services of a
real estate broker and began a formal process of negotiating to sell excess land
at its headquarters. This land has been classified as Land Held for Sale in the
Company's financial statements. In June of 1992, as a result of compliance with
a Sensitive Areas Ordinance enacted in July 1992 by the City of Redmond,
Washington, which increased development restrictions relating to land classified
as wetlands, the Company recorded a write-down of $2.6 million ($1.7 million
after taxes) for the value of land effectively condemned by this ordinance. In
addition, in December 1993 the Company recorded an additional $2.0 million
write-down in the value of this land due to changes in valuation for commercial
real estate comparable to the land held by Data I/O. In order to enhance the
land's marketability, the Company currently has listed its entire Redmond
headquarters property, including the building, as available for sale with
long-term lease back provisions on the building. See Note 4 of "Notes to
Consolidated Financial Statements."
The Company currently leases approximately 20,000 square feet of space for its
manufacturing facility in Anaheim, California. This facility will be closed
during the first quarter 1996 as the Company moves and consolidates its
automated programming and handling system manufacturing operations to its
Redmond facility. The Company also leases approximately 5,000 square feet of
space for its semiconductor equipment manufacturing facility in Indianapolis,
Indiana. In April 1996 the Company plans to relocate its semiconductor
equipment manufacturing facility to another site in Indianapolis. This new
leased site will have approximately 12,000 square feet of space.
In addition, approximately 1,000 square feet of space is leased at one U.S.
sales and service location and approximately 20,000 square feet is leased at
four foreign sales and service locations. As part of the restructuring of its
sales and distribution channels, the Company has plans to abandon approximately
4,000 square feet of space in the foreign sales and service locations.
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 28, 1995.
Page 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The following table shows the market 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
------ ----- ---
1995 Fourth Quarter $ 8.88 $6.00
Third Quarter 12.63 7.63
Second Quarter 9.63 4.88
First Quarter 6.00 4.38
1994 Fourth Quarter $5.75 $3.00
Third Quarter 3.50 2.63
Second Quarter 3.38 2.50
First Quarter 3.62 2.25
The approximate number of shareholders of record at March 1, 1996 was 1,148.
Except for a special cash dividend of $4.15 per share paid on March 8, 1989, the
Company has not paid cash dividends on its common stock and does not anticipate
paying regular cash dividends in the foreseeable future. The Company's U.S.
line of credit agreement restricts the payment of cash dividends through a
requirement for minimum levels of tangible net worth.
Page 21
ITEM 6. SELECTED FIVE-YEAR FINANCIAL DATA
YEAR ENDED
- -------------------------------------------------------------------------------------------------------------------------------
DEC. 28, DEC. 29, DEC. 30, DEC. 31, DEC. 26,
(in thousands, except employee and per share data) 1995 1994 1993 1992 (1) 1991
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR:
Net sales $66,031 $61,478 $63,186 $69,337 $67,387
Gross margin 35,433 33,094 31,775 39,292 38,824
Research and development 9,069 9,227 9,700 7,797 7,911
Selling, general and administrative 20,411 20,032 26,094 26,872 25,524
Write-off of acquired in-process R&D (2) 825
Provision for business restructuring (3) (400) 6,120
Operating income (loss) 5,528 3,835 (10,139) 4,623 5,389
Non-operating (income) expense (125) 134 2,218 310 463
Income (loss) before taxes, extraordinary item
and cumulative effect of accounting change 5,653 3,701 (12,357) 4,313 4,926
Income tax expense (benefit) 892 975 (700) 1,445 1,897
Income (loss) before extraordinary item and
cumulative effect of accounting change 4,761 2,726 (11,657) 2,868 3,029
Extraordinary item, net of tax (4) (1,675)
Cumulative effect of accounting change (5) 400
Net income (loss) $4,761 $2,726 ($11,257) $1,193 $3,029
- -------------------------------------------------------------------------------------------------------------------------------
AT YEAR-END:
Working capital $12,005 $10,038 $3,582 $9,940 $5,174
Total assets $44,776 $43,487 $43,025 $49,702 $46,730
Long-term debt (6) $1,500 $1,500 $1,500
Total debt $1,617 $1,940 $3,867 $3,422 $3,219
Stockholders' equity $25,929 $24,343 $21,183 $31,343 $29,377
Number of employees 401 379 445 517 487
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA:
Earnings per share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $0.60 $0.37 ($1.63) $0.40 $0.44
Net income (loss) $0.60 $0.37 ($1.57) $0.17 $0.44
Book value per share at year end $3.66 $3.28 $2.92 $4.46 $4.35
Shares outstanding at year end 7,084 7,432 7,250 7,030 6,749
Weighted average shares outstanding 7,879 7,420 7,170 7,117 6,900
- -------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS:
Current ratio 1.7 1.6 1.2 1.6 1.3
Gross margin to sales 53.7% 53.8% 50.3% 56.7% 57.6%
Operating income (loss) to sales 8.4% 6.2% (16.0%) 6.7% 8.0%
Net income (loss) to sales (7) 7.2% 4.4% (18.4%) 4.1% 4.5%
Return on average total assets (7) 10.4% 6.4% (23.7%) 6.1% 6.7%
Return on average stockholders' equity (7) 18.2% 12.3% (39.3%) 9.5% 11.1%
- -------------------------------------------------------------------------------------------------------------------------------
FOOTNOTES:
(1) Fiscal 1992 was a 53 week year.
(2) For further discussion, see Note 6 of "Notes to Consolidated Financial
Statements."
(3) For further discussion, see Note 2 of "Notes to Consolidated Financial
Statements."
(4) For further discussion, see Note 4 of "Notes to Consolidated Financial
Statements."
(5) For further discussion, see Note 10 of "Notes to Consolidated Financial
Statements."
(6) For further discussion, see Note 7 of "Notes to Consolidated Financial
Statements."
(7) Computed based on net income (loss) before cumulative effect of accounting
change and extraordinary item.
Page 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
BUSINESS ACQUISITION
On August 31, 1995 the Company acquired the assets of Reel-Tech, Inc. and
entered into employment and non-compete agreements with its two founding
technologists. The purchase included an initial cash payment of $2.0 million
and assumption of certain liabilities valued at $1.2 million. The Company has
agreed to make additional payments of up to $2.0 million over the next three
years, with these payments contingent upon the acquired operation achieving
specified performance goals. This acquisition was recorded using the purchase
method of accounting.
As part of the accounting for this acquisition the Company recorded in the third
quarter of 1995 a charge of $825,000 for in-process research and development and
accrued a long-term payable of $666,000. See Note 6 of "Notes to Consolidated
Financial Statements."
SHARE REPURCHASE PROGRAM
The Company announced on October 27, 1995 a share repurchase program which
authorized the Company to repurchase up to 7.5% (approximately 570,000 shares)
of its outstanding shares of common stock. At December 28, 1995 the Company had
repurchased 562,400 shares for approximately $4.1 million.
The Company announced on February 21, 1996 that the Board of Directors had
authorized the extension of the share repurchase program. The extension
authorizes the Company to repurchase up to an additional 8% (approximately
570,000 shares) 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. Purchases may commence
or be discontinued at any time.
FORWARD-LOOKING STATEMENTS
Although most of the information contained in this report is historical, certain
of the statements contain forward-looking information. To the extent these
statements involve, without limitation, product development and introduction
plans, the Company's expectations for growth, estimates of future revenue,
expenses, profit, cash flow, balance sheet items, sell-through or backlog,
forecasts of demand or market trends for the Company's various product
categories and for the industries in which the Company operates or any other
guidance on future periods, these statements are forward-looking and involve
matters which are subject to a number of risks and uncertainties that could
cause actual results to differ materially from those expressed in such forward-
looking statements. Readers of this report should consider, along with other
relevant information, the risk factors identified by the Company under the
caption "Risk Factors" in Item 1 and elsewhere in this report, and other risks
identified from time to time in the Company's filings with the Securities and
Exchange Commission, press releases and other communications.
RESULTS OF OPERATIONS
In 1995 the Company reorganized its operations into three divisions: Programming
Systems, Semiconductor Equipment and Synario Design Automation. The following
discusses the Company's results of operations by division. For comparability
purposes, the discussions of 1994 compared to 1993 have been revised from that
contained in the Company's Annual Report for fiscal 1994 to follow this new
divisional structure.
Page 23
NET SALES
(IN THOUSANDS) 1995 CHANGE 1994 CHANGE 1993
- --------------------------------------------------------------------------------
Net sales $66,031 7.4% $61,478 (2.7%) $63,186
- --------------------------------------------------------------------------------
1995 VS. 1994
Sales increased by 7.4% in 1995 compared to 1994, with U.S. sales increasing
7.1% and international sales increasing 7.7%. Sales of the Company's
Programming Systems products increased 4.6% in 1995 compared to 1994.
Programming Systems products experienced year-over-year revenue growth due
primarily to increased sales of automated programming and handling systems which
was partially offset by a decline in sales of the Company's non-automated
programming systems and the Company's older software design tools. Sales for
the Synario Design Automation Division increased 40% in 1995 compared to 1994.
The addition of Semiconductor Equipment products, obtained as part of the Reel-
Tech acquisition in August of 1995, also provided incremental sales growth of
approximately $625,000.
Net sales for 1995 of the Company's non-automated programming systems declined
by $1.0 million or 2.5% over 1994. The Company experienced decreased sales for
the products used primarily in the engineering market. Partially offsetting
this decline was an increase in sales of non-automated parallel programming
systems used in the manufacturing market. The overall decline reflects the
continuing market shift toward lower-priced project-specific programmers and
away from higher-priced, full-featured universal programmers. In addition, the
Company believes that technological improvements in personal computers and
design software tools have caused a shift in the demand for IC design tools by
engineering teams away from hardware tools in favor of software design tools.
Finally, the Company believes that advances in semiconductor processing
technology have lowered the barriers to entry in the programmer business over
the last several years. This has caused new market entrants to appear
regularly, each trying to carve out a niche. New entrants cause downward price
pressure and each cycle of new competitors lowers the acceptable price of a
conventional IC programmer in the customer's view.
These industry changes had, and are continuing to have, an adverse effect on the
Company's non-automated programming systems sales and gross margins, especially
because the Company's products historically have been oriented toward hardware
tools and, within hardware tools, toward higher-priced universal programming
systems. However, the Company believes the trends toward low-cost programming
systems, EDA software tools and automated programming and handling systems will
eventually mean increased sales of its newer products ChipLab, 2700, Synario,
ProMaster 9500, ProMaster 7500, ProMaster 2500 and the Tape and Reel.
Sales of the Company's automated programming and handling systems for the
manufacturing environment increased by approximately 35% in 1995 compared to
1994. The Company believes this growth is due to a trend toward the expanded use
of programmable ICs in high-volume manufacturing situations. The Company
believes this trend is due to a reduction in the cost of programmable ICs
relative to fixed ICs, the desire of manufacturers to improve the time-to-market
for new and improved products, and the increased functionality and
miniaturization of programmable ICs. The Company believes this trend will
continue contributing to further growth and expansion of this market. The
Company's participation in this growth depends upon the market's acceptance of
its new products, its ability to understand and meet the changing needs of this
market, and its response to and development of changes in technology. The
automated programming and handling systems product line accounted for
approximately 30% of revenues in 1995 compared to 24% in 1994. A market shift
in the ProMaster product mix toward higher-priced models also contributed to the
sales increase. The Company's most recently introduced products, ProMaster
9500, ProMaster 7500, ProMaster 2500 and Tape and Reel, provided this growth
during 1995.
Sales of the Company's Programming Systems software products decreased by 28% in
1995 compared to 1994. The Company's older software design tools, including
ABEL and FutureNet, declined due to competitive pricing pressures, product aging
and the discontinuation of the FutureNet product.
Sales of the Company's Semiconductor Equipment products, acquired as part of the
Reel-Tech acquisition, were approximately $625,000. The market for
semiconductor equipment has experienced strong growth as semiconductor
manufacturers have expanded capacity in response to demand for ICs. The Company
is in the process of expanding its personnel, space and systems to meet expected
demand for its semiconductor equipment. The Company believes that if this
strong demand continues and the Company executes well in integrating the Reel-
Tech acquisition, the Company's Semiconductor Equipment products may provide a
significant revenue growth opportunity. Due to the cyclical nature of
Page 24
demand for ICs, the activities of competitors and other factors, there can be no
assurance that strong demand for this equipment will continue.
International sales were favorably impacted by foreign currency translation
gains which were approximately $1.3 million higher in 1995 compared to 1994,
primarily due to rate changes for the German Mark and the Japanese Yen which
strengthened relative to the U.S. Dollar during 1995. 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. A strengthening of the U.S.
Dollar would in general have the opposite economic effect on the Company.
Currency markets fluctuate and there can be no assurance of continued benefit
from currency changes. Sales in the U.S. accounted for approximately 53% of the
Company's sales in 1995 compared to 54% in 1994.
1994 VS. 1993
Sales of the Company's Programming Systems products declined 6.3% while sales of
Synario Design Automation Division software products increased by 235% in 1994
compared to 1993. Sales in the U.S. decreased 2.4% while international sales
decreased 3.1%. Sales in the U.S. accounted for approximately 54% of the
Company's sales in 1994 compared to 53% in 1993. The increase as a percentage
of total sales in the Company's sales to U.S. customers resulted primarily from
the continued economic weakness in the Japanese and German markets during 1994.
The Company experienced quarterly year-over-year revenue growth of 4.5% and 3.3%
for the third and fourth quarters of 1994 compared to 1993 due primarily to
increased sales of automated programming and handling systems. For the year,
decreased sales in the first half of 1994 compared to 1993 offset the second
half sales growth for an overall decline in sales of 2.7%. The 1994 sales
decline was due primarily to a decline in sales of the Company's non-automated
programming systems and older software design tools offset by increased sales of
the Company's automated programming and handling systems for the manufacturing
environment.
Net sales for 1994 in the Company's traditional line of non-automated
programming systems declined by $5.9 million or 13.1% over 1993. The Company
experienced decreased sales for nearly all of the products in this product line,
except for the low-priced ChipLab. This reflects the continuing market shift
toward lower-priced, project-specific, non-automated programming systems, the
shift in demand toward software design tools by engineering design teams and the
technological advances creating increased competition discussed above.
Sales of the Company's automated programming and handling systems for the
manufacturing environment increased by approximately 40.3% in 1994 compared to
1993. The Company believes this growth is due to a trend toward the expanded
use of programmable ICs in high-volume manufacturing situations as discussed
above. The automated programming and handling systems product line accounted
for approximately 24% of revenues in 1994 compared to 16% in 1993. A market
shift in the ProMaster product mix toward higher-priced models also contributed
to the sales increase. The Company's new products, ProMaster 7500, ProMaster
2500 and Tape and Reel, provided approximately 70% of this growth during 1994.
Sales of the Company's Programming Systems software products decreased by 31% in
1994 compared to 1993. The Company's ABEL and FutureNet products declined
primarily due to competitive pricing pressures, product aging and lower unit
sales. The Company believes that the strategic decision in 1993 to change its
software sales channel to value-added resellers, which it believes are more
appropriate for Windows-based software, continued to have a negative
transitional impact during early 1994. In addition, this change resulted in
lower net sales by the Company as it received lower wholesaler/distributor
pricing instead of direct/retail sales pricing.
Sales growth in the Company's Synario Design Automation software products,
including Synario and ECS, was due to having a full year of sales of the
Company's Synario product line after its introduction in October 1993. Synario
is targeted at the change in the industry demand toward greater usage of
software products and at the Company's belief in the emerging Windows-based EDA
market. The Company believes Synario is well positioned to take advantage of
the adoption of the Windows environment by users of EDA software tools.
Page 25
GROSS MARGIN
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1995 CHANGE 1994 CHANGE 1993
- --------------------------------------------------------------------------------
Gross margin $35,433 7.1% $33,094 4.2% $31,775
Percentage of net sales 53.7% 53.8% 50.3%
- --------------------------------------------------------------------------------
1995 VS. 1994
The gross margin increased in Dollars during 1995 compared to 1994 while staying
approximately the same as a percentage of sales. The increase in gross margin
Dollars is due primarily to the increase in sales volume. The Company
experienced improved gross margins on automated programming and handling system
products in 1995 due to increased volume and a shift toward higher-priced
models. Offsetting this improvement is a shift in the mix of sales of the
Company's non-automated programming systems products from higher-priced, higher-
margined products toward lower-priced alternatives which has lowered the overall
margins for this product line. The shift in the product mix to a lower overall
percentage of software sales, which have higher gross margins, has had an
additional offsetting impact. In addition, the gross margin on the ProMaster
9500 was below that of the Company's traditional automated programming and
handling systems due to higher material and labor costs. The Company expects
the ProMaster 9500 costs to decline in future periods due to the acquisition of
Reel-Tech and anticipated improvements in the proficiency of manufacturing and
service personnel in building and servicing this system. Finally, gross margin
was favorably affected by improvements due to the positive currency effects of a
weaker Dollar. As stated above, there is no assurance of continued benefit from
currency rate changes.
1994 VS. 1993
The gross margin increased in both Dollars and as a percentage of sales during
1994 compared to 1993 despite the decline in sales. The Company's gross margin
in 1993 was depressed due to increased reserves for excess and obsolete
inventories. The Company's restructuring reduced costs in its manufacturing,
service and distribution operations, improving margins in 1994. In addition,
the Company experienced improved gross margins on its automated programming and
handling system products in 1994 due to increased volume and a shift toward
higher-priced models.
Offsetting a portion of these gross margin improvements are the lower sales
volume and a shift from higher-priced to lower-priced products in the Company's
non-automated programming systems line. Lower sales in Japan and Germany also
unfavorably impacted gross margins as the Company generally receives higher
gross margins on sales to those countries.
RESEARCH AND DEVELOPMENT
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1995 CHANGE 1994 CHANGE 1993
- --------------------------------------------------------------------------------
Research and development $9,069 (1.7%) $9,227 (4.9%) $9,700
Percentage of net sales 13.7% 15.0% 15.4%
- --------------------------------------------------------------------------------
1995 VS. 1994
Research spending declined slightly both in Dollars and as a percentage of
sales. The decline is primarily due to lower personnel costs which relate
primarily to open job positions during the year. The Company focused its
research and development efforts in 1995 on its strategic growth markets, namely
automated programming and handling systems, Windows-based EDA software design
tools, low-priced project specific IC programmers and semiconductor equipment.
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.
The charge for in-process research and development acquired as part of the Reel-
Tech acquisition is discussed above under the caption "Business Acquisition" and
is not included in research and development expense.
Page 26
1994 VS. 1993
Research spending declined slightly both in Dollars and as a percentage of
sales. The decline was primarily due to personnel reductions made as a part of
the Company's restructuring. The Company focused its research and development
efforts in 1994 on its strategic growth markets, namely automated programming
and handling systems, Windows-based EDA software design tools and low-priced
project specific non-automated IC programmers.
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1995 CHANGE 1994 CHANGE 1993
- --------------------------------------------------------------------------------
Selling, general and
administrative $20,411 1.9% $20,032 (23.2%) $26,094
Percentage of net sales 30.9% 32.6% 41.3%
- --------------------------------------------------------------------------------
1995 VS. 1994
The actual Dollar increase in selling, general and administrative expenditures
in 1995 was due to increased marketing and promotion expenditures, increased
commissions resulting from the sales volume increase and increased expenses in
the Company's foreign offices due to currency rate changes. Partially offsetting
this increase were reductions in spending due to the restructuring efforts.
1994 VS. 1993
The decrease in selling, general and administrative expenditures in 1994 was due
primarily to the restructure efforts which reduced the number of personnel
worldwide and focused on matching cost effective sales channels to our products
and markets. These reductions were partially offset by performance bonuses and
incentive compensation which were not incurred in 1993.
BUSINESS RESTRUCTURING
During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1
million related to the restructure of its sales and distribution channels,
downsizing its operations to a level consistent with anticipated lower sales and
product margins, and to consolidate and outsource certain manufacturing
processes. The purpose of the restructure was primarily to reduce expenses and
significantly lower the Company's break-even point in reaction to reduced sales
and gross margins in 1993. Additionally, the Company made several strategic
changes to its sales and distribution channels to better align distribution of
the Company's current and anticipated future products to their markets and
customers. The general downsizing of operations and restructuring of the sales
and distribution system were substantially completed in 1994. The Company began
implementation of the planned changes to its manufacturing processes in 1994 for
completion in 1997. The manufacturing consolidation and relocation project was
completed in the first quarter of 1996, and the outsourcing of certain
manufacturing processes is scheduled to be completed in 1997.
Of the total 1993 restructure charge of $6.1 million, $2.1 million related to
restructuring the sales and distribution system, including severance for
terminated employees, facilities and equipment lease abandonment, facilities
relocation costs, the write-off of intangible assets associated with the
acquisition and setup of direct sales operations in Germany and the United
Kingdom, and costs associated with implementing new accounting and distribution
systems and processes; $2.0 million related to the consolidation and outsourcing
of certain portions of the Company's manufacturing operations, including the
write-down of production equipment to net realizable value, severance for
terminated employees, facility relocation costs, and costs associated with
outsourcing certain manufacturing processes; and the remaining $2.0 million
related to general organizational downsizing, including severance for terminated
employees, asset write-downs and costs associated with rearrangement of
facilities.
Of the total $6.1 million restructuring charge, the Company paid approximately
$1.5 million in cash in 1993 (including approximately $300,000 of previously
accrued vacation and pension payments), $2.1 million in 1994 (including
approximately $200,000 of previously accrued vacation and pension payments),
$855,000 in 1995 and expects to pay approximately $965,000 in future periods.
The Company expects to fund these cash payments from internally generated
Page 27
funds and, if necessary, borrowings on its lines of credit. In addition, the
Company recorded approximately $800,000 in asset write-downs related to its
restructuring.
The Company has continuously reviewed its restructure actions and compared them
to its original plan. Accordingly, during the fourth quarter of 1995, asset and
accrued liability accounts associated with the plan were adjusted such that the
total restructuring costs were lowered by $400,000 or 7% of the original plan.
This credit lowered the expected cost of the restructure of the Company's
manufacturing operations by approximately $200,000 and the Company's sales and
distribution systems by approximately $200,000. No other amounts related to the
restructuring plan were charged or credited to earnings since inception of the
plan. The restructuring plan changed primarily as the Company experienced
difficulties in proceeding as planned on outsourcing certain manufacturing
processes. The effect of this has been a delay in accomplishing portions of the
outsourcing plan, resulting in continued usage of certain production equipment
beyond the time that was originally planned, as well as reductions in originally
contemplated costs.
In the aggregate, the restructuring of the Company's operations reduced total
costs and expenses by a net of $7 million in 1994, with approximately $6.6
million of the savings attributable to reduced employee costs, approximately
$200,000 due to reduced facility and equipment lease expense, and approximately
$200,000 due to reduced depreciation and amortization. The 1993 restructure
resulted in an additional $1.6 million reduction in costs and expenses in 1995
compared to 1994, which was attributable primarily to reduced employee costs.
In addition to the actions described above, the Company implemented a temporary
pay and work week reduction of 10% for all U.S. employees for the period
January 1, 1994 through February 28, 1994. The Company realized savings of
approximately $250,000 in salary costs related to this reduction.
INTEREST
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1995 CHANGE 1994 CHANGE 1993
- --------------------------------------------------------------------------------
Interest income $398 176.4% $144 433.3% $27
Interest expense $273 0.0% $273 (14.2%) $318
- --------------------------------------------------------------------------------
1995 VS. 1994
Net interest income increased in 1995 to $125,000. This increase relates to
increased interest income from investment of higher cash balances and from funds
being invested at higher average interest rates during the year.
1994 VS. 1993
Net interest expense decreased in 1994 to $129,000. This decline relates to
increased interest income from investment of higher cash balances and to
decreased average borrowings on the Company's lines of credit.
ADJUSTMENT OF CARRYING VALUE OF LAND HELD FOR SALE
Due to the changes in valuation for commercial real estate comparable to the
land held by Data I/O, the Company recorded a $2.0 million valuation reserve
against the land held for sale at December 30, 1993. The Company has and
intends to continue to market this excess land. See Note 4 of "Notes to
Consolidated Financial Statements."
Page 28
INCOME TAXES
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1995 CHANGE 1994 CHANGE 1993
- --------------------------------------------------------------------------------
Income tax expense (benefit) $892 (8.5%) $975 N/A ($700)
Effective tax (benefit) rate 15.8% 26.3% (5.7%)
- --------------------------------------------------------------------------------
1995 VS. 1994
The effective income tax rate for 1995 differed from the statutory 34% tax rate
primarily due to reversal of tax valuation reserves established in 1993. The
reversal of valuation reserves was due to the utilization of foreign subsidiary
loss carryforwards and alternative minimum tax credit carryforwards as well as
the offset of reversing temporary differences against 1995 taxable income. See
Note 10 of "Notes to Consolidated Financial Statements."
The Company had valuation allowances of $2,571,000 at December 28, 1995 compared
to $3,358,000 at December 29, 1994. The valuation reserves will continue to
reverse in 1996 if the Company's profitability continues. In 1996, the criteria
that requires the Company to maintain its valuation allowance will be less
restrictive if the Company is profitable. The Company believes this may allow
further reductions in the valuation allowance for deferred tax assets. The
potential reversal of these valuation allowances may significantly reduce the
Company's effective tax rate in 1996.
1994 VS. 1993
The effective income tax rate for 1994 differed from the statutory 34% tax rate
primarily due to reversal of tax valuation reserves established in 1993. The
valuation reserves reversed due to the Company utilizing foreign subsidiary loss
carryforwards and the ability to offset reversing temporary differences against
1994 taxable income. See Note 10 of "Notes to Consolidated Financial
Statements."
The effective income tax rate for the 1993 loss benefit was reduced primarily
due to valuation reserves established for deferred tax assets. The valuation
reserves were increased during 1993 due to the loss generated during the year
and the increased uncertainty of the Company's ability to utilize the benefits
from its deferred tax assets, particularly net operating loss carryforwards. The
valuation reserves were set up for net operating loss carryforwards of foreign
subsidiaries and as a result of an evaluation of the benefit obtainable for
deferred tax assets.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was adopted during 1993 and the cumulative benefit of $400,000 was
included in net income as the cumulative effect of accounting change (see Note
10 of "Notes to Consolidated Financial Statements").
NET INCOME AND EARNINGS PER SHARE
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1995 CHANGE 1994 CHANGE 1993
- -------------------------------------------------------------------------------------------------------------
Before cumulative effect of accounting
change:
Income (loss) $4,761 74.7% $2,726 N/A ($11,657)
Percentage of net sales 7.2% 4.4% (18.4%)
Earnings (loss) per share $0.60 62.2% $0.37 N/A ($1.63)
Net income (loss) $4,761 74.7% $2,726 N/A ($11,257)
Earnings (loss) per share $0.60 62.2% $0.37 N/A ($1.57)
- -------------------------------------------------------------------------------------------------------------
1995 VS. 1994
The change in the Company's profitability was due primarily to the increased
sales volume, the reversal of a portion of the restructure accrual, reduced
costs and operating expenses resulting from the Company's 1993 restructure and
the reversal of deferred tax valuation reserves. Offsetting a portion of this
was the charge of $660,000 net of tax for in-process research and development
related to the Reel-Tech acquisition.
Page 29
1994 VS. 1993
The change in the Company's profitability before cumulative effect of accounting
change was due primarily to the reduced operating expenses and costs of goods
sold resulting from the restructure of the Company's operations.
INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
In the past, the Company has been able to offset the impact of inflation with
efficiency increases and price adjustments. Heightened competition has made the
Company's products subject to more price competition and has diminished its
ability to offset the impacts of inflation.
Sales and expenses incurred by foreign subsidiaries are denominated in the
subsidiary's local currency and translated into U.S. Dollar amounts at average
rates of exchange during the year. To date the foreign currency rate changes
have not significantly impacted the Company's profitability. This is because
only approximately one-third of the Company's sales are made by foreign
subsidiaries, independent currency fluctuations tend to minimize the 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 the sales of inventory and
certain loans to its foreign subsidiaries through the use of foreign exchange
contracts. See Note 1 of "Notes to Consolidated Financial Statements."
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1995 CHANGE 1994 CHANGE 1993
- --------------------------------------------------------------------------------
Working capital $12,005 $1,967 $10,038 $6,456 $3,582
Total debt $1,617 ($323) $1,940 ($1,927) $3,867
- --------------------------------------------------------------------------------
Working capital increased during 1995 primarily due to funds provided by
operations, which is net of $855,000 of restructure related expenditures.
The Company's trade accounts receivable at the end of 1995 increased by
approximately $3.0 million as compared to the end of 1994 due to increased sales
volume in the fourth quarter, Reel-Tech receivables, and a general increase in
the collection period related to sales of automated programming and handling
products. The Company increased inventory levels by approximately $1.6 million
or 23% during 1995. Inventory levels were increased primarily to support the
growth in automated programming and handling systems as well as provide a level
of safety stock during the Anaheim factory relocation. Additionally, inventory
increased due to the acquisition and expansion of Reel-Tech inventories. The
Company reduced its other current assets by approximately $500,000 primarily due
to collection of former lease deposits. Other long-term assets increased by
approximately $500,000 related to the capitalization of intangible assets
purchased from Reel-Tech which are offset by amortization. The Company also
reduced its accrued expenses primarily due to payments of approximately $855,000
of restructure related accruals. Borrowings on the foreign line of credit were
paid down by approximately $300,000. The use of $4.1 million of cash to
repurchase 562,400 shares of Common Stock during the fourth quarter was
partially offset by stock sale proceeds of $900,000 under the Company's employee
stock benefit plans. The funding for these changes in 1995 was provided
primarily by operations and by reducing the Company's level of cash by
approximately $2.8 million.
As of December 28, 1995, the Company had total debt of $1.6 million, or
approximately 6% of its $25.9 million in equity. Of this total, approximately
$117,000 is current debt, consisting entirely of borrowings on its foreign line
of credit. The $1.5 million of long-term debt consists of a note due in 1998
for the balance of the purchase price for CAD/CAM (see Note 6 of "Notes to
Consolidated Financial Statements"). At December 28, 1995, the Company also had
an unused $8.0 million U.S. line of credit maturing in May 1996 under which
borrowings would incur interest at the bank's published Prime rate or the LIBOR
rate plus 110 basis points.
Page 30
The foreign line of credit of $1.6 million matures in August 1996.
Historically, this debt and the U.S. line of credit, have been structured as
short-term and have been continuously renewed on their maturity dates. The
Company currently expects to be able to renew these lines of credit on maturity
under substantially the same terms as those presently in place. No assurances
can be made, however, in regard to the renewal of these agreements.
The Company estimates that capital expenditures for property, plant and
equipment during 1996 will be approximately $2.0 million. Such expenditures are
currently expected to be funded from internally generated funds and, if
necessary, borrowings from the Company's existing credit lines. Although the
Company fully expects that such expenditures will be made, it has commitments
for only a small portion of these amounts.
At December 28, 1995, the Company's material short-term unused sources of
liquidity consisted of approximately $4.5 million in cash and cash equivalents
and available borrowings of $8.0 million under its U.S. line of credit and
approximately $1.5 million under its foreign line of credit. The Company
believes these sources will be sufficient during 1996 to fund working capital
needs, service existing debt, finance planned capital acquisitions, fund the
Company's planned repurchase of up to 570,000 shares of its Common Stock, fund
the Reel-Tech contingent payment obligations and fund its remaining restructure
accrued liabilities. Additional capital will also be provided if the Company
successfully disposes of its Redmond headquarters property (see Note 4 of "Notes
to Consolidated Financial Statements").
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 32 through 47.
Page 31
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP , INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Data I/O Corporation
We have audited the accompanying consolidated balance sheets of Data I/O
Corporation as of December 28, 1995, and December 29, 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 28, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(A).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Data I/O Corporation at December 28, 1995, and December 29, 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 28, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 10 of "Notes to Consolidated Financial Statements," in 1993
the Company changed its method of accounting for income taxes.
Seattle, Washington //S// ERNST & YOUNG LLP
February 7, 1996 ERNST & YOUNG LLP
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
Management is responsible for preparing the Company's financial statements and
related information that appears in this annual report on Form 10-K. Management
believes that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of its operations in conformity with generally accepted accounting
principles. Management has included in the Company's financial statements
amounts that are based on estimates and judgments, which it believes are
reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements, and that assets are
adequately safeguarded.
Independent audits of the Company's financial statements are performed in
accordance with generally accepted auditing standards and provide an objective,
independent review of the fairness of reported financial condition and results
of operations.
The Board of Directors of the Company has an Audit Committee composed of non-
management Directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing and financial reporting matters.
//S//WILLIAM C. ERXLEBEN //S//STEVEN M. GORDON
WILLIAM C. ERXLEBEN STEVEN M. GORDON
President Vice President
Chief Executive Officer Finance and Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurer
Page 32
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------
DEC. 28, DEC. 29, DEC. 30,
FOR THE YEARS ENDED 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $66,031 $61,478 $63,186
Cost of goods sold 30,598 28,384 31,411
--------- --------- ---------
Gross margin 35,433 33,094 31,775
Operating expenses:
Research and development 9,069 9,227 9,700
Selling, general and administrative 20,411 20,032 26,094
Write-off of acquired in-process R&D 825
Provision for business restructuring (400) 6,120
--------- --------- ---------
Total operating expenses 29,905 29,259 41,914
--------- --------- ---------
Operating income (loss) 5,528 3,835 (10,139)
Non-operating (income) expense:
Interest income (398) (144) (27)
Interest expense 273 273 318
Foreign currency exchange 5 (73)
Adjustment of carrying value of land held for sale 2,000
--------- --------- ---------
Total non-operating (income) expense (125) 134 2,218
--------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change 5,653 3,701 (12,357)
Income tax expense (benefit) 892 975 (700)
--------- --------- ---------
Income (loss) before cumulative effect of
accounting change 4,761 2,726 (11,657)
Cumulative effect of accounting change 400
--------- --------- ---------
Net income (loss) $4,761 $2,726 ($11,257)
--------- --------- ---------
--------- --------- ---------
Earnings per share:
Income (loss) before cumulative effect of
accounting change $0.60 $0.37 ($1.63)
Cumulative effect of accounting change 0.06
--------- --------- ---------
Net income (loss) $0.60 $0.37 ($1.57)
--------- --------- ---------
--------- --------- ---------
Weighted average common and equivalent
shares outstanding 7,879 7,420 7,170
--------- --------- ---------
--------- --------- ---------
See notes to consolidated financial statements.
Page 33
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------
DEC. 28, DEC. 29,
1995 1994
- ----------------------------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $4,496 $7,279
Trade accounts receivable,
less allowance for doubtful
accounts of $311 and $277, respectively 13,115 10,145
Inventories 8,539 6,937
Recoverable income taxes 453
Deferred income taxes 976 675
Other current assets 893 1,361
--------- ---------
TOTAL CURRENT ASSETS 28,019 26,850
Land held for sale 2,095 2,006
Property, plant and equipment - net 10,240 10,737
Other assets 4,422 3,894
--------- ---------
TOTAL ASSETS $44,776 $43,487
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,071 $1,908
Accrued compensation 3,612 3,460
Deferred revenue 5,436 5,271
Other accrued liabilities 2,672 2,846
Accrued costs of business restructuring 965 1,890
Income taxes payable 1,141 997
Notes payable 117 440
--------- ---------
TOTAL CURRENT LIABILITIES 16,014 16,812
LONG-TERM DEBT 1,500 1,500
LONG-TERM OTHER PAYABLES 1,117 361
DEFERRED INCOME TAXES 216 471
COMMITMENTS (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 7,083,825
and 7,431,901 shares, respectively 17,528 20,729
Retained earnings 7,946 3,185
Currency translation adjustments 455 429
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 25,929 24,343
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,776 $43,487
--------- ---------
--------- ---------
See notes to consolidated financial statements.
Page 34
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
DEC. 28, DEC. 29, DEC. 30,
FOR THE YEARS ENDED 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net income (loss) $4,761 $2,726 ($11,257)
Adjustments to reconcile income (loss)
to net cash provided by operating activities:
Depreciation and amortization 4,285 4,671 4,860
Adjustment of carrying value of land held for sale 2,000
Write-off of acquired in-process R&D 825
Income and deferred income taxes and refunds 39 2,133 (533)
Cumulative effect of accounting change (400)
Business restructure (925) (1,936) 4,955
Deferred revenue 184 937 458
Changes in current items other
than cash and cash equivalents:
Trade accounts receivable (1,712) (741) 3,518
Inventories (1,469) 1,345 2,393
Other current assets 474 (218) 48
Accounts payable and accrued liabilities (354) 38 (1,441)
--------- --------- ---------
Cash provided by operating activities 6,108 8,955 4,601
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,654) (1,876) (2,820)
Investment in assets of acquired business (2,055)
Additions to other assets (104) (53) (1,405)
Cash used for investing activities (4,813) (1,929) (4,225)
FINANCING ACTIVITIES:
Repayment of notes payable (921) (1,931) (1,060)
Sale of common stock 333 327 410
Proceeds from exercise of stock options 585 160 275
Repurchase of common stock (4,119) (65)
--------- --------- ---------
Cash used for financing activities (4,122) (1,444) (440)
Increase (decrease) in cash and cash equivalents (2,827) 5,582 (64)
--------- --------- ---------
Effects of exchange rate changes on cash 44 (7) (6)
Cash and cash equivalents - Beginning of year 7,279 1,704 1,774
--------- --------- ---------
Cash and cash equivalents - End of year $4,496 $7,279 $1,704
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $121 $255 $343
Income taxes $923 $405 $573
See notes to consolidated financial statements.
Page 35
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------
COMMON STOCK CURRENCY
------------------------- RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT
- ----------------------------------------------------------------------------------------------------
(in thousands except share data)
BALANCE AT DECEMBER 31, 1992 7,029,931 $19,190 $11,716 $437
Net loss (11,257)
Stock options exercised 88,450 275
Issuance of stock through
Employee Stock Purchase Plan 149,259 410
Repurchase of common stock (17,604) (65)
Compensation on exercised or expired
stock options 432
Currency translation adjustment, net of
tax of $23 45
---------- ---------- ---------- ----------
BALANCE AT DECEMBER 30, 1993 7,250,036 20,242 459 482
Net income 2,726
Stock options exercised 44,875 160
Issuance of stock through
Employee Stock Purchase Plan 136,990 327
Currency translation adjustment, net of
tax benefit of $27 (53)
---------- ---------- ---------- ----------
BALANCE AT DECEMBER 29, 1994 7,431,901 20,729 3,185 429
Net Income 4,761
Stock options exercised 118,125 585
Issuance of stock through
Employee Stock Purchase Plan 96,199 333
Repurchase of Common Stock (562,400) (4,119)
Currency translation adjustment, net of
tax of $2 26
---------- ---------- ---------- ----------
BALANCE AT DECEMBER 28, 1995 7,083,825 $17,528 $7,946 $455
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See notes to consolidated financial statements.
Page 36
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF OPERATIONS
Data I/O Corporation (the "Company") manufactures hardware and software products
for users of programmable integrated circuits, and manufactures equipment used
by integrated circuit manufacturers. The Company's principal customers use the
Company's programming systems and software programs to design and manufacture
electronic equipment for industrial, commercial and military applications. The
Company also sells its semiconductor equipment products to semiconductor
manufacturers. Customers for the Company's programming systems, software and
semiconductor equipment products are located around the world, primarily in the
United States, Europe and the Far East. All of the Company's manufacturing
operations are located in the United States.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Data I/O
Corporation and its wholly owned subsidiaries. The consolidated financial
statements include the results of operations of Reel-Tech, Inc. since the
acquisition of this business on August 31, 1995. 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 1995, 1994 and 1993 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 grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and intends to continue to do so.
Accordingly, the Company recognizes no compensation expense for its stock option
grants.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenues, costs and expenses are
translated at average rates of exchange prevailing during the year. Translation
adjustments resulting from this process are charged or credited to stockholders'
equity, net of taxes. Realized and unrealized gains and losses on foreign
currency transactions are included in non-operating expense as Foreign Currency
Exchange.
In an effort to minimize the effect of exchange rate fluctuations on the results
of its operations, the Company hedges certain portions of its foreign currency
exposure through the use of forward exchange contracts. At December 28, 1995,
the Company had approximately $800,000 in foreign exchange contracts
outstanding, with the contract exchange rates being approximately equal to the
market exchange rates. These contract terms range from 30 to 120 days.
Page 37
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with insignificant
interest rate risk. The Company invests in the highest grade commercial paper
with original maturities of three months or less and conservative money market
funds. Interest earned is reported in non-operating (income) expense as
Interest Income.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is computed on a
currently adjusted standard basis, which approximates actual cost on an average
or first-in/first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated using the
straight-line method over estimated useful lives as follows:
Building 40 years
Equipment 3 to 7 years
Leasehold improvements Lesser of lease term or estimated useful life
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment or customer
acceptance, if an acceptance clause is specified in the sales terms. Revenue
from software products licensed to original equipment manufacturers is
recognized when earned per the terms of the contracts. Revenue from the sale of
service and update contracts is recorded as deferred revenue and recognized as
earned revenue on a straight-line basis over the contractual period.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. No software
development costs have been capitalized due to immateriality.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. Total expenses were
$2,261,000, $1,771,000 and $2,123,000 in 1995, 1994 and 1993, respectively.
WARRANTY EXPENSE
The Company warrants its products against defects for periods ranging from
ninety days to one year. The Company provides currently for the estimated cost
which may be incurred under its product warranties.
INCOME TAXES
Income tax expense includes U.S., state and foreign income taxes. Certain items
of income and expense are not reported in both the tax returns and financial
statements in the same year. The resulting difference is reported as deferred
income taxes.
In 1993, the Company adopted Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes," which requires the use of the
liability method in computing income taxes. Under the liability method,
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
These deferred tax assets and liabilities are measured by the provisions of
currently enacted tax laws. The adoption of SFAS 109 during the first quarter
of 1993 resulted in an increase in the net deferred tax asset by approximately
Page 38
$400,000, which was reported separately as the cumulative effect of a change in
the method of accounting for income taxes in the consolidated statement of
operations for the year ended December 30, 1993.
EARNINGS PER SHARE
The Company calculates and reports earnings per share based on the weighted
average common and common stock equivalent shares outstanding during the period
(using the treasury stock method). Common stock equivalents which are
antidilutive are not considered. Stock options are common stock equivalents.
Fully diluted earnings per share approximates primary earnings per share.
During 1995, the Company repurchased 562,400 shares of its common stock under a
Share Repurchase Program. The effect of this repurchase on earnings per share
for the year ended December 28, 1995 would have been an increase of
approximately $.02 if the shares had been repurchased as of the beginning of the
year. On February 21, 1996, the Company's Board of Directors extended the Share
Repurchase Program. This extension authorizes the repurchase of up to an
additional 8% (approximately 570,000 shares) of the Company's outstanding common
stock through open market purchases at prevailing market prices or through block
purchases or through privately negotiated transactions. Purchases may commence
or be discontinued at any time.
DIVERSIFICATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. The Company's trade
receivables are geographically dispersed and include customers in many different
industries. Management believes that any risk of loss is significantly reduced
due to the diversity of its end-customers and geographic sales areas. The
Company performs on-going credit evaluations of its customers' financial
condition and requires collateral, such as letters of credit and bank
guarantees, whenever deemed necessary.
RECLASSIFICATIONS
Certain prior years' balances have been reclassified to conform to current year
presentation.
NOTE 2 - PROVISION FOR BUSINESS RESTRUCTURING
During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1
million related to the restructure of its sales and distribution channels,
downsizing its operations to a level consistent with anticipated lower sales and
product margins, and consolidating and outsourcing of certain manufacturing
processes. The purpose of the restructure was primarily to reduce expenses and
significantly lower the Company's break-even point in reaction to the reduced
sales and gross margins realized in 1993. Additionally, the Company made
several strategic changes to its sales and distribution channels to better align
the Company's current and anticipated future products to their markets and
customers. The general downsizing of operations and restructuring of the sales
and distribution system were substantially completed in 1994. The Company began
implementation of planned changes to its manufacturing processes in 1994 for
completion in 1997. The manufacturing consolidation and relocation project was
completed in the first quarter of 1996, and the outsourcing of certain
manufacturing processes is scheduled to be completed in 1997.
Of the total original restructure charge of $6.1 million, $2.1 million related
to restructuring the sales and distribution system, including severance for
terminated employees, facilities and equipment lease abandonment, facilities
relocation costs, the write-off of intangible assets associated with the
acquisition and set-up of direct sales operations in Germany and the United
Kingdom, and costs associated with implementation of new accounting and
distribution systems and processes; $2.0 million related to the consolidation
and outsourcing of certain portions of the Company's manufacturing operations,
including the write-down of production equipment to net realizable value,
severance for terminated employees, facility relocation costs, and costs
associated with outsourcing certain manufacturing processes; and the remaining
$2.0 million related to general organizational downsizing, including severance
for terminated employees, asset write-downs and costs associated with
rearrangement of facilities.
Page 39
The Company has continuously reviewed its restructure actions and compares them
to its original plan. Accordingly, during the fourth quarter of 1995, asset and
accrued liability accounts associated with the plan were adjusted such that the
total restructuring costs were lowered by $400,000 or 7% of the original plan.
This credit lowered the expected cost of the restructure of the Company's
manufacturing operations by approximately $200,000 and the Company's sales and
distribution systems by approximately $200,000. No other amounts related to the
restructuring plan were charged or credited to earnings since inception of the
plan. The restructuring plan changed primarily as the Company experienced
difficulties in proceeding as planned on outsourcing certain manufacturing
processes. The effect of this has been a delay in accomplishing portions of the
outsourcing plan, resulting in continued usage of certain production equipment
beyond the time that was originally planned, as well as reductions in originally
contemplated costs.
At December 28, 1995, approximately $965,000 of the total restructure charge
remained in accrued liabilities to be paid out. Approximately $855,000, $1.9
million and $1.2 million had been spent during 1995, 1994 and 1993,
respectively, and $800,000 had been taken against related assets.
NOTE 3 - INVENTORIES
Inventories consisted of the following components (in thousands):
DEC. 28, DEC. 29,
1995 1994
---------- ----------
Raw material $4,839 $3,327
Work-in-process 2,125 1,955
Finished goods 1,575 1,655
------ ------
$8,539 $6,937
------ ------
------ ------
NOTE 4 - LAND HELD FOR SALE
The Company owns 79.4 acres of land at its headquarters site in Redmond,
Washington, which it purchased in various parcels between 1979 and 1986. The
land was intended as a campus on which to consolidate the operations of the
Company as it expanded internally and through acquisitions. The Company has
since abandoned its aggressive acquisition and consolidation strategy. In 1990,
the Company decided to market and sell the approximately 40 acres of land in
excess of that required for its current 100,000 square-foot building and another
50,000 square-foot expansion facility. At that time, the land was reclassified
at cost plus estimated disposition expenses, to Land Held for Sale in the
Company's financial statements. Based on information available at that time,
the cost approximated market value.
In June 1992, the Company recorded an extraordinary $2.6 million ($1.7 million
after-tax) write-down to reflect a decrease in the market value of its land.
This decrease in value was caused primarily by the enactment, in July 1992, of a
Sensitive Areas Ordinance ("SAO") by the City of Redmond. The SAO prohibits
building not only on land classified as wetlands, but on steep slopes and on
buffers around the wetlands which are wider than those required by most
jurisdictions. In addition, due to the changes in valuation for commercial real
estate comparable to the land held by Data I/O, the Company recorded a
$2.0 million valuation provision for the land held for resale at December 30,
1993.
Since placing the land on the market in 1990, the Company has entered into two
separate option agreements to sell the property. Both of these agreements were
allowed to expire due to the changes in regulatory requirements and valuations
of commercial real estate comparable to the land held by the Company, discussed
above. The Company intends to continue to market this excess land. In order to
enhance the property's marketability, the Company currently has listed its
entire Redmond headquarters property as available for sale with long-term lease
back provisions on the building.
Page 40
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
DEC. 28, DEC. 29,
1995 1994
------------ ------------
Land $ 910 $ 910
Building and improvements 7,539 7,334
Equipment 22,329 21,507
------- -------
30,778 29,751
Less accumulated depreciation 20,538 19,014
------- -------
Property, plant and equipment - net $10,240 $10,737
------- -------
------- -------
NOTE 6 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
DEC. 28, DEC. 29,
1995 1994
------------ ------------
Long-term lease deposits $ 262 $ 156
Investment in product lines 8,629 6,883
------ ------
8,891 7,039
Less accumulated amortization 4,469 3,145
------ ------
Other assets - net $4,422 $3,894
------ ------
------ ------
Total amortization recorded for 1995, 1994 and 1993 was $1,324,000, $1,399,000
and $1,338,000, respectively.
INVESTMENT IN PRODUCT LINES
The Company's investment in product lines includes intangible assets, the value
of which are dependent upon future technological trends. The Company amortizes
these intangible assets over their estimated useful lives. However, there is no
assurance that the actual lives will not materially differ from their estimated
useful lives.
REEL-TECH, INC.
On August 31, 1995, the Company acquired the assets of Reel-Tech, Inc. (Reel-
Tech) of Indianapolis, Indiana, and entered into employment and non-compete
agreements with its two founding technologists. The purchase price for the
assets of Reel-Tech included an initial cash payment of $2.0 million, $500,000
of which remains in escrow at December 28, 1995, and the assumption of certain
liabilities of approximately $1.2 million. The Company has agreed to make
additional payments of up to a maximum of $2.0 million over the next three
years, with these payments contingent upon the acquired operation achieving
specified performance goals.
The transaction was accounted for using the purchase method of accounting based
upon an independent appraisal. In addition to the initial cash payment, the
Company accrued in long-term payables a $666,000 contingent payment obligation.
The remaining contingent payments of $1,334,000 are expected to result in a
charge to earnings at the time a determination is made that the payments are
probable. The Company recorded approximately $1.3 million of tangible assets
consisting of approximately $1.2 million of trade receivables and approximately
$100,000 of inventories. As part of the purchase price allocation, intangible
assets of approximately $1.7 million were recorded, consisting of established
technology, customer base, workforce and non-competition agreements which are
being amortized over their estimated useful lives of five to seven years. In
addition, the Company recorded a charge in the third quarter of $825,000
relating to that portion of the purchase price allocated to in-process research
and development. At December 28, 1995, the net book value of the assets
capitalized in Other Assets related to this acquisition was approximately $1.7
million.
Page 41
CAD/CAM GROUP, INC.
On January 19, 1993, the Company acquired substantially all of the assets of
CAD/CAM Group, Inc. and entered into non-compete agreements with its two
founding technologists. The acquisition was accounted for under the purchase
method of accounting. Of the total purchase price of $3.0 million to be paid to
CAD/CAM Group, Inc. and its two founding technologists, $1.5 million was paid
during 1993 and the balance plus accrued interest payable at the U.S. Treasury
Bill rate is payable in 1998. Of the total consideration, approximately $2.9
million plus approximately $200,000 of transaction costs were allocated to
various identifiable intangible assets. These are reported in the accompanying
balance sheet as Other Assets and are being amortized ratably over the economic
life of the specific assets acquired (two to eight years). The net book value
of the assets capitalized in Other Assets related to this acquisition was $1.2
million and $1.8 million at December 28, 1995 and December 29, 1994,
respectively.
QUALITY AUTOMATION, INC.
On September 25, 1990, the Company acquired exclusive rights to distribute
automated handling and labeling equipment manufactured by Quality Automation,
Inc. The Company also obtained options to acquire Quality Automation's existing
and future products as well as certain other assets. On September 25, 1992, the
Company exercised its options and purchased the assets, technology and rights in
the products of Quality Automation Inc., and Q.A. Engineering, Inc. (both herein
combined and referred to as "Quality Automation" or "QA"). The acquisition was
accounted for as a purchase, with the aggregate purchase price totaling $4.8
million. The aggregate purchase price, along with the associated transaction
fees, was allocated to the assets acquired, based on estimated fair market
value. Of the total acquisition cost, approximately $3.8 million of various
identifiable intangible assets were reported as Other Assets in the accompanying
balance sheets and are being amortized ratably over the economic life of the
specific assets acquired (three to five years). The net book value of the
assets capitalized in Other Assets related to this acquisition is $1.3 million
and $1.9 million at December 28, 1995, and December 29, 1994, respectively.
NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following components:
DEC. 28, DEC. 29,
(IN THOUSANDS) 1995 1994
------------ ------------
Borrowings under a $1.6 million
unsecured foreign revolving line
of credit maturing August 9, 1996,
with variable interest rates of 2.1%
to 4.0% and a weighted average rate
of 3.1% at December 28, 1995 and a
weighted average interest rate of
3.2% at December 29, 1994. $ 117 $ 440
Unsecured note payable to the
CAD/CAM Group, Inc., maturing in full
on January 19, 1998, with variable
interest rates based on one-year U.S.
Treasury Bills (5.15% at December 28,
1995). 1,500 1,500
------ ------
Total debt 1,617 1,940
Less current maturities 117 440
------ ------
Total long-term debt $1,500 $1,500
------ ------
------ ------
The Company also has a U.S. unsecured revolving line of credit of $8 million
maturing May 31, 1996, with variable interest rates of the lender's Prime rate
or LIBOR plus 1.1% at the Company's option.
Historically, the U.S. and foreign lines of credit have been structured as
short-term and have been continuously renewed on their maturity dates. The
Company anticipates renewing these lines of credit in 1996 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.
Page 42
NOTE 8 - COMMITMENTS
The Company has commitments under non-cancelable operating leases and other
agreements, primarily for office space, with initial or remaining terms of one
year or more as follows (in thousands):
1996 $670
1997 270
1998 148
1999 114
2000 93
Thereafter 23
Lease and rental expense was $977,000, $1,169,000 and $1,432,000 in 1995, 1994
and 1993, respectively. The Company has renewal options on substantially all of
its major leases.
NOTE 9 - EMPLOYEE STOCK AND RETIREMENT PLANS
STOCK OPTION PLANS
At December 28, 1995, there were 1,105,097 shares of common stock reserved for
issuance under the Company's employee stock option plans. Pursuant to these
plans, options are granted to officers and key employees of the Company with
exercise prices equal to the fair market value of the common stock at the date
of grant and generally vest over four years. Options granted under the plans
have termination dates ranging from five to six years from the date of grant.
At December 28, 1995, options to purchase 267,250 shares were exercisable at
prices ranging from $2.44 to $6.38. The following table summarizes activity
under the plans for each of the three years ended December 28, 1995:
SHARES OPTION PRICE
------------- -----------------------
Outstanding December 31, 1992 782,575 $1.60 - $6.38
Granted 266,000 2.59 - 4.50
Exercised (88,450) 1.60 - 3.73
Expired and terminated (213,375) 1.98 - 5.88
--------
Outstanding December 30, 1993 746,750 2.06 - 6.38
Granted 413,000 2.44 - 3.59
Exercised (44,875) 2.06 - 3.75
Expired and terminated (298,875) 2.06 - 5.88
--------
Outstanding December 29, 1994 816,000 2.06 - 6.38
Granted 280,750 5.56 - 8.63
Exercised (118,125) 2.06 - 4.25
Expired and terminated (119,500) 2.44 - 4.25
--------
Outstanding December 28, 1995 859,125 2.44 - 8.63
--------
--------
There were 245,972 and 55,720 shares available for grant under the plans at
fiscal year end 1995 and 1993, respectively. At December 29, 1994, the Company
had granted 55,862 more options than it had available for grant under its plans.
At the Company's 1995 annual meeting, the shareholders authorized a 500,000
share increase in the number of shares available for 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 1995,
Page 43
1994 and 1993, a total of 96,199, 136,990 and 149,259 shares were purchased
under the plan at average prices of $3.46, $2.39 and $2.74 per share,
respectively. At December 28, 1995, a total of 150,440 shares were reserved for
future issuance.
STOCK APPRECIATION RIGHTS PLAN
The Company has a Stock Appreciation Rights Plan ("SAR") under which each
director, executive officer or holder of 10% or more of the Company's common
stock has a SAR with respect to each exercisable stock option. The SAR entitles
the SAR holder to receive cash from the Company for the difference between the
market value of the stock and the exercise price of the option in lieu of
exercising the related option. SARs are only exercisable following a tender
offer or exchange offer for the Company's stock, or following approval by
stockholders of the Company of any merger, consolidation, reorganization or
other transaction providing for the conversion or exchange of more than 50% of
the common shares outstanding. As no event has occurred which would make the
SARs exercisable, no compensation expense has been recorded under this plan.
RETIREMENT SAVINGS PLAN
The Company has a savings plan that qualifies as a cash or deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the plan,
participating U.S. employees may defer up to 17% of their pre-tax salary, but no
more than approximately $9,000 per plan year. In fiscal years 1995 and 1994,
the Company contributed one Dollar for each Dollar contributed by a participant,
with a maximum contribution of 4% of a participant's earnings. In fiscal year
1993, the Company contributed 75 cents for each Dollar contributed by a
participant, with a maximum contribution of 3% of a participant's earnings. The
Company's matching contribution expense for the savings plan was approximately
$455,000, $384,000 and $400,000 in 1995, 1994 and 1993, respectively.
NOTE 10 - ACCOUNTING FOR INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 109. This requires the establishment of deferred tax assets
and liabilities for expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and the tax basis of assets and
liabilities using currently enacted tax rates which are expected to be in effect
during the years in which the differences are anticipated to reverse. The
cumulative effect of this change in accounting for income taxes of $400,000 was
determined as of January 1, 1993, and is reported separately in the consolidated
statement of operations for the year ended December 30, 1993. Prior years'
financial statements were not restated to apply the provisions of SFAS 109.
YEAR ENDED DECEMBER
-----------------------------------
(IN THOUSANDS) 1995 1994 1993
-------- --------- ----------
Components of income (loss) before taxes:
U.S. operations $4,703 $2,615 ($10,736)
Foreign operations 950 1,086 (1,621)
------ ------ --------
$5,653 $3,701 ($12,357)
------ ------ --------
------ ------ --------
Income tax expense (benefit) consists of:
Current tax expense (benefit)
U.S. federal $1,284 ($103) ($1,665)
State 77 127 (46)
Foreign 89 78 117
------ ------ --------
1,450 102 (1,594)
Deferred tax expense (benefit)
U.S. federal (573) 859 538
Foreign 15 14 356
------ ------ --------
(558) 873 894
------ ------ --------
Total income tax expense (benefit) $ 892 $975 ($700)
------ ------ --------
------ ------ --------
Page 44
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 $222,000, $15,000 and $49,000 in 1995, 1994 and 1993, respectively.
Foreign currency translation adjustments, which were recorded directly in
equity, were recorded net of the related deferred tax liabilities of $2,000 in
1995 and $23,000 in 1993 and a deferred tax asset of $27,000 in 1994.
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below in
accordance with SFAS 109 (in thousands):
DEC. 28, DEC. 29, DEC. 30,
1995 1994 1993
----------- ----------- -----------
Deferred income tax assets:
Receivables allowance for doubtful accounts $ 89 $ 79 $ 84
Inventory, product return reserves and basis differences 1,077 1,079 1,088
Land basis 1,522 966 980
Compensation accruals 283 253 271
Intercompany profit 163 308 578
Pension and retirement accruals 239 127 390
Restructure asset and liability reserves 275 606 1,424
Accrued liability reserves 253 270 252
Reel-Tech amortization 279
Foreign net operating loss carryforwards 350 720 1,127
Alternative minimum tax credit carryforwards 275
Other, net 61 93 119
------ ------- -------
4,591 4,776 6,313
Valuation allowance (2,571) (3,358) (3,751)
------ ------- -------
$2,020 $ 1,418 $ 2,562
------ ------- -------
------ ------- -------
Deferred income tax liabilities:
Tax accelerated depreciation and amortization $ 949 $ 798 $ 1,017
Foreign currency translation 310 279 307
Other 138 163
------ ------- -------
$1,259 $ 1,215 $ 1,487
------ ------- -------
------ ------- -------
The valuation allowance for deferred tax assets decreased $787,000 during the
year ended December 28, 1995 due primarily to the partial utilization of the net
operating loss carryforwards of foreign subsidiaries and the total utilization
of the alternative minimum tax credit carryforwards. The $393,000 decrease in
valuation allowance during the year ended December 29, 1994 were mainly related
to reversals of temporary differences offset partially by an alternative minimum
tax credit carryforward. The net deferred tax assets recorded were limited to
temporary differences of $2.2 million at December 28, 1995 and $1.5 million at
December 29, 1994, which was determined by the carryback benefit available at
the time of their expected reversal. These temporary differences were related
primarily to restructure charges becoming tax deductions when paid.
A reconciliation of the Company's effective income tax rate and the U.S. federal
tax rate is as follows:
YEAR ENDED DECEMBER
---------------------------------------
1995 1994 1993
---------- ---------- ---------
Statutory rate 34.0% 34.0% (34.0%)
Foreign Sales Corporation tax benefit (4.5%) (2.7%) (0.3%)
State and foreign income tax, net of
federal income tax benefit 1.2% 5.1% 0.4%
Valuation allowance for deferred assets (12.9%) (10.7%) 28.1%
Other (2.0%) 0.6% 0.1%
------ ------- ------
15.8% 26.3% (5.7%)
------ ------- ------
------ ------- ------
Page 45
The Company has foreign net operating loss ("NOLs") carryforwards of
approximately $1,030,000, with the following expirations: $440,000 in 1998 and
$590,000 available indefinitely. Deferred tax assets arising from these foreign
NOLs are fully provided for in the valuation allowance.
NOTE 11 - GEOGRAPHIC SEGMENT INFORMATION
Data I/O Corporation and its subsidiaries operate predominantly within a single
industry segment and offer three major product groups: (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; and (3) Electronic Design Automation software used to
create designs for programmable ICs. No one customer accounted for more than
10% of the Company's revenues in the years ended December 28, 1995, December 29,
1994 and December 30, 1993. Major operations outside the U.S. include sales
subsidiaries in Japan, Germany, Canada and the United Kingdom.
Geographic information for the three years ended December 28, 1995 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 $22,160,000, $18,522,000 and $22,626,000 in 1995,
1994 and 1993, 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) 1995 1994 1993
---------- ---------- ---------
Net sales:
U.S. $35,280 $32,930 $33,738
Europe 16,555 16,221 15,910
Other 14,196 12,327 13,538
------- ------- --------
$66,031 $61,478 $63,186
------- ------- --------
------- ------- --------
Operating income (loss):
U.S. $1,245 $1,235 ($6,847)
Europe 2,202 2,012 (2,306)
Other 2,081 588 (986)
------- ------- --------
$5,528 $3,835 ($10,139)
------- ------- --------
------- ------- --------
Identifiable assets:
U.S. $35,604 $35,790 $34,638
Europe 5,280 4,284 4,626
Other 3,892 3,413 3,761
------- ------- --------
$44,776 $43,487 $43,025
------- ------- --------
------- ------- --------
Page 46
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited selected quarterly financial data for
the Company for 1995 and 1994. 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) 1995
-----------------------------------------------------------
FOR THE QUARTERS ENDED: MAR. 30 JUNE 29 SEPT. 28 DEC. 28
----------- ----------- ------------ -----------
Net sales $16,208 $16,126 $15,648 $18,049
Gross margin 8,837 8,803 7,985 9,808
Net income (loss) 1,141 1,189 244 2,187
Earnings per share:
Net income (loss) $0.15 $0.15 $0.03 $0.28
Market price per share:
High $6.00 $9.63 $12.63 $8.88
Low $4.38 $4.88 $7.63 $6.00
(IN THOUSANDS EXCEPT PER SHARE DATA) 1994
-----------------------------------------------------------
FOR THE QUARTERS ENDED: MAR. 31 JUNE 30 SEPT. 29 DEC. 29
----------- ----------- ------------ -----------
Net sales $14,404 $16,131 $15,620 $15,324
Gross margin 7,016 8,772 8,381 8,925
Net income (loss) (399) 788 797 1,541
Earnings per share:
Net income (loss) ($0.05) $0.11 $0.11 $0.20
Market price per share:
High $3.62 $3.38 $3.50 $5.75
Low $2.25 $2.50 $2.63 $3.00
The third quarter of 1995 reflects the charge of $660,000 net of tax for the
acquisition of in-process research and development. The fourth quarter of 1995
reflects the $350,000 net of tax reversal of a portion of the restructure
accrual. For the first three quarters of 1995, the Company recorded taxes at an
effective tax rate of 20%. The effective tax rate in the fourth quarter was 10%
due to the reversal of additional valuation allowances.
For the first three quarters of 1994, the Company's effective tax rate reflected
building additional valuation allowances for foreign subsidiary losses and tax
credits. The effective tax rate in the fourth quarter of 1994 was zero due to
the reversal of valuation allowances. The valuation allowances that reversed
related primarily to reversals of temporary differences and utilization of
foreign loss carryforwards.
Data I/O Corporation's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol DAIO and is quoted in many financial
publications, including the WALL STREET JOURNAL. The per share prices reported
in the table above are those reported by NASDAQ. The approximate number of
stockholders of record at March 1, 1996, was 1,148.
Except for a special cash dividend of $4.15 per share paid on March 8, 1989, the
Company has not paid cash dividends on its common stock and does not anticipate
paying regular cash dividends in the foreseeable future. The Company's U.S.
line of credit agreement restricts the payment of cash dividends through a
requirement for minimum levels of tangible net worth.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
Page 47
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 14, 1996, 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 14, 1996, 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 14, 1996, 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
10.1.
(2) 1984 Deferred Compensation Plan. See Exhibit 10.2.
(3) Retirement Plan and Trust Agreement. See Exhibit 10.13, 10.19, and
10.26.
(4) 1985 Stock Option Plan. See Exhibit 10.3.
(5) 1984 Future Net Employee Stock Option Plan. See Exhibit 10.4.
(6) Summary of Management Incentive Compensation Plan. See Exhibit 10.12,
10.14 and 10.20.
(7) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit
10.8.
(8) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.9 and
10.22.
(9) Form of Change in Control Agreements. See Exhibit 10.18.
(10) 1996 Director Fee Plan. See Exhibit 10.27.
(11) Synario Division Proceeds Sharing Plan. See Exhibit 10.28.
(12) Letter Agreement with William J. Haydamack. See Exhibit 10.29
(A)LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT: PAGE
----
(1) INDEX TO FINANCIAL STATEMENTS:
Report of Independent Auditors 32
Report of Management 32
Consolidated Statements of Operations for each of the three
years ended December 28, 1995 33
Consolidated Balance Sheets as of December 28, 1995 and
December 29, 1994 34
Consolidated Statements of Cash Flows for each of the three
years ended December 28, 1995 35
Consolidated Statements of Stockholders' Equity for each of
the three years ended December 28, 1995 36
Notes to Consolidated Financial Statements 37
Page 49
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES:
II Consolidated Valuation and Qualifying Accounts 53
All other schedules not listed above have been omitted because the
required information is included in the consolidated financial
statements or the notes thereto, or is not applicable or required.
(3) INDEX TO EXHIBITS:
3 ARTICLES OF INCORPORATION:
3.1 The Company's restated Articles of Incorporation filed
November 2, 1987 (Incorporated by reference to Exhibit
3.1 to the Company's 1987 Annual Report on Form 10-K
(File No. 0-10394)). N/A
3.2 The Company's Bylaws as amended and restated as of
February 21, 1996. 61
3.3 Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A filed April 5, 1988
(File No. 0-10394)). N/A
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
4.1 Form of Rights Agreement, dated as of March 31, 1988,
between the Company and Chemical Mellon Shareholder
Services (formerly Chemical Trust Company of California)
which includes as Exhibit B thereto the form of Rights
Certificate(Incorporated by reference to the Company's
Registration Statement Form 8-A filed on April 5, 1988
(File No. 0-10394)). N/A
10 MATERIAL CONTRACTS:
10.1 Amended and restated 1982 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement of Form S-8,
File No. 33-42010, filed August 1, 1991). N/A
10.2 1984 Deferred Compensation Plan (Incorporated by
reference to Exhibit 10.22 of the Company's 1983
Annual Report on Form 10-K (File No. 0-10394)). N/A
10.3 1985 Stock Option Plan (Incorporated by reference
to Exhibit 10.22 of the Company's 1984 Annual
Report on Form 10-K (File No. 0-10394)). N/A
10.4 1984 FutureNet Employee Stock Option Plan
(Incorporated by reference to Exhibit 10.23 of the
Company's 1984 Annual Report on Form 10-K
(File No. 0-10394)). N/A
10.5 Business Loan Agreement dated November 25, 1992, with
Seattle First National Bank for $8.0 million
(Incorporated by reference to Exhibit 10.20 of the
Company's 1992 Annual Report on Form 10-K
(File No. 0-10394)). N/A
Page 50
10.6 Asset Purchase Agreement, dated as of December 31, 1992,
by and among Data I/O Corporation, CAD/CAM Group, Inc.,
and certain of its shareholders, and an Amendment
thereto, dated January 19, 1993 (Incorporated by
reference to Exhibit 10.21 of the Company's 1992 Annual
Report on Form 10-K (File No. 0-10394)). N/A
10.7 Software Development Agreement, dated as of
January 19, 1993, by and among Data I/O Corporation,
Michael J. Mendelsohn and Peter C. Niday (Incorporated
by reference to Exhibit 10.22 of the Company's 1992
Annual Report on Form 10-K (File No. 0-10394)). N/A
10.8 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
10.9 Amended and Restated 1986 Stock Option Plan dated
February 3, 1993 (Incorporated by reference to
Exhibit 10.24 of the Company's 1992 Annual Report
on Form 10-K (File No. 0-10394)). N/A
10.10 Amendment, dated April 30, 1993, to the business loan
agreement dated November 25, 1992, with Seattle First
National Bank. (Incorporated by reference to
Exhibit 10.22 of the Company's 1993 Annual Report on
Form 10K (File No. O-10394)). N/A
10.11 Business loan agreement dated February 28, 1994, with
Seattle First National Bank for $8.0 million.
(Incorporated by reference to Exhibit 10.24 of the
Company's 1993 Annual Report on Form 10K
(File No. O-10394)). N/A
10.12 Summary of 1994 Management Incentive Compensation Plan.
(Incorporated by reference to Exhibit 10.25 of the
Company's 1993 Annual Report on Form 10K
(File No. O-10394)). N/A
10.13 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
10.14 Management Incentive Compensation Plan. (Incorporated by
reference to Exhibit 10.16 of the Company's 1994 Annual
Report on Form 10K (File No. 0-10394) N/A
10.15 Performance Bonus Plan (Incorporated by reference to
Exhibit 10.17 of the Company's 1994 Annual Report on
Form 10K (File No. 0-10394) N/A
10.16 Amendment, dated July 22, 1994, to the business loan
agreement dated February 28, 1994, with Seattle First
National Bank (Incorporated by reference to
Exhibit 10.18 of the Company's 1994 Annual Report on
Form 10K (File No. 0-10394) N/A
10.17 Amendment, dated November 16, 1994 to the Business Loan
Agreement dated February 28, 1994, with Seattle First
National Bank (Incorporated by reference to
Exhibit 10.19 of the Company's 1994 Annual Report on
Form 10K (File No. 0-10394) N/A
Page 51
10.18 Form of Change in Control Agreements (Incorporated by
reference to Exhibit 10.20 of the Company's 1994 Annual
Report on Form 10K (File No. 0-10394) N/A
10.19 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
10.20 Amended and Restated Management Incentive Compensation
Plan dated January 1, 1996 72
10.21 Amended and Restated Performance Bonus Plan dated
January 1, 1996 78
10.22 Amended and Restated 1986 Stock Option Plan dated
February 22, 1995 84
10.23 Business Loan Agreement dated May 12, 1995, with
Seattle First National Bank for $8.0 million 92
10.24 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 2.1 of
to the Company's Form 8-K Report dated November 6, 1995 N/A
10.25 Escrow Agreement dated as of August 31, 1995, among
Reel-Tech, Inc., a Washington corporation, Reel-Tech,
Inc., an Indiana corporation, and Seattle First
National Bank (Incorporated by reference to Exhibit 2.2
of to the Company's Form 8-K Report dated
November 6, 1995 N/A
10.26 Second Amendment to the Data I/O Tax Deferred Retirement
Plan 104
10.27 Data I/O Corporation 1996 Director Fee Plan 105
10.28 Synario Division Proceeds Sharing Plan (Confidential
treatment has been requested for certain portions of
this exhibit) 108
10.29 Letter Agreement with William J. Haydamack
(Confidential treatment has been requested for certain
portions of this exhibit) 112
11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 54
22 SUBSIDIARIES OF THE REGISTRANT 55
24 INDEPENDENT AUDITORS' CONSENT 56
(B) FORM 8-K:
A report on Form 8-K dated November 6, 1995, was filed relating to the
acquisition of the assets of Reel-Tech, Inc.
Page 52
DATA I/O CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
COLLECTION
CHARGED/ OF
(CREDITED) ACCOUNTS
BALANCE AT TO COSTS PREVIOUSLY ACCOUNTS BALANCE AT
BEGINNING AND WRITTEN WRITTEN END OF
YEAR ENDED OF PERIOD EXPENSES OFF OFF PERIOD
- ------------------------------ -------------- -------------- -------------- ------------ --------------
(IN THOUSANDS)
December 30, 1993: $366 $32 $14 ($80) $332
-------------- -------------- -------------- ------------ --------------
-------------- -------------- -------------- ------------ --------------
December 29, 1994: $332 $ 4 $12 ($71) $277
-------------- -------------- -------------- ------------ --------------
-------------- -------------- -------------- ------------ --------------
December 28, 1995: $277 $55 $12 ($33) $311
-------------- -------------- -------------- ------------ --------------
-------------- -------------- -------------- ------------ --------------
Page 53
EXHIBIT 11
DATA I/O CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Earnings per share reported in Form 10-K for the three years ended December 28,
1995 are based on the following (in thousands):
PRIMARY AND FULLY DILUTED: 1995 1994 1993
- ------------------------------------------------- ------------ ------------ ------------
Weighted Average Shares Outstanding 7,514 7,354 7,170
Dilutive Effect of Stock Options 365 66
------------ ------------ ------------
Weighted Average Common and Equivalent
Shares Outstanding 7,879 7,420 7,170
------------ ------------ ------------
------------ ------------ ------------
Page 54
EXHIBIT 22
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 Japan Company, Limited Japan 100%
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%
Data I/O Limited United Kingdom 100%
Reel-Tech, Inc. Washington 100%
Page 55
EXHIBIT 24
- -------------------------------------------------------------------------------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
Board of Directors and Stockholders
Data I/O Corporation
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-2254, 33-3958, 33-26472, 33-42010, 33-54422, 33-66824 and
33-95608) of our report dated February 7, 1996, with respect to the
consolidated financial statements and schedule of Data I/O Corporation
included in the Annual Report (Form 10-K) for the year ended December 28,
1995.
//S// ERNST & YOUNG LLP
------------------------
ERNST & YOUNG LLP
Seattle, Washington
March 19, 1996
Page 56
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 7, 1996 By: //S//STEVEN M. GORDON
----------------------
Steven M. Gordon
Vice President
Finance and Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 7, 1996, by the following persons on behalf of
the Registrant and in the capacities indicated.
NAME TITLE
By: //S//WILLIAM C. ERXLEBEN
------------------------ President
William C. Erxleben Chief Executive Officer
Director
By: //S//W. HUNTER SIMPSON
------------------------ Director
W. Hunter Simpson
By: //S//DONALD R. STENQUIST
------------------------ Director
Donald R. Stenquist
By: //S//MILTON F. ZEUTSCHEL
------------------------ Director
Milton F. Zeutschel
By: //S//FRANCES M. CONLEY
------------------------ Director
Frances M. Conley
Page 57
EXHIBITS INDEX
EXHIBIT NUMBER TITLE PAGE NUMBER
- ---------------- ----------------------------------------------------------------------- ---------------
3 ARTICLES OF INCORPORATION:
3.1 The Company's restated Articles of Incorporation filed November 2, 1987
(Incorporated by reference to Exhibit 3.1 to the Company's 1987 Annual
Report on Form 10-K (File No. 0-10394)). N/A
3.2 The Company's Bylaws as amended and restated as of February 21, 1996. 61
3.3 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock (Incorporated by reference to Exhibit 1
to the Company's Registration Statement on Form 8-A filed April 5, 1988
(File No. 0-10394)). N/A
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES:
4.1 Form of Rights Agreement, dated as of March 31, 1988, between the
Company and Chemical Mellon Shareholder Services (formerly
Chemical Trust Company of California) which includes as Exhibit B
thereto the form of Rights Certificate (Incorporated by reference
to the Company's Registration Statement Form 8-A filed on April 5, 1988
(File No. 0-10394)). N/A
10 MATERIAL CONTRACTS:
10.1 Amended and restated 1982 Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement of
Form S-8, File No. 33-42010, filed August 1, 1991). N/A
10.2 1984 Deferred Compensation Plan (Incorporated by reference to Exhibit
10.22 of the Company's 1983 Annual Report on Form 10-K
(File No. 0-10394)). N/A
10.3 1985 Stock Option Plan (Incorporated by reference to Exhibit 10.22 of
the Company's 1984 Annual Report on Form 10-K (File No. 0-10394)). N/A
10.4 1984 FutureNet Employee Stock Option Plan (Incorporated by reference
to Exhibit 10.23 of the Company's 1984 Annual Report on Form 10-K
(File No. 0-10394)). N/A
10.5 Business Loan Agreement dated November 25, 1992, with Seattle First
National Bank for $8.0 million (Incorporated by reference to Exhibit
10.20 of the Company's 1992 Annual Report on Form 10-K
(File No. 0-10394)). N/A
10.6 Asset Purchase Agreement, dated as of December 31, 1992, by and among
Data I/O Corporation, CAD/CAM Group, Inc., and certain of its
shareholders, and an Amendment thereto, dated January 19, 1993
(Incorporated by reference to Exhibit 10.21 of the Company's 1992
Annual Report on Form 10-K (File No. 0-10394)). N/A
10.7 Software Development Agreement, dated as of January 19, 1993, by and
among Data I/O Corporation, Michael J. Mendelsohn and Peter C. Niday
(Incorporated by reference to Exhibit 10.22 of the Company's 1992
Annual Report on Form 10-K (File No. 0-10394)). N/A
Page 58
10.8 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
10.9 Amended and Restated 1986 Stock Option Plan dated February 3, 1993
(Incorporated by reference to Exhibit 10.24 of the Company's 1992
Annual Report on Form 10-K (File No. 0-10394)). N/A
10.10 Amendment, dated April 30, 1993, to the business loan agreement dated
November 25, 1992, with Seattle First National Bank. (Incorporated by
reference to Exhibit 10.22 of the Company's 1993 Annual Report on Form
10K (File No. O-10394)). N/A
10.11 Business loan agreement dated February 28, 1994, with Seattle First
National Bank for $8.0 million. (Incorporated by reference to Exhibit
10.24 of the Company's 1993 Annual Report on Form 10K
(File No. O-10394)). N/A
10.12 Summary of 1994 Management Incentive Compensation Plan. (Incorporated
by reference to Exhibit 10.25 of the Company's 1993 Annual Report on
Form 10K (File No. O-10394)). N/A
10.13 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
10.14 Management Incentive Compensation Plan. (Incorporated by reference to
Exhibit 10.16 of the Company's 1994 Annual Report on Form 10K
(File No. 0-10394) N/A
10.15 Performance Bonus Plan (Incorporated by reference to Exhibit 10.17 of
the Company's 1994 Annual Report on Form 10K (File No. 0-10394) N/A
10.16 Amendment, dated July 22, 1994, to the business loan agreement dated
February 28, 1994, with Seattle First National Bank (Incorporated by
reference to Exhibit 10.18 of the Company's 1994 Annual Report on Form
10K (File No. 0-10394) N/A
10.17 Amendment, dated November 16, 1994 to the Business Loan Agreement dated
February 28, 1994, with Seattle First National Bank (Incorporated by
reference to Exhibit 10.19 of the Company's 1994 Annual Report on Form
10K (File No. 0-10394) N/A
10.18 Form of Change in Control Agreements (Incorporated by reference to
Exhibit 10.20 of the Company's 1994 Annual Report on Form 10K
(File No. 0-10394) N/A
10.19 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
10.20 Amended and Restated Management Incentive Compensation Plan dated
January 1, 1996 72
10.21 Amended and Restated Performance Bonus Plan dated January 1, 1996 78
Page 59
10.22 Amended and Restated 1986 Stock Option Plan dated February 22, 1995 84
10.23 Business Loan Agreement dated May 12, 1995, with Seattle First National
Bank for $8.0 million 92
10.24 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 2.1 of to the
Company's Form 8-K Report dated November 6, 1995 N/A
10.25 Escrow Agreement dated as of August 31, 1995, among Reel-Tech, Inc., a
Washington corporation, Reel-Tech, Inc., an Indiana corporation, and
Seattle First National Bank (Incorporated by reference to Exhibit 2.2
of to the Company's Form 8-K Report dated November 6, 1995 N/A
10.26 Second Amendment to the Data I/O Tax Deferred Retirement Plan 104
10.27 Data I/O Corporation 1996 Director Fee Plan 105
10.28 Synario Division Proceeds Sharing Plan (Confidential treatment has been
requested for certain portions of this exhibit) 108
10.29 Letter Agreement with William J. Haydamack (Confidential treatment has
been requested for certain portions of this exhibit) 112
Page 60