<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
FIRST AMENDMENT
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 29, 1994 Commission File No. 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0864123
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10525 Willows Road N.E., Redmond, Washington, 98073-9746
(address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (206) 881-6444
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (No Par)
Series A Junior Participating Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of voting stock held
by non-affiliates of the registrant as of March 1, 1995
$36,523,705
7,492,042 shares of no par value Common Stock outstanding as of March 1, 1995
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Proxy Statement relating to its May 16, 1995,
Annual Meeting of Stockholders are incorporated into Part III of this
annual report on Form 10-K.
Page 1 of 38
Exhibit Index on Page N/A
<PAGE>
DATA I/O CORPORATION
FORM 10-K/A
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1994
INDEX
Part I Page
- ------ ----
Item 1. Business N/A
Item 2. Properties N/A
Item 3. Legal Proceedings N/A
Item 4. Submission of Matters to a Vote of Stockholders N/A
Part II
Item 5 Market for Registrant's Common Stock and Related Stockholder
Matters
Item 6. Selected Five-Year Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
(as originally filed) 3
Item 8. Financial Statements and Supplementary Data (as amended) 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures N/A
Part III
Item 10. Directors and Executive Officers of the Registrant N/A
Item 11. Executive Compensation N/A
Item 12. Security Ownership of Certain Beneficial Owners and
Management N/A
Item 13. Certain Relationships and Related Transactions N/A
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K N/A
Signatures 38
Page 2
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ITEM II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (AS ORIGINALLY FILED)
See pages 4 through 20.
Page 3
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R E P O R T O F E R N S T & Y O U N G L L P ,
I N D E P E N D E N T A U D I T O R S
- -------------------------------------------------------------------------------
Board of Directors and Stockholders
Data I/O Corporation
We have audited the accompanying consolidated balance sheets of Data I/O
Corporation as of December 29, 1994, and December 30, 1993, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 29, 1994. Our audits also
included the financial statement schedule listed in the Index at Item 14(A).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Data I/O Corporation at December 29, 1994, and December 30, 1993, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 29, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 10 of "Notes to Consolidated Financial Statements," in 1993
the Company changed its method of accounting for income taxes.
Seattle, Washington //S// ERNST & YOUNG LLP
February 9, 1995 ERNST & YOUNG LLP
- -------------------------------------------------------------------------------
R E P O R T O F M A N A G E M E N T
- -------------------------------------------------------------------------------
Management is responsible for preparing the Company's financial statements and
related information that appears in this annual report on Form 10-K. Management
believes that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of its operations in conformity with generally accepted accounting
principles. Management has included in the Company's financial statements
amounts that are based on estimates and judgments, which it believes are
reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements, and that assets are
adequately safeguarded.
Independent audits of the Company's financial statements are performed in
accordance with generally accepted auditing standards and provide an objective,
independent review of the fairness of reported financial condition and results
of operations.
The Board of Directors of the Company has an Audit Committee composed of non-
management Directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing and financial reporting matters.
//S// WILLIAM C. ERXLEBEN //S// STEVEN M. GORDON
WILLIAM C. ERXLEBEN STEVEN M. GORDON
President Vice President
Chief Executive Officer Finance and Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurer
Page 4
<PAGE>
<TABLE>
<CAPTION>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
Dec. 29, Dec. 30, Dec. 31,
FOR THE YEARS ENDED 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands, except per share data)
Net sales $61,478 $63,186 $69,337
Cost of goods sold 28,384 31,411 30,045
------- ------- -------
Gross margin 33,094 31,775 39,292
Operating expenses:
Research and development 9,227 9,700 7,797
Selling, general and administrative 20,032 26,094 26,872
Provision for business restructuring 6,120
------- ------- -------
Total operating expenses 29,259 41,914 34,669
------- ------- -------
Operating income (loss) 3,835 (10,139) 4,623
Non-operating expense:
Interest income (144) (27) (42)
Interest expense 273 318 274
Foreign currency exchange 5 (73) 78
Adjustment of carrying value of land held for sale 2,000
------- ------- -------
Total non-operating expense 134 2,218 310
------- ------- -------
Income (loss) before income taxes, extraordinary item
cumulative effect of accounting change 3,701 (12,357) 4,313
Income tax expense (benefit) 975 (700) 1,445
------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change 2,726 (11,657) 2,868
Extraordinary item, net of income taxes of $925 (1,675)
Cumulative effect of accounting change 400
------- ------- -------
Net income (loss) $2,726 ($11,257) $1,193
------- ------- -------
------- ------- -------
Earnings per share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $0.37 ($1.63) $0.40
Extraordinary item ($0.23)
Cumulative effect of accounting change $0.06
------- ------- -------
Net income (loss) $0.37 ($1.57) $0.17
------- ------- -------
------- ------- -------
Weighted average shares outstanding 7,420 7,170 7,117
------- ------- -------
------- ------- -------
See notes to consolidated financial statements.
</TABLE>
Page 5
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<TABLE>
<CAPTION>
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
Dec. 29, Dec. 30,
1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $7,279 $1,704
Trade accounts receivable,
less allowance for doubtful
accounts of $277 and $332, respectively 10,145 9,364
Inventories 6,937 8,282
Recoverable income taxes 453 1,689
Deferred income taxes 675 1,475
Other current assets 1,361 687
------ ------
TOTAL CURRENT ASSETS 26,850 23,201
Land held for sale 2,006 1,983
Property, plant and equipment - net 10,737 12,200
Other assets 3,894 5,641
------- -------
TOTAL ASSETS $43,487 $43,025
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,908 $1,267
Accrued compensation 3,460 3,634
Deferred revenue 5,331 4,383
Other accrued liabilities 2,786 3,171
Accrued costs of business restructuring 1,890 3,826
Income taxes payable 997 971
Notes payable 440 2,367
------- -------
TOTAL CURRENT LIABILITIES 16,812 19,619
LONG TERM DEBT 1,500 1,500
LONG TERM OTHER PAYABLES 361 323
DEFERRED INCOME TAXES 471 400
COMMITMENTS (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 7,431,901
and 7,250,036 shares, respectively 20,729 20,242
Retained earnings 3,185 459
Currency translation adjustments 429 482
------- -------
TOTAL STOCKHOLDERS' EQUITY 24,343 21,183
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,487 $43,025
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements
Page 6
<PAGE>
<TABLE>
<CAPTION>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------
Dec. 19, Dec. 30, Dec. 31,
For the years ended 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
OPERATING ACTIVITIES:
Net income (loss) $2,726 ($11,257) $1,193
Adjustments to reconcile income (loss)
to net cash provided by operating activities:
Depreciation and amortization 4,671 4,860 3,598
Stock option compensation expense 80
Adjustment of carrying value of land held
for sale 2,000 1,675
Income and deferred income taxes 2,133 (533) (305)
Cumulative effect of accounting change (400)
Business restructure (1,936) 4,955
Deferred revenue 921 468 464
Changes in current items other
than cash and cash equivalents:
Trade accounts receivable (741) 3,518 171
Inventories 1,345 2,393 (3,501)
Other current assets (218) 48 (9)
Accounts payable and accrued liabilities 54 (1,451) 318
------- ------- ------
Cash provided by operating activities 8,955 4,601 3,684
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,876) (2,820) (2,272)
Additions to other assets (53) (1,405) (1,272)
------- ------- -------
Cash used for investing activities (1,929) (4,225) (3,544)
FINANCING ACTIVITIES:
Proceeds from (repayment of) notes payable (1,931) (1,060) 172
Sale of common stock 327 410 348
Proceeds from exercise of stock options 160 275 794
Purchase of common stock (65) (137)
------- ------- -------
Cash provided by (used for) financing activities (1,444) (440) 1,177
------- ------- -------
Increase (decrease) in cash and cash equivalents 5,582 (64) 1,317
Effects of exchange rate changes on cash (7) (6) (37)
Cash and cash equivalents - Beginning of year 1,704 1,774 494
------- ------- -------
Cash and cash equivalents - End of year $7,279 $1,704 $1,774
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $255 $343 $236
Income taxes $405 $573 $1,501
</TABLE>
See notes to consolidated financial statements.
Page 7
<PAGE>
<TABLE>
<CAPTION>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------
Currency
Common Stock Retained Translation
--------------------------------
Shares Amount Earnings Adjustment
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands except share data)
BALANCE AT DECEMBER 26, 1991 6,748,587 $17,980 $10,523 $ 874
Net income 1,193
Stock options exercised 199,476 794
Issuance of stock through
Employee Stock Purchase Plan 108,650 348
Purchase of common stock (26,782) (137)
Compensation on exercised or expired
stock options 205
Currency translation adjustment, net of
tax benefit of $203 (437)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1992 7,029,931 19,190 11,716 437
Net loss (11,257)
Stock options exercised 88,450 275
Issuance of stock through
Employee Stock Purchase Plan 149,259 410
Purchase of common stock (17,604) (65)
Compensation on exercised or expired
stock options 432
Currency translation adjustment, net of
tax of $23 45
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 30, 1993 7,250,036 20,242 459 482
Net income 2,726
Stock options exercised 44,875 160
Issuance of stock through
Employee Stock Purchase Plan 136,990 327
Currency translation adjustment, net of
tax benefit of $27 (53)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 29, 1994 7,431,901 $20,729 $ 3,185 $ 429
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
Page 8
<PAGE>
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Data I/O
Corporation and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REPORTING PERIOD
The Company reports on a fifty-two, fifty-three week basis. Results of
operations for 1994 and 1993 are for fifty-two week periods whereas 1992
consisted of a fifty-three week period.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenues, costs, and expenses are
translated at average rates of exchange prevailing during the year. Translation
adjustments resulting from this process are charged or credited to stockholders'
equity, net of taxes. Realized and unrealized gains and losses on foreign
currency transactions are included in non-operating expense as Foreign Currency
Exchange.
In an effort to minimize the effect of exchange rate fluctuations on the results
of its operations, the Company hedges certain portions of its foreign currency
exposure through the use of forward exchange contracts. At December 29, 1994,
the Company had approximately $2.3 million in foreign exchange contracts
outstanding with the contract exchange rate being approximately equal to the
market exchange rate. These contracts range from sixty days to one year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with insignificant
interest rate risk. The Company invests in the highest grade commercial paper
with original maturities of three months or less. The Company intends that
these investments are held to maturity. Interest earned is reported in non-
operating expense as Interest Income.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is computed on a
currently adjusted standard basis, which approximates actual cost on an average
or first-in/first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated using the
straight-line method over estimated useful lives as follows:
Building 40 years
Equipment 3 to 7 years
Leasehold improvements Lesser of lease term or estimated useful life
Page 9
<PAGE>
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment or customer
acceptance, if an acceptance clause is specified in the sales terms. Revenue
from software products licensed to original equipment manufacturers is
recognized when earned per the terms of the contracts. Revenue from the sale of
service and update contracts is recorded as deferred revenue and recognized as
earned revenue on a straight-line basis over the contractual period.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. No software
development costs have been capitalized due to immateriality.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. Total expenses were
$1,771,000, $2,123,000 and $2,331,000 in 1994, 1993 and 1992, respectively.
WARRANTY EXPENSE
The Company warrants its products against defects for periods ranging from
ninety days to one year. The Company provides currently for the estimated cost
which may be incurred under its product warranties.
INCOME TAXES
Income tax expense includes U.S., state and foreign income taxes. Certain
items of income and expense are not reported in both the tax returns and
financial statements in the same year. The resulting difference is reported as
deferred income taxes.
The Company adopted in 1993 Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes," which requires the use of the
liability method in computing income taxes. Under the liability method,
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
These deferred tax assets and liabilities are measured by the provisions of
currently enacted tax laws. The adoption of SFAS 109 during the first quarter
of 1993 resulted in an increase in the net deferred tax asset by approximately
$400,000, which was reported separately as the cumulative effect of a change in
the method of accounting for income taxes in the consolidated statement of
operations for the year ended December 30, 1993.
EARNINGS PER SHARE
The Company calculates and reports earnings per share on a primary basis, using
the treasury stock method of computing weighted average common and common stock
equivalent shares outstanding during the period. Common stock equivalents which
are antidilutive are not considered. Stock options are common stock equivalents.
Fully diluted earnings per share is approximately the same as primary earnings
per share.
DIVERSIFICATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. The Company's trade
receivables are geographically dispersed and include customers in many different
industries. Management believes that any risk of loss is significantly reduced
due to the diversity of its end-customers and geographic sales areas. The
Company performs ongoing credit evaluations of its customers' financial
condition and requires collateral, such as letters of credit and bank
guarantees, whenever deemed necessary.
Page 10
<PAGE>
RECLASSIFICATIONS
Certain prior years' balances have been reclassified to conform to current year
presentation.
NOTE 2 - PROVISION FOR BUSINESS RESTRUCTURING
During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1
million related to the restructure of its sales and distribution channels,
downsizing its operations to a level consistent with anticipated lower sales and
product margins, and consolidating and outsourcing of certain manufacturing
processes. The purpose of the restructure is primarily to reduce expenses and
significantly lower the Company's break-even point in reaction to the reduced
sales and gross margins realized in 1993. Additionally, the Company made
several strategic changes to its sales and distribution channels to better align
the Company's current and anticipated future products to their markets and
customers. The general downsizing of operations and restructure of the sales
and distribution system were substantially completed at December 29, 1994. The
Company began implementation of planned changes to its manufacturing processes
in the first quarter of 1994 for completion by the end of 1996.
Of the total restructure charge of $6.1 million, $2.1 million relates to
restructuring the sales and distribution system, including severance for
terminated employees, facilities and equipment lease abandonment, facilities
relocation costs, the writeoff of intangible assets associated with the
acquisition and set up of direct sales operations in Germany and the United
Kingdom, and costs associated with implementation of new accounting and
distribution systems and processes; $2.0 million relates to the consolidation
and outsourcing of certain portions of the Company's manufacturing operations,
including the writedown of production equipment to net realizable value,
severance for terminated employees, facility relocation costs, and costs
associated with outsourcing certain manufacturing processes; and the remaining
$2.0 million relates to general organizational downsizing, including severance
for terminated employees, asset write-downs and costs associated with
rearrangement of facilities.
At December 29, 1994 approximately $1.9 million of the total restructure charge
remained in accrued liabilities to be paid out in 1995 and 1996. Approximately
$1.9 million and $1.2 million had been spent during 1994 and 1993, respectively,
and $1.1 million had been charged against related assets.
NOTE 3 - INVENTORIES
Inventories consisted of the following components (in thousands):
<TABLE>
<CAPTION>
December 29, December 30,
1994 1993
------------ ------------
<S> <C> <C>
Raw material $3,327 $2,963
Work-in-process 1,955 2,513
Finished goods 1,655 2,806
------------ ------------
$6,937 $8,282
------------ ------------
------------ ------------
</TABLE>
NOTE 4 - LAND HELD FOR SALE
The Company owns 79.4 acres of land at its headquarters site in Redmond,
Washington, which it purchased in various parcels between 1979 and 1986. The
land was intended as a campus on which to consolidate the operations of the
Company as it expanded internally and through acquisitions. The Company has
since abandoned its aggressive acquisition and consolidation strategy. In 1990
the Company decided to market and sell the approximately 40 acres of land in
excess of that required for its current 100,000 square foot building and another
50,000 square foot expansion facility. At that time the land was reclassified,
at cost plus estimated disposition expenses, to Land Held for Sale in the
Company's financial statements. Based on information available at that time,
the cost approximated market value.
Page 11
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In June 1992 the Company recorded an extraordinary $2.6 million ($1.7 million
after-tax) write-down to reflect a decrease in the market value of its land.
This decrease in value was caused primarily by the enactment, in July 1992, of a
Sensitive Areas Ordinance ("SAO") by the City of Redmond. The SAO prohibits
building not only on land classified as wetlands, but on steep slopes and on
buffers around the wetlands which are wider than those required by most
jurisdictions. In addition, due to the changes in valuation for commercial real
estate comparable to the land held by Data I/O, the Company recorded a $2.0
million valuation provision for the land held for resale at December 30, 1993.
Since placing the land on the market in 1990, the Company has entered into two
separate option agreements to sell the property. Both of these agreements were
allowed to expire due to the changes in regulatory requirements and valuations
of commercial real estate comparable to the land held by the Company, discussed
above. The Company intends to continue to market this excess land.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
<TABLE>
<CAPTION>
December 29, December 30,
1994 1993
------------ ------------
<S> <C> <C>
Land $ 910 $ 910
Building and improvements 7,334 6,863
Equipment 21,507 22,140
------------ ------------
29,751 29,913
Less accumulated depreciation 19,014 17,713
Property, plant & equipment - net $10,737 $12,200
------------ ------------
------------ ------------
</TABLE>
NOTE 6 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
<TABLE>
<CAPTION>
December 29, December 30,
1994 1993
------------ ------------
<S> <C> <C>
Long-term lease deposits $ 156 $ 504
Investment in product lines 6,883 6,883
------------ ------------
7,039 7,387
Less accumulated amortization 3,145 1,746
------------ ------------
$3,894 $5,641
------------ ------------
------------ ------------
</TABLE>
Total amortization recorded for 1994, 1993 and 1992 was $1,399,000, 1,338,000
and $582,000, respectively. The decrease in long-term lease deposits is
attributable to the termination of a foreign office lease.
INVESTMENT IN PRODUCT LINES
CAD/CAM GROUP, INC.
On January 19, 1993, the Company acquired substantially all of the assets of
CAD/CAM Group, Inc. and entered into non-compete agreements with its two
founding technologists. The acquisition was accounted for under the purchase
method of accounting. Of the total purchase price of $3.0 million to be paid to
CAD/CAM Group, Inc. and its two founding technologists, $1.5 million was paid
during 1993 and the balance plus accrued interest payable at the U.S. Treasury
Bill rate is payable in 1998. Of the total consideration, approximately $2.9
million plus approximately $200,000 of transaction costs were allocated to
various identifiable intangible assets. These are reported in the accompanying
balance sheet as Other Assets and is being amortized ratably over the economic
life of the specific assets acquired (two to eight years). The net book value
Page 12
<PAGE>
of the assets capitalized in Other Assets related to this acquisition was $1.8
million at December 29, 1994 and $2.4 million at December 30, 1993.
QUALITY AUTOMATION, INC.
On September 25, 1990, the Company acquired exclusive rights to distribute
automated handling and labeling equipment manufactured by Quality Automation,
Inc. The Company also obtained options to acquire Quality Automation's existing
and future products as well as certain other assets. On September 25, 1992, the
Company exercised its options and purchased the assets, technology and rights in
the products of Quality Automation Inc., and Q.A. Engineering, Inc. (both herein
combined and referred to as "Quality Automation" or "QA"). The acquisition was
accounted for as a purchase, with the aggregate purchase price totaling $4.8
million. The aggregate purchase price, along with the associated transaction
fees, was allocated to the assets acquired, based on estimated fair market
value. Of the total acquisition cost, approximately $3.8 million of various
identifiable intangible assets were reported as Other Assets in the accompanying
balance sheets and are being amortized ratably over the economic life of the
specific assets acquired (three to five years). The net book value of the
assets capitalized in Other Assets related to this acquisition is $1.9 million
and $2.7 million at December 29, 1994, and December 30, 1993, respectively.
NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
Notes payable and long-term debt consisted of the following components:
(In thousands) December 29, December 30,
1994 1994
------------ ----------
<S> <C> <C>
Borrowings under a $5.0 million
unsecured U.S. revolving line of credit,
maturing May 31, 1994, with a weighted
average interest rate of 4.4% at
December 30, 1993. $1,250
Borrowings under a $1.5 million
unsecured foreign revolving line of
credit maturing August 11, 1995, with
variable interest rates of 3.0% to 4.1%
and a weighted average rate of 3.2% at
December 29, 1994 and a weighted
average interest rate of 4.4% at
December 30, 1993. $440 1,117
Unsecured note payable to the CAD/CAM
Group, Inc., maturing in full on January 19,
1998, with variable interest rates based on
one-year U.S. Treasury Bills (7.15% at
December 29, 1994). 1,500 1,500
---------- ----------
Total debt 1,940 3,867
Less current maturities 440 2,367
---------- ----------
Total long-term debt $1,500 $1,500
---------- ----------
---------- ----------
</TABLE>
In addition to the $5.0 million line of credit, at December 30, 1993, the
Company had an unused $3.0 million unsecured U.S. revolving/term loan requiring
equal quarterly principal payments beginning on March 31, 1995, and maturing on
December 31, 1996. At December 30, 1993, the Company was in violation of
certain covenants of its borrowing agreement with the lender of both of these
U.S. lines of credit. The lender granted to the Company a waiver of these
covenant violations through February 28, 1994. On February 28, 1994, the two
U.S. lines of credit described above were canceled and the Company signed a new
loan agreement for an $8.0 million revolving line of credit, secured by the
Company's accounts receivable and inventory and maturing on May 31, 1995.
Borrowings under this line of credit were restricted to $1.0 million plus 75% of
accounts receivable. In addition, the Company could borrow up to $2.0 million
against a negative pledge of its equipment until June 30, 1994. This new line
of credit called for interest at rates 50 to 125 basis points above the rates
charged on the previous lines of credit. Effective July 22, 1994, the Company's
lender for its $8 million U.S. line of credit agreed to release the collateral
supporting the credit line, eliminate the borrowing base calculation used to
determine available borrowings on the credit line and reduce the interest rate
charged on outstanding borrowings by 25 to 30 basis points. On November 16,
Page 13
<PAGE>
1994, the Company's lender again reduced the interest rate charged on
outstanding borrowings by an additional 45 basis points to the bank's published
Prime rate or the Libor rate plus 150 basis points.
Historically, the U.S. and foreign lines of credit have been structured as
short-term and have been continuously renewed on their maturity dates. The
Company anticipates renewing these lines of credit in 1995 under substantially
the same terms. No assurance can be made, however, in regard to the renewal of
these agreements if the Company again experiences losses.
NOTE 8 - COMMITMENTS
The Company has commitments under non-cancelable operating leases and other
agreements, primarily for office space, with initial or remaining terms of one
year or more as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1995 $820
1996 526
1997 97
1998 3
</TABLE>
Lease and rental expense was $1,169,000, $1,432,000 and $1,415,000 in 1994, 1993
and 1992, respectively. The Company has renewal options on substantially all of
its major leases.
NOTE 9 - EMPLOYEE STOCK AND RETIREMENT PLANS
STOCK OPTION PLANS
At December 29, 1994, there were 760,138 shares of common stock reserved for
issuance under the Company's employee stock option plans. Pursuant to these
plans, options are granted to officers and key employees of the Company with
exercise prices equal to the fair market value of the common stock at the date
of grant and generally vest over four years. Options granted under the plans
have termination dates ranging from five to seven years from the date of grant.
At December 29, 1994, options to purchase 219,125 shares were exercisable at
prices ranging from $2.06 to $6.38. The following table summarizes activity
under the plans for each of the three years ended December 29, 1994:
<TABLE>
<CAPTION>
Shares Option Price
------------ ----------------------------------------
<S> <C> <C> <C> <C>
Outstanding December 26, 1991 853,248 $1.60 - $5.88
Granted 177,500 3.75 - 6.38
Exercised (199,476) 1.98 - 4.60
Expired and terminated (48,697) 1.60 - 5.75
------------
Outstanding December 31, 1992 782,575 1.60 - 6.38
Granted 266,000 2.59 - 4.50
Exercised (88,450) 1.60 - 3.73
Expired and terminated (213,375) 1.98 - 5.88
------------
Outstanding December 30, 1993 746,750 2..06 - 6.38
Granted 413,000 2.44 - 3.59
Exercised (44,875) 2.06 - 3.75
Expired and terminated (298,875) 2.06 - 5.88
------------
Outstanding December 29, 1994 816,000 2.06 - 6.38
------------
------------
</TABLE>
At December 29, 1994, the Company had granted 55,862 more options than it had
available for grant under its plans. The Company expects that this difference
will be partially offset by options that will expire or terminate during the
first half of 1995. Additionally, the Company will request that stockholders
approve a resolution authorizing an additional 500,000
Page 14
<PAGE>
shares of common stock be reserved for the stock option plans. This resolution
will be voted on at the Company's 1995 annual meeting. The terms of the
resolution are included in the Company's Proxy Statement relating to the annual
meeting of stockholders to be held on May 16, 1995.
There were 55,720 and 110,470 shares available for grant under the plans at
fiscal year-end 1993 and 1992, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan, eligible employees may purchase shares
of the Company's common stock at six-month intervals at 85% of the lower of the
fair market value on the first or the last day of each six-month period.
Employees may purchase shares having a value not exceeding 10% of their gross
compensation during an offering period. During 1994, 1993 and 1992, a total of
136,990, 149,259 and 108,650 shares were purchased under the plan at average
prices of $2.39, $2.74 and $3.21 per share, respectively. At December 29,
1994, a total of 246,394 shares were reserved for future issuance.
STOCK APPRECIATION RIGHTS PLAN
The Company has a Stock Appreciation Rights Plan ("SAR") under which each
director, executive officer, or holder of 10% or more of the Company's common
stock has a SAR with respect to each exercisable stock option. The SAR entitles
the SAR holder to receive cash from the Company for the difference between the
market value of the stock and the exercise price of the option in lieu of
exercising the related option. SARs are only exercisable following a tender
offer or exchange offer for the Company's stock, or following approval by
stockholders of the Company of any merger, consolidation, reorganization or
other transaction providing for the conversion or exchange of more than 50% of
the common shares outstanding. As no event has occurred which would make the
SARs exercisable, no compensation expense has been recorded under this plan.
RETIREMENT SAVINGS PLAN
The Company has a savings plan that qualifies as a cash or deferred salary
arrangement under section 401(k) of the Internal Revenue Code. Under the plan,
participating U.S. employees may defer up to 17% of their pre-tax salary, but no
more than approximately $9,000 per plan year. The Company contributes one
dollar for each dollar contributed by a participant, with a maximum contribution
of 4% of a participant's earnings. The Company's matching contribution expense
for the savings plan was $384,000, $400,000 and $355,000 in 1994, 1993 and 1992,
respectively.
Page 15
<PAGE>
NOTE 10 - ACCOUNTING FOR INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 109. This requires the establishment of deferred tax assets
and liabilities for expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and the tax basis of assets and
liabilities using currently enacted tax rates which are expected to be in effect
during the years in which the differences are anticipated to reverse. The
cumulative effect of this change in accounting for income taxes of $400,000 was
determined as of January 1, 1993, and is reported separately in the consolidated
statement of operations for the year ended December 30, 1993. Prior years'
financial statements have not been restated to apply the provisions of SFAS 109.
<TABLE>
<CAPTION>
Year Ended December
------------------------------
1994 1993 1992
---------- ---------- ----------
Components of income (loss) before taxes were: (in thousands):
<S> <C> <C> <C>
U.S. operations $2,615 ($10,736) $3,933
Foreign operations 1,086 (1,621) 380
---------- ---------- ----------
$3,701 ($12,357) $4,313
---------- ---------- ----------
---------- ---------- ----------
Income tax expense (benefit) consists of (in thousands):
Current tax expense (benefit)
U.S. Federal ($176) ($1,665) $1,635
State 127 (46) 110
Foreign 151 117 95
---------- ---------- ----------
102 (1,594) 1,840
Deferred tax expense (benefit)
U.S. Federal 859 538 (395)
Foreign 14 356
---------- ---------- ----------
873 894 (395)
---------- ------------------------------
Total income tax expense (benefit) $975 ($700) $1,445
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
For federal income tax purposes, a deduction is received for stock option
compensation gains. The benefit of this deduction, which is recorded in common
stock, was $15,000, $49,000 and $64,000 in 1994, 1993 and 1992, respectively.
Foreign currency translation adjustments, which were recorded directly in
equity, were recorded net of the related deferred tax assets of $27,000 in 1994
and $203,000 in 1992 and a deferred tax liability of $23,000 in 1993. In 1992,
the extraordinary loss on land held for sale was recorded net of the applicable
$925,000 income tax benefit.
Deferred taxes relating to timing differences in 1992 were (in thousands):
<TABLE>
<CAPTION>
1992
----------
<S> <C>
Inventory and product return allowances ($352)
Leases 10
Intercompany profit in foreign subsidiaries' inventory 192
Depreciation and amortization 3
Accrued compensation, pension and retirement (141)
Domestic International Sales Corporation (50)
Other (57)
----------
($395)
----------
----------
</TABLE>
Page 16
<PAGE>
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):
<TABLE>
<CAPTION>
Upon
Adoption at
December 29, December 30, January 1,
1994 1993 1993
------------ ------------ ------------
Deferred income tax assets:
<S> <C> <C> <C>
Receivables allowance for doubtful accounts $ 79 $ 84 $ 80
Inventory, product return reserves and basis differences 1,079 1,088 973
Land basis 966 980
Compensation accruals 253 271 346
Intercompany profit 308 578 523
Pension and retirement accruals 127 390 325
Restructure asset and liability reserves 606 1,424
Accrued liability reserves 270 252 251
Foreign net operating loss carryforwards 720 1,127 618
Alternative minimum tax credit carryforwards 275
Other, net 93 119 116
------------ ------------ ------------
4,776 6,313 3,232
Valuation allowance (3,358) (3,751) (311)
------------ ------------ ------------
$1,418 $2,562 $2,921
------------ ------------ ------------
------------ ------------ ------------
Deferred income tax liabilities:
Tax accelerated depreciation and amortization $798 $1,017 $916
Foreign currency translation 279 307 284
Other 138 163 152
------------ ------------ ------------
$1,215 $1,487 $1,352
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The valuation allowance for deferred tax assets decreased $393,000 during the
year ended December 29, 1994, due primarily to reversals of temporary
differences offset partially by an alternative minimum tax credit in
carryforward. The $3,440,000 increase in valuation allowance during the year
ended December 30, 1993 related to net operating losses of foreign subsidiaries
and to an assessment of the benefit obtainable for other net deferred tax
assets. The net deferred tax assets recorded were limited to temporary
differences of $1.5 million at December 29, 1994 and $4.5 million at December
30, 1993 which are expected to result in loss carryback benefits when they
reverse. These temporary differences relate primarily to restructure charges
becoming tax deductions when paid. The benefit of these future carrybacks was
limited by the alternative minimum tax.
A reconciliation of the Company's effective income tax rate and the U.S. federal
tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December
--------------------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate 34.0% (34.0%) 34.0%
Foreign Sales Corporation tax benefit (2.7%) (0.3%) (5.9%)
State and foreign income tax, net of
federal income tax benefit 5.1% 0.4% 3.6%
Valuation allowance for deferred assets (10.7%) 28.1%
Other .6% 0.1% 1.8%
---------- ---------- ----------
26.3% (5.7%) 33.5%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company has foreign net operating loss ("NOLs") carryforwards of
approximately $2,117,000, with the following expirations: $881,000 in 1998 and
$1,236,000 available indefinitely. The Company has alternative minimum tax
credit carryforwards of $275,000, which are available indefinitely to reduce
future regular federal income taxes. Deferred tax assets arising from these
foreign NOLs and alternative minimum tax credits are fully provided for in the
valuation allowance.
Page 17
<PAGE>
NOTE 11 - GEOGRAPHIC SEGMENT INFORMATION
Data I/O and its subsidiaries operate predominantly within a single industry
segment: the design, manufacture, sale and service of programming systems and
design software for programmable integrated circuits. No one customer accounted
for more than 10% of the Company's revenues in the years ended December 29,
1994, December 30, 1993 and December 31, 1992. Major operations outside the
U.S. include sales subsidiaries in Japan, Germany, Canada and the United
Kingdom.
Geographic information for the three years ended December 29, 1994, is presented
in the table that follows. Net sales, as shown in the table below, is based
upon the geographic area into which the products were sold and delivered. As
such, U.S. export sales of $18,522,000, $22,626,000 and $22,520,000 in 1994,
1993 and 1992, respectively, have been excluded from U.S. reported net sales.
Transfers between geographic areas are made at prices consistent with rules and
regulations of governing tax authorities. The profit on transfers between
geographic areas is not recognized until sales are made to non-affiliated
customers. For purposes of the table below, the profit on the transfers between
geographic areas has been shown in operating income in the geographic area where
the final sale to non-affiliated customers took place. General corporate
expenses are charged to the U.S. segment. Identifiable assets are those assets
that can be directly associated with a particular geographic area.
<TABLE>
<CAPTION>
Year Ended December
-------------------------------------------
(In thousands) 1994 1993 1992
------------- ------------ ------------
<S> <C> <C> <C>
Net sales:
U.S. $ 32,930 $ 33,738 $ 34,816
Europe 16,221 15,910 19,447
Other 12,327 13,538 15,074
------------- ------------ ------------
$ 61,478 $ 63,186 $ 69,337
------------- ------------ ------------
------------- ------------ ------------
Operating income (loss):
U.S. $ 1,235 ($ 6,847) $ 1,014
Europe 2,012 (2,306) 1,446
Other 588 (986) 2,163
------------- ------------ ------------
$ 3,835 ($ 10,139) $ 4,623
------------- ------------ ------------
------------- ------------ ------------
Identifiable assets:
U.S. $ 35,790 $ 34,638 $ 38,398
Europe 4,284 4,626 6,338
Other 3,413 3,761 4,966
------------- ------------ ------------
$ 43,487 $ 43,025 $ 49,702
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
Page 18
<PAGE>
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited selected quarterly financial data for
the Company for 1994 and 1993. Although the Company's business is not seasonal,
growth rates of sales and earnings have varied from quarter to quarter as a
result of factors, such as stocking orders from international distributors, the
timing of new product introductions, business acquisitions, and short-term
industry and general U.S. and international economic conditions. Information as
to any one or more quarters is therefore not necessarily indicative of trends in
the Company's business or profitability.
<TABLE>
<CAPTION>
1994
-----------------------------------------------------
For the quarters ended: Mar. 31 June 30 Sept. 29 Dec. 29
------- ------- -------- -------
(In thousands except per share data)
<S> <C> <C> <C> <C>
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
<CAPTION>
1993
-----------------------------------------------------
For the quarters ended: Apr. 1 July 1 Sept. 30 Dec. 30
------- ------- -------- -------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Net sales $16,443 $16,962 $14,947 $14,834
Gross margin 9,135 8,479 8,376 5,786
Income (loss) before cumulative effect of
accounting change 121 (593) ( 1,306) ( 9,879)
Net income (loss) 521 (593) ( 1,306) ( 9,879)
Earnings per share:
Income (loss) before cumulative effect of
accounting change $0.02 ($0.08) ($0.18) ($1.36)
Net income (loss) $0.07 ($0.08) ($0.18) ($1.36)
Market price per share:
High $4.88 $4.38 $3.25 $3.13
Low $4.25 $3.00 $2.88 $2.25
</TABLE>
For the first three quarters of 1994, the Company's effective tax rate reflected
building additional valuation allowances for foreign subsidiary losses and tax
credits. The fourth quarter income bore an effective tax rate of zero due to
the reversal of valuation allowances. The valuation allowances that reversed
related primarily to reversals of temporary differences and utilization of
foreign loss carryforwards.
In the fourth quarter of 1993, the Company recorded a $6.1 million restructure
charge (see Note 2 of "Notes to Consolidated Financial Statements") and a $2.0
million writedown of its land held for sale (see Note 4 of "Notes to
Consolidated Financial Statements").
For the first quarter of 1993, the Company estimated that its effective tax rate
would be 38%. For the remaining quarters of 1993, the Company estimated its
effective tax benefit rate would be 34% before changes in the valuation account.
The actual tax benefit rate for 1993 operations was 5.7% (see Note 10 of "Notes
to Consolidated Financial Statements").
Data I/O Corporation's common stock is traded in the over-the-counter National
Market System (NASDAQ symbol is DAIO) and quoted in many financial publications,
including the WALL STREET JOURNAL. The per share prices reported in the table
above are those reported by NASDAQ. The approximate number of stockholders of
record at March 1, 1995, was 7,492,042.
Page 19
<PAGE>
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (AS AMENDED)
See pages 21 through 37
Page 20
<PAGE>
- -------------------------------------------------------------------------------
R E P O R T O F E R N S T & Y O U N G L L P ,
I N D E P E N D E N T A U D I T O R S
- -------------------------------------------------------------------------------
Board of Directors and Stockholders
Data I/O Corporation
We have audited the accompanying consolidated balance sheets of Data I/O
Corporation as of December 29, 1994, and December 30, 1993, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 29, 1994. Our audits also
included the financial statement schedule listed in the Index at Item 14(A).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Data I/O Corporation at December 29, 1994, and December 30, 1993, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 29, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 10 of "Notes to Consolidated Financial Statements," in 1993
the Company changed its method of accounting for income taxes.
Seattle, Washington //S// ERNST & YOUNG LLP
February 9, 1995 ERNST & YOUNG LLP
- -------------------------------------------------------------------------------
R E P O R T O F M A N A G E M E N T
- -------------------------------------------------------------------------------
Management is responsible for preparing the Company's financial statements and
related information that appears in this annual report on Form 10-K. Management
believes that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of its operations in conformity with generally accepted accounting
principles. Management has included in the Company's financial statements
amounts that are based on estimates and judgments, which it believes are
reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements, and that assets are
adequately safeguarded.
Independent audits of the Company's financial statements are performed in
accordance with generally accepted auditing standards and provide an objective,
independent review of the fairness of reported financial condition and results
of operations.
The Board of Directors of the Company has an Audit Committee composed of non-
management Directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing and financial reporting matters.
//S// WILLIAM C. ERXLEBEN //S// STEVEN M. GORDON
WILLIAM C. ERXLEBEN STEVEN M. GORDON
President Vice President
Chief Executive Officer Finance and Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurer
Page 21
<PAGE>
<TABLE>
<CAPTION>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
Dec. 29, Dec. 30, Dec. 31,
FOR THE YEARS ENDED 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands, except per share data)
Net sales $61,478 $63,186 $69,337
Cost of goods sold 28,384 31,411 30,045
------- ------- -------
Gross margin 33,094 31,775 39,292
Operating expenses:
Research and development 9,227 9,700 7,797
Selling, general and administrative 20,032 26,094 26,872
Provision for business restructuring 6,120
------- ------- -------
Total operating expenses 29,259 41,914 34,669
------- ------- -------
Operating income (loss) 3,835 (10,139) 4,623
Non-operating expense:
Interest income (144) (27) (42)
Interest expense 273 318 274
Foreign currency exchange 5 (73) 78
Adjustment of carrying value of land held for sale 2,000
------- ------- -------
Total non-operating expense 134 2,218 310
------- ------- -------
Income (loss) before income taxes, extraordinary item
cumulative effect of accounting change 3,701 (12,357) 4,313
Income tax expense (benefit) 975 (700) 1,445
------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change 2,726 (11,657) 2,868
Extraordinary item, net of income taxes of $925 (1,675)
Cumulative effect of accounting change 400
------- ------- -------
Net income (loss) $2,726 ($11,257) $1,193
------- ------- -------
------- ------- -------
Earnings per share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $0.37 ($1.63) $0.40
Extraordinary item ($0.23)
Cumulative effect of accounting change $0.06
------- ------- -------
Net income (loss) $0.37 ($1.57) $0.17
------- ------- -------
------- ------- -------
Weighted average shares outstanding 7,420 7,170 7,117
------- ------- -------
------- ------- -------
See notes to consolidated financial statements.
</TABLE>
Page 22
<PAGE>
<TABLE>
<CAPTION>
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
Dec. 29, Dec. 30,
1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $7,279 $1,704
Trade accounts receivable,
less allowance for doubtful
accounts of $277 and $332, respectively 10,145 9,364
Inventories 6,937 8,282
Recoverable income taxes 453 1,689
Deferred income taxes 675 1,475
Other current assets 1,361 687
------ ------
TOTAL CURRENT ASSETS 26,850 23,201
Land held for sale 2,006 1,983
Property, plant and equipment - net 10,737 12,200
Other assets 3,894 5,641
------- -------
TOTAL ASSETS $43,487 $43,025
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,908 $1,267
Accrued compensation 3,460 3,634
Deferred revenue 5,331 4,383
Other accrued liabilities 2,786 3,171
Accrued costs of business restructuring 1,890 3,826
Income taxes payable 997 971
Notes payable 440 2,367
------- -------
TOTAL CURRENT LIABILITIES 16,812 19,619
LONG TERM DEBT 1,500 1,500
LONG TERM OTHER PAYABLES 361 323
DEFERRED INCOME TAXES 471 400
COMMITMENTS (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 7,431,901
and 7,250,036 shares, respectively 20,729 20,242
Retained earnings 3,185 459
Currency translation adjustments 429 482
------- -------
TOTAL STOCKHOLDERS' EQUITY 24,343 21,183
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,487 $43,025
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements
Page 23
<PAGE>
<TABLE>
<CAPTION>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------
Dec. 29, Dec. 30, Dec. 31,
For the years ended 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
OPERATING ACTIVITIES:
Net income (loss) $2,726 ($11,257) $1,193
Adjustments to reconcile income (loss)
to net cash provided by operating activities:
Depreciation and amortization 4,671 4,860 3,598
Stock option compensation expense 80
Adjustment of carrying value of land held
for sale 2,000 1,675
Income and deferred income taxes 2,133 (533) (305)
Cumulative effect of accounting change (400)
Business restructure (1,936) 4,955
Deferred revenue 921 468 464
Changes in current items other
than cash and cash equivalents:
Trade accounts receivable (741) 3,518 171
Inventories 1,345 2,393 (3,501)
Other current assets (218) 48 (9)
Accounts payable and accrued liabilities 54 (1,451) 318
------- ------- ------
Cash provided by operating activities 8,955 4,601 3,684
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,876) (2,820) (2,272)
Additions to other assets (53) (1,405) (1,272)
------- ------- -------
Cash used for investing activities (1,929) (4,225) (3,544)
FINANCING ACTIVITIES:
Proceeds from (repayment of) notes payable (1,931) (1,060) 172
Sale of common stock 327 410 348
Proceeds from exercise of stock options 160 275 794
Purchase of common stock (65) (137)
------- ------- -------
Cash provided by (used for) financing activities (1,444) (440) 1,177
------- ------- -------
Increase (decrease) in cash and cash equivalents 5,582 (64) 1,317
Effects of exchange rate changes on cash (7) (6) (37)
Cash and cash equivalents - Beginning of year 1,704 1,774 494
------- ------- -------
Cash and cash equivalents - End of year $7,279 $1,704 $1,774
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $255 $343 $236
Income taxes $405 $573 $1,501
</TABLE>
See notes to consolidated financial statements.
Page 24
<PAGE>
<TABLE>
<CAPTION>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------
Currency
Common Stock Retained Translation
--------------------------------
Shares Amount Earnings Adjustment
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands except share data)
BALANCE AT DECEMBER 26, 1991 6,748,587 $17,980 $10,523 $ 874
Net income 1,193
Stock options exercised 199,476 794
Issuance of stock through
Employee Stock Purchase Plan 108,650 348
Purchase of common stock (26,782) (137)
Compensation on exercised or expired
stock options 205
Currency translation adjustment, net of
tax benefit of $203 (437)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1992 7,029,931 19,190 11,716 437
Net loss (11,257)
Stock options exercised 88,450 275
Issuance of stock through
Employee Stock Purchase Plan 149,259 410
Purchase of common stock (17,604) (65)
Compensation on exercised or expired
stock options 432
Currency translation adjustment, net of
tax of $23 45
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 30, 1993 7,250,036 20,242 459 482
Net income 2,726
Stock options exercised 44,875 160
Issuance of stock through
Employee Stock Purchase Plan 136,990 327
Currency translation adjustment, net of
tax benefit of $27 (53)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 29, 1994 7,431,901 $20,729 $ 3,185 $ 429
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
Page 25
<PAGE>
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Data I/O
Corporation and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REPORTING PERIOD
The Company reports on a fifty-two, fifty-three week basis. Results of
operations for 1994 and 1993 are for fifty-two week periods whereas 1992
consisted of a fifty-three week period.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenues, costs, and expenses are
translated at average rates of exchange prevailing during the year. Translation
adjustments resulting from this process are charged or credited to stockholders'
equity, net of taxes. Realized and unrealized gains and losses on foreign
currency transactions are included in non-operating expense as Foreign Currency
Exchange.
In an effort to minimize the effect of exchange rate fluctuations on the results
of its operations, the Company hedges certain portions of its foreign currency
exposure through the use of forward exchange contracts. At December 29, 1994,
the Company had approximately $2.3 million in foreign exchange contracts
outstanding with the contract exchange rate being approximately equal to the
market exchange rate. These contracts range from sixty days to one year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with insignificant
interest rate risk. The Company invests in the highest grade commercial paper
with original maturities of three months or less. The Company intends that
these investments are held to maturity. Interest earned is reported in non-
operating expense as Interest Income.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is computed on a
currently adjusted standard basis, which approximates actual cost on an average
or first-in/first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated using the
straight-line method over estimated useful lives as follows:
Building 40 years
Equipment 3 to 7 years
Leasehold improvements Lesser of lease term or estimated useful life
Page 26
<PAGE>
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment or customer
acceptance, if an acceptance clause is specified in the sales terms. Revenue
from software products licensed to original equipment manufacturers is
recognized when earned per the terms of the contracts. Revenue from the sale of
service and update contracts is recorded as deferred revenue and recognized as
earned revenue on a straight-line basis over the contractual period.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. No software
development costs have been capitalized due to immateriality.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. Total expenses were
$1,771,000, $2,123,000 and $2,331,000 in 1994, 1993 and 1992, respectively.
WARRANTY EXPENSE
The Company warrants its products against defects for periods ranging from
ninety days to one year. The Company provides currently for the estimated cost
which may be incurred under its product warranties.
INCOME TAXES
Income tax expense includes U.S., state and foreign income taxes. Certain
items of income and expense are not reported in both the tax returns and
financial statements in the same year. The resulting difference is reported as
deferred income taxes.
The Company adopted in 1993 Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes," which requires the use of the
liability method in computing income taxes. Under the liability method,
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
These deferred tax assets and liabilities are measured by the provisions of
currently enacted tax laws. The adoption of SFAS 109 during the first quarter
of 1993 resulted in an increase in the net deferred tax asset by approximately
$400,000, which was reported separately as the cumulative effect of a change in
the method of accounting for income taxes in the consolidated statement of
operations for the year ended December 30, 1993.
EARNINGS PER SHARE
The Company calculates and reports earnings per share on a primary basis, using
the treasury stock method of computing weighted average common and common stock
equivalent shares outstanding during the period. Common stock equivalents which
are antidilutive are not considered. Stock options are common stock equivalents.
Fully diluted earnings per share is approximately the same as primary earnings
per share.
DIVERSIFICATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. The Company's trade
receivables are geographically dispersed and include customers in many different
industries. Management believes that any risk of loss is significantly reduced
due to the diversity of its end-customers and geographic sales areas. The
Company performs ongoing credit evaluations of its customers' financial
condition and requires collateral, such as letters of credit and bank
guarantees, whenever deemed necessary.
Page 27
<PAGE>
RECLASSIFICATIONS
Certain prior years' balances have been reclassified to conform to current year
presentation.
NOTE 2 - PROVISION FOR BUSINESS RESTRUCTURING
During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1
million related to the restructure of its sales and distribution channels,
downsizing its operations to a level consistent with anticipated lower sales and
product margins, and consolidating and outsourcing of certain manufacturing
processes. The purpose of the restructure is primarily to reduce expenses and
significantly lower the Company's break-even point in reaction to the reduced
sales and gross margins realized in 1993. Additionally, the Company made
several strategic changes to its sales and distribution channels to better align
the Company's current and anticipated future products to their markets and
customers. The general downsizing of operations and restructure of the sales
and distribution system were substantially completed at December 29, 1994. The
Company began implementation of planned changes to its manufacturing processes
in the first quarter of 1994 for completion by the end of 1996.
Of the total restructure charge of $6.1 million, $2.1 million relates to
restructuring the sales and distribution system, including severance for
terminated employees, facilities and equipment lease abandonment, facilities
relocation costs, the writeoff of intangible assets associated with the
acquisition and set up of direct sales operations in Germany and the United
Kingdom, and costs associated with implementation of new accounting and
distribution systems and processes; $2.0 million relates to the consolidation
and outsourcing of certain portions of the Company's manufacturing operations,
including the writedown of production equipment to net realizable value,
severance for terminated employees, facility relocation costs, and costs
associated with outsourcing certain manufacturing processes; and the remaining
$2.0 million relates to general organizational downsizing, including severance
for terminated employees, asset write-downs and costs associated with
rearrangement of facilities.
At December 29, 1994 approximately $1.9 million of the total restructure charge
remained in accrued liabilities to be paid out in 1995 and 1996. Approximately
$1.9 million and $1.2 million had been spent during 1994 and 1993, respectively,
and $1.1 million had been charged against related assets.
NOTE 3 - INVENTORIES
Inventories consisted of the following components (in thousands):
<TABLE>
<CAPTION>
December 29, December 30,
1994 1993
------------ ------------
<S> <C> <C>
Raw material $3,327 $2,963
Work-in-process 1,955 2,513
Finished goods 1,655 2,806
------------ ------------
$6,937 $8,282
------------ ------------
------------ ------------
</TABLE>
NOTE 4 - LAND HELD FOR SALE
The Company owns 79.4 acres of land at its headquarters site in Redmond,
Washington, which it purchased in various parcels between 1979 and 1986. The
land was intended as a campus on which to consolidate the operations of the
Company as it expanded internally and through acquisitions. The Company has
since abandoned its aggressive acquisition and consolidation strategy. In 1990
the Company decided to market and sell the approximately 40 acres of land in
excess of that required for its current 100,000 square foot building and another
50,000 square foot expansion facility. At that time the land was reclassified,
at cost plus estimated disposition expenses, to Land Held for Sale in the
Company's financial statements. Based on information available at that time,
the cost approximated market value.
Page 28
<PAGE>
In June 1992 the Company recorded an extraordinary $2.6 million ($1.7 million
after-tax) write-down to reflect a decrease in the market value of its land.
This decrease in value was caused primarily by the enactment, in July 1992, of a
Sensitive Areas Ordinance ("SAO") by the City of Redmond. The SAO prohibits
building not only on land classified as wetlands, but on steep slopes and on
buffers around the wetlands which are wider than those required by most
jurisdictions. In addition, due to the changes in valuation for commercial real
estate comparable to the land held by Data I/O, the Company recorded a $2.0
million valuation provision for the land held for resale at December 30, 1993.
Since placing the land on the market in 1990, the Company has entered into two
separate option agreements to sell the property. Both of these agreements were
allowed to expire due to the changes in regulatory requirements and valuations
of commercial real estate comparable to the land held by the Company, discussed
above. The Company intends to continue to market this excess land.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
<TABLE>
<CAPTION>
December 29, December 30,
1994 1993
------------ ------------
<S> <C> <C>
Land $ 910 $ 910
Building and improvements 7,334 6,863
Equipment 21,507 22,140
------------ ------------
29,751 29,913
Less accumulated depreciation 19,014 17,713
Property, plant & equipment - net $10,737 $12,200
------------ ------------
------------ ------------
</TABLE>
NOTE 6 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
<TABLE>
<CAPTION>
December 29, December 30,
1994 1993
------------ ------------
<S> <C> <C>
Long-term lease deposits $ 156 $ 504
Investment in product lines 6,883 6,883
------------ ------------
7,039 7,387
Less accumulated amortization 3,145 1,746
------------ ------------
$3,894 $5,641
------------ ------------
------------ ------------
</TABLE>
Total amortization recorded for 1994, 1993 and 1992 was $1,399,000, 1,338,000
and $582,000, respectively. The decrease in long-term lease deposits is
attributable to the termination of a foreign office lease.
INVESTMENT IN PRODUCT LINES
CAD/CAM GROUP, INC.
On January 19, 1993, the Company acquired substantially all of the assets of
CAD/CAM Group, Inc. and entered into non-compete agreements with its two
founding technologists. The acquisition was accounted for under the purchase
method of accounting. Of the total purchase price of $3.0 million to be paid to
CAD/CAM Group, Inc. and its two founding technologists, $1.5 million was paid
during 1993 and the balance plus accrued interest payable at the U.S. Treasury
Bill rate is payable in 1998. Of the total consideration, approximately $2.9
million plus approximately $200,000 of transaction costs were allocated to
various identifiable intangible assets. These are reported in the accompanying
balance sheet as Other Assets and is being amortized ratably over the economic
life of the specific assets acquired (two to eight years). The net book value
Page 29
<PAGE>
of the assets capitalized in Other Assets related to this acquisition was $1.8
million at December 29, 1994 and $2.4 million at December 30, 1993.
QUALITY AUTOMATION, INC.
On September 25, 1990, the Company acquired exclusive rights to distribute
automated handling and labeling equipment manufactured by Quality Automation,
Inc. The Company also obtained options to acquire Quality Automation's existing
and future products as well as certain other assets. On September 25, 1992, the
Company exercised its options and purchased the assets, technology and rights in
the products of Quality Automation Inc., and Q.A. Engineering, Inc. (both herein
combined and referred to as "Quality Automation" or "QA"). The acquisition was
accounted for as a purchase, with the aggregate purchase price totaling $4.8
million. The aggregate purchase price, along with the associated transaction
fees, was allocated to the assets acquired, based on estimated fair market
value. Of the total acquisition cost, approximately $3.8 million of various
identifiable intangible assets were reported as Other Assets in the accompanying
balance sheets and are being amortized ratably over the economic life of the
specific assets acquired (three to five years). The net book value of the
assets capitalized in Other Assets related to this acquisition is $1.9 million
and $2.7 million at December 29, 1994, and December 30, 1993, respectively.
NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
Notes payable and long-term debt consisted of the following components:
(In thousands) December 29, December 30,
1994 1993
------------ ----------
<S> <C> <C>
Borrowings under a $5.0 million
unsecured U.S. revolving line of credit,
maturing May 31, 1994, with a weighted
average interest rate of 4.4% at
December 30, 1993. $1,250
Borrowings under a $1.5 million
unsecured foreign revolving line of
credit maturing August 11, 1995, with
variable interest rates of 3.0% to 4.1%
and a weighted average rate of 3.2% at
December 29, 1994 and a weighted
average interest rate of 4.4% at
December 30, 1993. $440 1,117
Unsecured note payable to the CAD/CAM
Group, Inc., maturing in full on January 19,
1998, with variable interest rates based on
one-year U.S. Treasury Bills (7.15% at
December 29, 1994). 1,500 1,500
---------- ----------
Total debt 1,940 3,867
Less current maturities 440 2,367
---------- ----------
Total long-term debt $1,500 $1,500
---------- ----------
---------- ----------
</TABLE>
In addition to the $5.0 million line of credit, at December 30, 1993, the
Company had an unused $3.0 million unsecured U.S. revolving/term loan requiring
equal quarterly principal payments beginning on March 31, 1995, and maturing on
December 31, 1996. At December 30, 1993, the Company was in violation of
certain covenants of its borrowing agreement with the lender of both of these
U.S. lines of credit. The lender granted to the Company a waiver of these
covenant violations through February 28, 1994. On February 28, 1994, the two
U.S. lines of credit described above were canceled and the Company signed a new
loan agreement for an $8.0 million revolving line of credit, secured by the
Company's accounts receivable and inventory and maturing on May 31, 1995.
Borrowings under this line of credit were restricted to $1.0 million plus 75% of
accounts receivable. In addition, the Company could borrow up to $2.0 million
against a negative pledge of its equipment until June 30, 1994. This new line
of credit called for interest at rates 50 to 125 basis points above the rates
charged on the previous lines of credit. Effective July 22, 1994, the Company's
lender for its $8 million U.S. line of credit agreed to release the collateral
supporting the credit line, eliminate the borrowing base calculation used to
determine available borrowings on the credit line and reduce the interest rate
charged on outstanding borrowings by 25 to 30 basis points. On November 16,
Page 30
<PAGE>
1994, the Company's lender again reduced the interest rate charged on
outstanding borrowings by an additional 45 basis points to the bank's published
Prime rate or the Libor rate plus 150 basis points.
Historically, the U.S. and foreign lines of credit have been structured as
short-term and have been continuously renewed on their maturity dates. The
Company anticipates renewing these lines of credit in 1995 under substantially
the same terms. No assurance can be made, however, in regard to the renewal of
these agreements if the Company again experiences losses.
NOTE 8 - COMMITMENTS
The Company has commitments under non-cancelable operating leases and other
agreements, primarily for office space, with initial or remaining terms of one
year or more as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1995 $820
1996 526
1997 97
1998 3
</TABLE>
Lease and rental expense was $1,169,000, $1,432,000 and $1,415,000 in 1994, 1993
and 1992, respectively. The Company has renewal options on substantially all of
its major leases.
NOTE 9 - EMPLOYEE STOCK AND RETIREMENT PLANS
STOCK OPTION PLANS
At December 29, 1994, there were 760,138 shares of common stock reserved for
issuance under the Company's employee stock option plans. Pursuant to these
plans, options are granted to officers and key employees of the Company with
exercise prices equal to the fair market value of the common stock at the date
of grant and generally vest over four years. Options granted under the plans
have termination dates ranging from five to seven years from the date of grant.
At December 29, 1994, options to purchase 219,125 shares were exercisable at
prices ranging from $2.06 to $6.38. The following table summarizes activity
under the plans for each of the three years ended December 29, 1994:
<TABLE>
<CAPTION>
Shares Option Price
------------ ----------------------------------------
<S> <C> <C> <C> <C>
Outstanding December 26, 1991 853,248 $1.60 - $5.88
Granted 177,500 3.75 - 6.38
Exercised (199,476) 1.98 - 4.60
Expired and terminated (48,697) 1.60 - 5.75
------------
Outstanding December 31, 1992 782,575 1.60 - 6.38
Granted 266,000 2.59 - 4.50
Exercised (88,450) 1.60 - 3.73
Expired and terminated (213,375) 1.98 - 5.88
------------
Outstanding December 30, 1993 746,750 2.06 - 6.38
Granted 413,000 2.44 - 3.59
Exercised (44,875) 2.06 - 3.75
Expired and terminated (298,875) 2.06 - 5.88
------------
Outstanding December 29, 1994 816,000 2.06 - 6.38
------------
------------
</TABLE>
At December 29, 1994, the Company had granted 55,862 more options than it had
available for grant under its plans. The Company expects that this difference
will be partially offset by options that will expire or terminate during the
first half of 1995. Additionally, the Company will request that stockholders
approve a resolution authorizing an additional 500,000
Page 31
<PAGE>
shares of common stock be reserved for the stock option plans. This resolution
will be voted on at the Company's 1995 annual meeting. The terms of the
resolution are included in the Company's Proxy Statement relating to the annual
meeting of stockholders to be held on May 16, 1995.
There were 55,720 and 110,470 shares available for grant under the plans at
fiscal year-end 1993 and 1992, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan, eligible employees may purchase shares
of the Company's common stock at six-month intervals at 85% of the lower of the
fair market value on the first or the last day of each six-month period.
Employees may purchase shares having a value not exceeding 10% of their gross
compensation during an offering period. During 1994, 1993 and 1992, a total of
136,990, 149,259 and 108,650 shares were purchased under the plan at average
prices of $2.39, $2.74 and $3.21 per share, respectively. At December 29,
1994, a total of 246,394 shares were reserved for future issuance.
STOCK APPRECIATION RIGHTS PLAN
The Company has a Stock Appreciation Rights Plan ("SAR") under which each
director, executive officer, or holder of 10% or more of the Company's common
stock has a SAR with respect to each exercisable stock option. The SAR entitles
the SAR holder to receive cash from the Company for the difference between the
market value of the stock and the exercise price of the option in lieu of
exercising the related option. SARs are only exercisable following a tender
offer or exchange offer for the Company's stock, or following approval by
stockholders of the Company of any merger, consolidation, reorganization or
other transaction providing for the conversion or exchange of more than 50% of
the common shares outstanding. As no event has occurred which would make the
SARs exercisable, no compensation expense has been recorded under this plan.
RETIREMENT SAVINGS PLAN
The Company has a savings plan that qualifies as a cash or deferred salary
arrangement under section 401(k) of the Internal Revenue Code. Under the plan,
participating U.S. employees may defer up to 17% of their pre-tax salary, but no
more than approximately $9,000 per plan year. The Company contributes one
dollar for each dollar contributed by a participant, with a maximum contribution
of 4% of a participant's earnings. The Company's matching contribution expense
for the savings plan was $384,000, $400,000 and $355,000 in 1994, 1993 and 1992,
respectively.
Page 32
<PAGE>
NOTE 10 - ACCOUNTING FOR INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 109. This requires the establishment of deferred tax assets
and liabilities for expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and the tax basis of assets and
liabilities using currently enacted tax rates which are expected to be in effect
during the years in which the differences are anticipated to reverse. The
cumulative effect of this change in accounting for income taxes of $400,000 was
determined as of January 1, 1993, and is reported separately in the consolidated
statement of operations for the year ended December 30, 1993. Prior years'
financial statements have not been restated to apply the provisions of SFAS 109.
<TABLE>
<CAPTION>
Year Ended December
------------------------------
1994 1993 1992
---------- ---------- ----------
Components of income (loss) before taxes were: (in thousands):
<S> <C> <C> <C>
U.S. operations $2,615 ($10,736) $3,933
Foreign operations 1,086 (1,621) 380
---------- ---------- ----------
$3,701 ($12,357) $4,313
---------- ---------- ----------
---------- ---------- ----------
Income tax expense (benefit) consists of (in thousands):
Current tax expense (benefit)
U.S. Federal ($176) ($1,665) $1,635
State 127 (46) 110
Foreign 151 117 95
---------- ---------- ----------
102 (1,594) 1,840
Deferred tax expense (benefit)
U.S. Federal 859 538 (395)
Foreign 14 356
---------- ---------- ----------
873 894 (395)
---------- ------------------------------
Total income tax expense (benefit) $975 ($700) $1,445
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
For federal income tax purposes, a deduction is received for stock option
compensation gains. The benefit of this deduction, which is recorded in common
stock, was $15,000, $49,000 and $64,000 in 1994, 1993 and 1992, respectively.
Foreign currency translation adjustments, which were recorded directly in
equity, were recorded net of the related deferred tax assets of $27,000 in 1994
and $203,000 in 1992 and a deferred tax liability of $23,000 in 1993. In 1992,
the extraordinary loss on land held for sale was recorded net of the applicable
$925,000 income tax benefit.
Deferred taxes relating to timing differences in 1992 were (in thousands):
<TABLE>
<CAPTION>
1992
----------
<S> <C>
Inventory and product return allowances ($352)
Leases 10
Intercompany profit in foreign subsidiaries' inventory 192
Depreciation and amortization 3
Accrued compensation, pension and retirement (141)
Domestic International Sales Corporation (50)
Other (57)
----------
($395)
----------
----------
</TABLE>
Page 33
<PAGE>
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):
<TABLE>
<CAPTION>
Upon
Adoption at
December 29, December 30, January 1,
1994 1993 1993
------------ ------------ ------------
Deferred income tax assets:
<S> <C> <C> <C>
Receivables allowance for doubtful accounts $ 79 $ 84 $ 80
Inventory, product return reserves and basis differences 1,079 1,088 973
Land basis 966 980
Compensation accruals 253 271 346
Intercompany profit 308 578 523
Pension and retirement accruals 127 390 325
Restructure asset and liability reserves 606 1,424
Accrued liability reserves 270 252 251
Foreign net operating loss carryforwards 720 1,127 618
Alternative minimum tax credit carryforwards 275
Other, net 93 119 116
------------ ------------ ------------
4,776 6,313 3,232
Valuation allowance (3,358) (3,751) (311)
------------ ------------ ------------
$1,418 $2,562 $2,921
------------ ------------ ------------
------------ ------------ ------------
Deferred income tax liabilities:
Tax accelerated depreciation and amortization $798 $1,017 $916
Foreign currency translation 279 307 284
Other 138 163 152
------------ ------------ ------------
$1,215 $1,487 $1,352
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The valuation allowance for deferred tax assets decreased $393,000 during the
year ended December 29, 1994, due primarily to reversals of temporary
differences offset partially by an alternative minimum tax credit in
carryforward. The $3,440,000 increase in valuation allowance during the year
ended December 30, 1993 related to net operating losses of foreign subsidiaries
and to an assessment of the benefit obtainable for other net deferred tax
assets. The net deferred tax assets recorded were limited to temporary
differences of $1.5 million at December 29, 1994 and $4.5 million at December
30, 1993 which are expected to result in loss carryback benefits when they
reverse. These temporary differences relate primarily to restructure charges
becoming tax deductions when paid. The benefit of these future carrybacks was
limited by the alternative minimum tax.
A reconciliation of the Company's effective income tax rate and the U.S. federal
tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December
--------------------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate 34.0% (34.0%) 34.0%
Foreign Sales Corporation tax benefit (2.7%) (0.3%) (5.9%)
State and foreign income tax, net of
federal income tax benefit 5.1% 0.4% 3.6%
Valuation allowance for deferred assets (10.7%) 28.1%
Other .6% 0.1% 1.8%
---------- ---------- ----------
26.3% (5.7%) 33.5%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company has foreign net operating loss ("NOLs") carryforwards of
approximately $2,117,000, with the following expirations: $881,000 in 1998 and
$1,236,000 available indefinitely. The Company has alternative minimum tax
credit carryforwards of $275,000, which are available indefinitely to reduce
future regular federal income taxes. Deferred tax assets arising from these
foreign NOLs and alternative minimum tax credits are fully provided for in the
valuation allowance.
Page 34
<PAGE>
NOTE 11 - GEOGRAPHIC SEGMENT INFORMATION
Data I/O and its subsidiaries operate predominantly within a single industry
segment: the design, manufacture, sale and service of programming systems and
design software for programmable integrated circuits. No one customer accounted
for more than 10% of the Company's revenues in the years ended December 29,
1994, December 30, 1993 and December 31, 1992. Major operations outside the
U.S. include sales subsidiaries in Japan, Germany, Canada and the United
Kingdom.
Geographic information for the three years ended December 29, 1994, is presented
in the table that follows. Net sales, as shown in the table below, is based
upon the geographic area into which the products were sold and delivered. As
such, U.S. export sales of $18,522,000, $22,626,000 and $22,520,000 in 1994,
1993 and 1992, respectively, have been excluded from U.S. reported net sales.
Transfers between geographic areas are made at prices consistent with rules and
regulations of governing tax authorities. The profit on transfers between
geographic areas is not recognized until sales are made to non-affiliated
customers. For purposes of the table below, the profit on the transfers between
geographic areas has been shown in operating income in the geographic area where
the final sale to non-affiliated customers took place. General corporate
expenses are charged to the U.S. segment. Identifiable assets are those assets
that can be directly associated with a particular geographic area.
<TABLE>
<CAPTION>
Year Ended December
-------------------------------------------
(In thousands) 1994 1993 1992
------------- ------------ ------------
<S> <C> <C> <C>
Net sales:
U.S. $ 32,930 $ 33,738 $ 34,816
Europe 16,221 15,910 19,447
Other 12,327 13,538 15,074
------------- ------------ ------------
$ 61,478 $ 63,186 $ 69,337
------------- ------------ ------------
------------- ------------ ------------
Operating income (loss):
U.S. $ 1,235 ($ 6,847) $ 1,014
Europe 2,012 (2,306) 1,446
Other 588 (986) 2,163
------------- ------------ ------------
$ 3,835 ($ 10,139) $ 4,623
------------- ------------ ------------
------------- ------------ ------------
Identifiable assets:
U.S. $ 35,790 $ 34,638 $ 38,398
Europe 4,284 4,626 6,338
Other 3,413 3,761 4,966
------------- ------------ ------------
$ 43,487 $ 43,025 $ 49,702
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
Page 35
<PAGE>
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited selected quarterly financial data for
the Company for 1994 and 1993. Although the Company's business is not seasonal,
growth rates of sales and earnings have varied from quarter to quarter as a
result of factors, such as stocking orders from international distributors, the
timing of new product introductions, business acquisitions, and short-term
industry and general U.S. and international economic conditions. Information as
to any one or more quarters is therefore not necessarily indicative of trends in
the Company's business or profitability.
<TABLE>
<CAPTION>
1994
-----------------------------------------------------
For the quarters ended: Mar. 31 June 30 Sept. 29 Dec. 29
------- ------- -------- -------
(In thousands except per share data)
<S> <C> <C> <C> <C>
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
<CAPTION>
1993
-----------------------------------------------------
For the quarters ended: Apr. 1 July 1 Sept. 30 Dec. 30
------- ------- -------- -------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Net sales $16,443 $16,962 $14,947 $14,834
Gross margin 9,135 8,479 8,376 5,786
Income (loss) before cumulative effect of
accounting change 121 (593) ( 1,306) ( 9,879)
Net income (loss) 521 (593) ( 1,306) ( 9,879)
Earnings per share:
Income (loss) before cumulative effect of
accounting change $0.02 ($0.08) ($0.18) ($1.36)
Net income (loss) $0.07 ($0.08) ($0.18) ($1.36)
Market price per share:
High $4.88 $4.38 $3.25 $3.13
Low $4.25 $3.00 $2.88 $2.25
</TABLE>
For the first three quarters of 1994, the Company's effective tax rate reflected
building additional valuation allowances for foreign subsidiary losses and tax
credits. The fourth quarter income bore an effective tax rate of zero due to
the reversal of valuation allowances. The valuation allowances that reversed
related primarily to reversals of temporary differences and utilization of
foreign loss carryforwards.
In the fourth quarter of 1993, the Company recorded a $6.1 million restructure
charge (see Note 2 of "Notes to Consolidated Financial Statements") and a $2.0
million writedown of its land held for sale (see Note 4 of "Notes to
Consolidated Financial Statements").
For the first quarter of 1993, the Company estimated that its effective tax rate
would be 38%. For the remaining quarters of 1993, the Company estimated its
effective tax benefit rate would be 34% before changes in the valuation account.
The actual tax benefit rate for 1993 operations was 5.7% (see Note 10 of "Notes
to Consolidated Financial Statements").
Data I/O Corporation's common stock is traded in the over-the-counter National
Market System (NASDAQ symbol is DAIO) and quoted in many financial publications,
including the WALL STREET JOURNAL. The per share prices reported in the table
above are those reported by NASDAQ. The approximate number of stockholders of
record at March 1, 1995, was 1,369.
Page 36
<PAGE>
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 37
<PAGE>
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: May 11, 1995 By://S//Steven M. Gordon
-------------------------------
Steven M. Gordon
Vice President
Finance and Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurer
Page 38
