UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended JUNE 25, 1998 Commission File No. 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0864123
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10525 Willows Road N.E., Redmond, Washington, 98052
(address of principal executive offices, Zip Code)
(425) 881-6444
(Registrant's telephone number, including area code)
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
7,186,851 shares of no par value Common Stock outstanding as of August 4, 1998
Page 1 of 56
Exhibit Index on Page 16
<PAGE>
DATA I/O CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 25, 1998
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (unaudited) 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter Ended Six Months Ended
- ---------------------------------------------------------- -------------------- - ---------------------
Jun. 25, Jun. 26, Jun. 25, Jun. 26,
1998 1997 1998 1997
- ---------------------------------------------------------- -------- -------- --------- ---------
(in thousands, except per share data)
Net sales $8,782 $11,398 $17,208 $23,265
Cost of goods sold 5,254 5,802 10,024 11,711
-------- -------- --------- ---------
Gross margin 3,528 5,596 7,184 11,554
Operating expenses:
Research and development 2,397 1,963 4,811 4,035
Selling, general and administrative 3,760 3,767 7,099 7,061
-------- -------- --------- ---------
Total operating expenses 6,157 5,730 11,910 11,096
-------- -------- --------- ---------
Operating income (loss) (2,629) (134) (4,726) 458
Non-operating income (expense):
Interest income 382 138 851 198
Interest expense (17) (58) (49) (109)
Foreign currency exchange (2) (29) (3) (14)
Net gain (loss) on dispositions (352) 2,347 (355) 2,347
-------- -------- --------- ---------
Total non-operating income 11 2,398 444 2,422
Income (loss) from continuing operations
-------- -------- --------- ---------
before income taxes (2,618) 2,264 (4,282) 2,880
Income tax expense 7 247 36 430
-------- -------- --------- ---------
Income (loss) from continuing operations (2,625) 2,017 (4,318) 2,450
Income (loss) from discontinued operations, net of taxes 527 (639) 707 (1,023)
-------- -------- --------- ---------
Net income (loss) ($2,098) $1,378 (3,611) 1,427
======== ======== ========= =========
Basic and diluted earnings (loss) per share:
From continuing operations ($0.36) $0.29 ($0.61) $0.35
From discontinued operations 0.07 (0.09) 0.10 (0.15)
-------- -------- --------- ---------
Total basic and diluted earnings (loss) per share ($0.29) $0.20 ($0.51) 0.20
======== ======== ========= =========
Weighted average shares outstanding 7,148 6,877 7,128 6,847
======== ======== ========= =========
Weighted average and potential shares outstanding 7,148 7,018 7,128 6,966
======== ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------- ------------ --------- ------------
Jun. 25, Dec. 25,
1998 1997
- ---------------------------------------------------------------- ------------ --------- ------------
(in thousands, except share data) (unaudited) (note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,956 $8,113
Marketable securities 22,104 24,855
Trade accounts receivable, less allowance for
doubtful accounts of $391 and $394 5,603 5,678
Inventories 8,358 8,158
Recoverable income taxes 1,093
Deferred income taxes 1,423 1,990
Other current assets 1,687 3,910
------------ ------------
TOTAL CURRENT ASSETS 44,224 52,704
Property, plant and equipment - net 3,876 3,389
Other assets 1,272 532
Deferred income taxes 593 1,111
------------ ------------
TOTAL ASSETS $49,965 $57,736
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,471 $3,760
Accrued compensation 2,676 2,958
Deferred revenue 3,964 4,795
Other accrued liabilities 4,436 3,117
Income taxes payable 639 2,848
Notes payable and current maturities of long-term debt 568 2,000
------------ ------------
TOTAL CURRENT LIABILITIES 14,754 19,478
Long-term other payables 561
Deferred gain on sale of property 2,919 3,083
------------ ------------
TOTAL LIABILITIES 17,673 23,122
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 7,148,657
and 7,038,786 shares 16,981 16,412
Retained earnings 14,734 18,345
Unrealized loss on marketable securities (732)
Cumulative translation adjustment 577 589
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 32,292 34,614
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 49,965 $57,736
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------- ------------- ------ ------------
For the six months ended: June 25, June 26,
1998 1997
- ------------------------------------------------------------------- ------------- ------ ------------
(in thousands)
OPERATING ACTIVITIES:
Income (loss) from continuing operations ($4,318) $2,450
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,045 1,234
Deferred income taxes 1,085 (813)
Deferred revenue (831) (118)
Amortization of deferred gain on sale (164) (48)
Net change in:
Trade accounts receivable (598) (163)
Inventories (200) 1,686
Recoverable income taxes (1,093) (123)
Other current assets 2,223 176
Business restructure (204)
Accounts payable and accrued liabilities (2,365) 2,168
------------- ------------
Cash provided by (used in) operating activities of (5,216) 6,245
continuing operations
Cash provided by (used in) operating activities of 707 (1,002)
discontinued operations
------------- ------------
Net cash provided by (used in) operating activities (4,509) 5,243
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,264) (3,593)
Net proceeds on sale of property 13,421
Additions to other assets (994)
Purchases of marketable securities (13,882) (15,553)
Proceeds from sales of marketable securities 17,366
------------- ------------
Cash used in investing activities 1,226 (5,725)
FINANCING ACTIVITIES:
Additions to (repayment of) notes payable (1,436) 530
Sale of common stock 148 179
Proceeds from exercise of stock options 421 390
Repurchased of common stock (3)
------------- ------------
Cash provided by (used in) financing activities (867) 1,096
------------- ------------
Increase (decrease) in cash and cash equivalents (4,150) 614
Effects of exchange rate changes on cash (7) 2
Cash and cash equivalents at beginning of year 8,113 4,048
------------- ------------
Cash and cash equivalents at end of year $3,956 $4,664
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $49 $92
Income taxes $2,207 $143
See notes to consolidated financial statements.
</TABLE>
Page 5
<PAGE>
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENT PREPARATION
The financial statements as of June 25, 1998 and June 26, 1997, have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). These statements are unaudited but, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments and accruals) necessary to present fairly the results for the
periods presented. The balance sheet at December 25, 1997 has been derived from
the audited financial statements at that date. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. Operating results for the quarter
ended June 25, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. These financial statements
should be read in conjunction with the annual audited financial statements and
the accompanying notes included in the Company's Form 10-K for the year ended
December 25, 1997. Certain prior period's balances have been reclassified to
conform to the presentation used in the current period.
As of December 26, 1997, the Company adopted SFAS 130, Reporting Comprehensive
Income. Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or shareholders' equity. Statement 130
requires unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments to be included in other
comprehensive income. During the second quarter 1998 and 1997, total
comprehensive income (loss), which includes net income and other comprehensive
income, amounted to ($1,583,000) and $1,387,000, respectively. During the first
six months of 1998 and 1997, total comprehensive income (loss) amounted to
($2,891,000) and $1,399,000, respectively.
NOTE 2 - INVENTORIES
Inventories consisted of the following components (in thousands):
Jun. 25, Dec. 25,
1998 1997
-------------- -------------
Raw material $3,120 $2,965
Work-in-process 2,336 2,470
Finished goods 2,902 2,723
============== =============
$8,358 $8,158
============== =============
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Jun. 25, Dec. 25,
1998 1997
-------------
--------------
Building and improvements $ 93 $ 83
Equipment 21,920 21,493
-------------
--------------
22,013 21,576
Less accumulated depreciation 18,137 18,187
============== =============
$ 3,876 $ 3,389
============== =============
Page 6
<PAGE>
NOTE 4 - DISCONTINUED OPERATIONS
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc. Also in November 1997,
the Company entered into a licensing agreement and an agreement to sell certain
assets of its Synario Design Automation Division to MINC Washington
Incorporated. These transactions discontinue the Semiconductor Equipment
Division and Synario Design Automation Division operations of the Company.
However, the Company is entitled to receive and may realize certain licensing
revenues related to its former Synario, ABEL and ECS products through December
31, 1999, and will recognize revenue in 1998 from source code sales as well as
training and support services provided. Operating results of these discontinued
divisions are classified as discontinued operations in the financial statements.
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share data):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Second Quarter First Six Months
--------------------- ----------------------
1998 1997 1998 1997
Numerator for basic and diluted earnings per share:
Income from continuing operations ($2,625) $2,017 ($4,318) $2,449
Income (loss) from discontinued operations 527 (639) 707 (1,023)
--------- -------- --------- ---------
Net income (loss) ($2,098) $1,378 ($3,611) $1,426
========= ======== ========= =========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 7,148 6,877 7,128 6,847
Employee stock options (1) 141 119
--------- -------- --------- ---------
Denominator for diluted earnings per
share - adjusted weighted-average shares
and assumed conversions 7,148 7,018 7,128 6,966
========= ======== ========= =========
Basic earnings (loss) per share
From continuing operations $(0.36) $0.29 $(0.61) $0.35
From discontinued operations 0.07 (0.09) 0.10 (0.15)
--------- -------- --------- ---------
Total basic earnings per share $(0.29) $0.20 $(0.51) $0.20
========= ======== ========= =========
Diluted earnings (loss) per share
From continuing operations $(0.36) $0.29 $(0.61) $0.35
From discontinued operations 0.07 (0.09) 0.10 (0.15)
--------- -------- --------- ---------
Total diluted earnings per share $(0.29) $0.20 $(0.51) $0.20
========= ======== ========= =========
(1) Excludes 113,500 employee stock options which were antidilutive as of June 26, 1997.
</TABLE>
NOTE 6 - ACCOUNTING FOR INCOME TAXES
The Company's effective tax rate for the first quarter of 1998 differed from the
statutory 34% tax rate primarily due to operating losses for which no tax
benefit was recorded. Tax valuation reserves increased by approximately $759,000
during the quarter and $1,212,000 during the first six months of 1998. As of
March 26, 1998 the Company has valuation reserves of $1,376,000 that may
increase should the Company continue to incur losses or reverse as the Company
records income.
Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
FORWARD-LOOKING STATEMENTS
Although most of the information contained in this report is historical, certain
of the statements contain forward-looking information. To the extent statements
in this report involve, without limitation, development, introduction and
shipment of new products, the pursuit of new technologies, markets or strategic
alternatives, the Company's expectations for future revenue, expenses, profit,
cash flow, balance sheet items, sell-through or backlog, forecasts of demand or
market trends for the Company's products and for the industries in which the
Company operates or any other guidance on future periods, these statements are
forward-looking and involve matters which are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by such forward-looking statements. These risks and
uncertainties include the possible inability of the Company to overcome
technical challenges in the development of new products; production difficulties
or delays due to possible delays or non-deliveries of key components by
suppliers or other factors; uncertainty of market acceptance of new products;
product introductions, technological innovations and pricing practices of
competitors; the effect of global, national and regional economic conditions;
the possible inability to retain key personnel; the possible loss of sales
channel partners due to new product delays or other factors; changes in
operating system platforms of preference; changes in demand; increases in
component prices or other costs; inventory risks due to shifts in market demand,
product obsolescence or other factors and a number of other risks including
those identified by the Company under the caption "Risk Factors" in Item 1 and
elsewhere in the Company's Annual Report on Form 10-K for the year ended
December 25, 1997, and other risks identified from time to time in the Company's
filings with the Securities and Exchange Commission, press releases and other
communications. There can be no assurance the Company will not encounter
significant technological, supplier, manufacturing or other problems which will
cause the introduction or production of its new products to be delayed. All
forward-looking statements contained in this report reflect the Company's
expectations at the time of this report only, and the Company disclaims any
responsibility to revise or update any such forward-looking statement except as
may be required by law.
BUSINESS RESTRUCTURING
On July 30, 1998, the Company announced a business restructuring that will
include a downsizing of its work force by approximately one third by the fourth
quarter of 1998, consolidation of its facility, and other steps to reduce
operations to a level consistent with the lower sales it is experiencing. The
Company estimates that these steps, when completed, could result in quarterly
savings of approximately $2 million by the first quarter of 1999.
The Company expects to record a charge to earnings in the third quarter of 1998
in the range of approximately $2.5 to $3.3 million to reflect the cost of this
restructure, consisting primarily of severance costs, write-downs of certain
assets, and facility consolidation costs. Cash payments related to this
restructure are estimated to be in the range of approximately $2.0 to $2.8
million during the period from the third quarter 1998 through 1999.
Approximately two thirds of those cash payments are expected to take place in
the third and fourth quarters of 1998, related to employee severance and
benefits, previously accrued vacation, facility consolidation costs and
consulting fees.
The Company has recently completed an analysis of its new product development
programs and an assessment of the programmer market and has concluded that the
most appropriate action at this time is to reduce its corporate overhead and
research and development expenses and to focus its on-going development spending
in the segments of the market that show the best potential for growth and return
on investment for the Company. The Company plans to focus its research and
development efforts for the remainder of 1998 on the ProMaster 970, on in-system
programming products, and on sustaining engineering for the Company's existing
products, and plans to discontinue development of the ProMaster 870 and the
application of the DataSite technology in the general purpose programmer market.
The Company will continue development of DataSite for use with the ProMaster
970.
Once operating expenses are reduced through staff reductions and
reprioritization of research and development efforts, the Company intends to
focus much of its attention on identifying means to improve the Company's
competitive position. Strategic initiatives may include (1) the pursuit of
business opportunities in parallel markets; (2) acceleration of efforts to offer
in-system programming solutions; (3) acquisitions or arrangements with partners
which bring technologies or strategic relationships helpful to Data I/O
customers; or (4) business combinations to enhance shareholder value.
Page 8
<PAGE>
RESULTS OF CONTINUING OPERATIONS
For all periods presented in this section, results of operations have been
reclassified to reflect the classification of the Company's Semiconductor
Equipment and Synario Design Automation Divisions as discontinued operations
(see "Discontinued Operations"). Prior quarter's figures have been reclassified
for comparability.
NET SALES
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Second Quarter First Six Months
-------------------------------------------------------------------
Net sales 1998 1997 % Change 1998 1997 % Change
-----------------------------------------------------------------------------------------------------
Non-automated programming systems $6,603 $7,126 (7.3%) $13,512 $15,076 (10.4%)
Automated programming systems 2,179 4,272 (49.0%) 3,696 8,189 (54.9%)
--------------------------------- ----------------------------------
Total programming systems $8,782 $11,398 (23.0%) $17,208 $23,265 (26.0%)
Second Quarter First Six Months
-------------------------------------------------------------------
Net sales by location 1998 1997 % Change 1998 1997 % Change
-----------------------------------------------------------------------------------------------------
United States $4,430 $5,747 (22.9%) $8,428 $11,415 (26.2%)
% of total 50.4% 50.4% 49.0% 49.1%
International 4,352 5,651 (23.0%) $8,780 $11,850 (25.9%)
% of total 49.6% 49.6% 51.0% 50.9%
-----------------------------------------------------------------------------------------------------
</TABLE>
Sales and orders decreased for the Company's programming system products in the
second quarter of 1998 compared to the second quarter of 1997. Orders in the
second quarter of 1998 decreased approximately 22% to $9.1 million, compared
with $11.6 million in 1997. The sales decline in the first and second quarters
of 1998 are primarily attributable to automated programming systems, and in
particular the inability to record revenue on units of the Company's new
ProMaster 970 Fine Pitch Programming System that had been delivered to customers
in previous quarters but not yet accepted pending completion of certain
configuration options and performance enhancements. The Company and its supplier
are continuing to work on completion of these configuration options and
performance enhancements, but does not expect to recognize revenue on these
systems in the third quarter.
Sales are expected to continue to be soft primarily due to increased competition
in areas where Data I/O products are nearing the end of their product life
cycles. In addition, the decline in non-automated programming system sales
reflects the continuing market shift away from the Company's traditional line of
higher-priced IC programmers for the engineering market, toward lower-priced
programmers. As a result, the Company believes that demand for its programming
systems likely will continue to decline in 1998 and is taking steps to
restructure its organization to reduce operations to a level consistent with the
lower sales it is experiencing. See "Business Restructuring". The Company
expects that during each of the quarters and for the year ended December 31,
1998, it will continue to experience year over year declines in revenue and that
it will incur losses from operations.
Recent changes in programmable IC technology, such as increasingly complex logic
ICs, lower voltage requirements and higher pin counts, and the increasing need
for higher quality and high-volume programming by users of programmable ICs
means that there is a significant market need for more sophisticated programmers
with new programming technology and automated programming systems. The Company
believes that its ProMaster 970 Fine Pitch Automated Programming System, which
integrates the Company's DataSite programmer technology, addresses a portion of
this market. However, the Company has discontinued development of the
application of the DataSite technology for the general purpose programmer
market. Furthermore, the Company recently determined that the ProMaster 870,
which was intended to compete in the mid-price range of the automated
programming system market, would miss the price point required for its intended
market segment and has therefore discontinued development of this product (see
"Business Restructuring").
Page 9
<PAGE>
GROSS MARGIN
Second Quarter First Six Months
------------------------------------------------------
(in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Gross Margin $3,528 $5,596 $7,184 $11,554
Percentage of net sales 40.2% 49.1% 41.8% 49.7%
- --------------------------------------------------------------------------------
Gross margin for both the second quarter and first six months of 1998 decreased
compared to the same periods in 1997 due primarily to the lower sales volume
during 1998. The relatively high fixed component of cost of goods sold causes
any shift in total volume to have a significant impact on gross margin. Also
contributing to the decline were additional inventory reserves and high costs
associated with the ProMaster 970 customer support.
RESEARCH AND DEVELOPMENT
Second Quarter First Six Months
-------------------------------------------------
(in thousands) 1998 1997 1998 1997
------------------------------------------------------------------------------
Research and development $2,397 $1,963 $4,811 $4,035
Percentage of net sales 27.3% 17.2% 28.0% 17.3%
------------------------------------------------------------------------------
The increase in research and development spending for both the second quarter
and first six months of 1998 as compared to the same periods in 1997 is
primarily due to increased engineering staff and spending for materials used in
product development related to the Company's continued high investment in new
technology through the second quarter. However, as part of the business
restructuring the Company plans to focus its research and development efforts
for the remainder of 1998 on the ProMaster 970, on in-system programming
products, and on sustaining engineering for the Company's existing products, and
plans to discontinue development of the ProMaster 870 and the application of the
DataSite technology in the general purpose programmer market. The Company
expects that this shift in focus and development will result in decreased
spending on research and development during the third and fourth quarters. See
"Business Restructuring."
SELLING, GENERAL AND ADMINISTRATIVE
Second Quarter First Six Months
--------------------------------------------
(in thousands) 1998 1997 1998 1997
------------------------------------------------------------------------------
Selling, general & administrative $3,760 $3,767 $7,099 $7,061
Percentage of net sales 42.8% 33.0% 41.3% 30.4%
------------------------------------------------------------------------------
Selling, general and administrative expenditures in the second quarter and first
six months of 1998 were flat as compared with the second quarter and first six
months of 1997. The Company expects that, as a result of the business
restructuring which was started in the third quarter, selling general and
administrative expenditures will be lower in the fourth quarter. See "Business
Restructuring."
Page 10
<PAGE>
INTEREST
Second Quarter First Six Months
-------------------------------------------------------
(in thousands) 1998 1997 1998 1997
------------------------------------------------------------------------------
Interest income $382 $138 $851 $198
Interest expense $17 $58 $49 $109
------------------------------------------------------------------------------
The increase in interest income for the second quarter of 1998 as compared to
the second quarter of 1997 is due to an increase in cash, cash equivalents and
marketable securities, due primarily to the proceeds received from the Company's
land sale and business dispositions during 1997 (see "Discontinued Operations").
INCOME TAXES
Second Quarter First Six Months
-----------------------------------------------------
(in thousands) 1998 1997 1998 1997
-----------------------------------------------------------------------------
Income tax expense $7 $247 $36 $430
Effective tax rate (0.3%) 10.9% (0.8%) 14.9%
-----------------------------------------------------------------------------
The Company's effective tax rate for the first quarter of 1998 differed from the
statutory 34% tax rate primarily due to operating losses for which no tax
benefit was recorded. Tax valuation reserves increased by approximately $759,000
during the quarter and $1,212,000 during the first six months of 1998. As of
March 26, 1998 the Company has valuation reserves of $1,376,000 that may
increase should the Company continue to incur losses or reverse as the Company
records income.
NET INCOME AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Second Quarter First Six Months
-----------------------------------------------------------
(in thousands, except per share data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Income (loss) from continuing ($2,625) $2,017 ($4,318) $2,450
operations
Percentage of net sales (29.9%) 17.7% (25.1%) 10.5%
Basic and diluted earnings (loss)
per share from continuing
operations ($0.36) $0.29 ($0.61) $0.35
- -------------------------------------------------------------------------------------------------
</TABLE>
Net income for the second quarter of 1998 decreased as compared to the second
quarter of 1997 due primarily to decreased sales and gross margin, the gain
recognized on the sale and leaseback of the corporate headquarters property in
the second quarter of 1997, and to a lesser extent due to increases in research
and development expenses.
Page 11
<PAGE>
DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(in thousands) Second Quarter First Six Months
-------------------------- --------------------------
1998 1997 1998 1997
-----------------------------------------------------
Net Sales of discontinued operations $557 $3,603 $948 $6,811
========================== ==========================
Income (loss) from operations before $527 ($846) $707 ($1,381)
income taxes
Income taxes 207 358
-------------------------- ------------ --------------
Total income (loss) on discontinued $527 ($639) $707 ($1,023)
segments
- -------------------------------------------------------------------------------------------------
</TABLE>
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc. Also in November 1997,
the Company entered into a licensing agreement and an agreement to sell certain
assets of its Synario Design Automation Division to MINC Incorporated. These
transactions discontinue the Semiconductor Equipment Division and Synario Design
Automation Division operations of the Company. However, the Company is entitled
to receive and may realize certain licensing revenues related to its former
Synario, ABEL and ECS products through December 31, 1999. Combined operating
results of these discontinued divisions are shown in the table above.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
June Dec
(in thousands) 25, Change 25,
1998 1997
- -------------------------------------- ------------- -------------- ------------
Working capital $29,470 ($3,756) $33,226
Total debt $568 ($1,432) $2,000
- -------------------------------------- ------------- -------------- ------------
Working capital decreased during the first six months of 1998 primarily due to
the early settlement of a long-term pension obligation, spending on property,
plant and equipment, the minority interest investment in JTAG Technologies and
the loss from operations. Also, other assets decreased by approximately $2.2
million due to the collection of trade accounts receivable related to the
discontinued Reel-Tech and Synario Design Automation Divisions (see
"Discontinued Operations").
Accrued expenses decreased primarily due to the payment of income taxes of $2.2
million, repayment of a note payable of $1.5 million, payment of an obligation
carrying over from the purchase of the now disposed Reel-Tech Division and
payment of accrued compensation related to 1997.
As of March 26, 1998, the Company had total debt of $568,000 or approximately 2%
of its $32.3 million in equity. This is current debt consisting of borrowings on
the Company's $1.2 million foreign lines of credit. No borrowings were
outstanding under the Company's $8.0 million U.S. line of credit. The U.S. line
of credit matures in May 1999. The foreign lines of credit mature in August and
November 1998. Historically, these credit lines have been structured as
short-term and have been renewed on their maturity dates. The Company currently
expects to be able to renew these lines of credit on maturity under
substantially the same terms as those presently in place.
The Company estimates that capital expenditures for property, plant and
equipment during the remainder of 1998 will be approximately $600,000. Such
expenditures are currently expected to be funded from internally generated funds
and, if necessary, borrowings under the Company's existing credit lines.
Although the Company expects that such expenditures will be made, it has
purchase commitments for only a small portion of this amount.
At June 25, 1998, the Company's material short-term unused sources of working
capital consisted of approximately $26 million in cash, cash equivalents and
marketable securities, available borrowings of $8.0 million under its U.S. line
of credit and available borrowings of approximately $568,000 under its foreign
lines of credit. The Company believes these sources and cash flow from
operations will be sufficient during 1998 to fund working capital needs, service
existing debt and finance planned capital acquisitions. During the fist two
quarters of 1998 the Company consumed cash at a rate approximately equal to its
loss from operations. During the third quarter of 1998 the Company started to
implement a restructuring intended to
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reduce operations to a level consistent with the lower sales it is
experiencing. See "Business Restructuring." There can be no assurance that the
Company will be able to reduce expenses and achieve sales sufficient to generate
cash from operations.
In April 1998 the Company signed an agreement for a strategic alliance with JTAG
Technologies, a Netherlands-based manufacturer and developer of boundary scan
test and programming solutions. Under the terms of the agreement, the Company
has purchased a minority interest in JTAG Technologies for approximately
$994,000, and will sell in-system programming products under the Data I/O name.
The Company does not expect material revenue from the sales of these products
during 1998.
SHARE REPURCHASE PROGRAM
The Company announced on October 27, 1995 a share repurchase program which
authorized the Company to repurchase up to 7.5% (approximately 570,000 shares)
of its outstanding shares of common stock. On February 21, 1996 and May 13, 1997
the Company announced an extension of the share repurchase program which
authorized the Company to repurchase up to an additional 8% (approximately
570,000 shares) and approximately 14.5% (up to 1,000,000 shares) respectively of
its outstanding common stock. These purchases may be executed through open
market purchases at prevailing market prices, through block purchases or in
privately negotiated transactions. Purchases may commence or be discontinued at
any time. As of June 25, 1998, the Company had repurchased 1,016,200 shares
since October 1995 at a total cost of approximately $7.1 million.
GENERAL
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment of its data processing systems and will
have to modify or replace portions of its software so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project budget was initially estimated and authorized for
approximately $1 million, which included approximately $200,000 for new hardware
to be capitalized and approximately $800,000 of costs to be expensed as
incurred. The Company currently estimates that the cost of this project will be
less than the initial budgeted amount. As of June 25, 1998, the Company had
incurred and expensed approximately $300,000 related to this project.
The Company has completed the most significant portion of this project. The
Company believes, based on its current understanding of its systems, that with
modifications to the existing software and conversions to new software, the Year
2000 issue should not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not properly made,
or are not completed timely, the Year 2000 issue could have a material adverse
impact on the operations of the Company. The cost of the project and the date on
which the Company believes it will complete the Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, cooperation of vendors and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in the area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
SHAREHOLDER RIGHTS PLAN
In March 1998, the Company adopted a Shareholder Rights Plan (the "Rights Plan")
that went into effect simultaneously with the expiration of its previously
existing shareholder rights plan. Under the Rights Plan, a dividend of one Share
Purchase Right (a "Right") was declared for each share of Company Common Stock
outstanding at the close of business on April 4, 1998. In the event that a
person or group (the "Acquirer") acquires 15% or more of the Company's Common
Stock without advance approval by the Company's Board of Directors, each Right
will entitle the holder, other than the Acquirer, to buy Common Stock with a
market value of twice the Right's then current exercise price (initially $30,
subject to adjustment). In addition, if Rights are triggered by such a
non-approved acquisition and the Company is thereafter acquired in a merger or
other transaction in which the shareholders of the Company are not treated
equally, shareholders with unexercised Rights will be entitled to purchase
common stock of the Acquirer with a value of twice the exercise price of the
Rights. The Company's Board of Directors may redeem the Rights for a nominal
amount at any time prior to an event that causes the Rights to
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become exercisable. The Rights trade automatically with the underlying
Common Stock (unless and until a distribution event occurs under the Rights
Plan) and expire on April 4, 2008 if not redeemed earlier.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 12, 1998, there were
present in person or by proxy the holders of 5,727,853 shares of the
7,134,657 shares of Common Stock of the Corporation. Following are the
matters ratified and the voting results:
(a)Election of a Board of Directors consisting of the following
four (4) directors:
NAME VOTES FOR VOTES WITHHELD
Keith L. Barnes 5,140,209 587,644
Frances M. Conley 5,143,116 584,737
Paul A. Gary 5,139,173 588,680
Edward D. Lazowska 5,138,274 589,579
(b)Approval of an amendment to the Company's 1986 Employee Stock Option
Plan whereby the number of shares of the Company's Common Stock
reserved for issuance under the Plan was increased by 300,000 shares.
Votes cast were 4,303,482 For, 1,355,164 Against, 69,207 Abstain and
no Broker Non-votes.
ITEM 5. OTHER INFORMATION
On July 30, 1998, the Company issued a press release regarding
second quarter 1998 financial results, a business restructuring
and a search for new business opportunities, which is filed as
Exhibit 99.1 attached.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K PAGE
(a)EXHIBITS
2.1 Shareholders Agreement Dated April 15, 1998 among JTAG
Technologies B.V., Data I/O Corporation, Harry Bleeker
and Peter Van Den Eijnden 17
99.1 Press release dated July 30, 1998, regarding
second quarter 1998 financial results, a business
restructuring and a search for new
business opportunities. 53
(b)REPORTS ON FORM 8-K
None
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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: August 7, 1998
By://S//JOEL S. HATLEN
Joel S. Hatlen
Vice President - Finance
Chief Financial Officer
Secretary and Treasurer
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EXHIBIT INDEX
EXHIBIT NUMBER TITLE PAGE NUMBER
2.1 Shareholders Agreement Dated April 15, 1998 among JTAG
Technologies B.V., Data I/O Corporation, Harry Bleeker
and Peter Van Den Eijnden 17
99.1 Press release dated July 30, 1998, regarding
second quarter 1998 financial results, a restructure
and a search for new business opportunities. 53
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Exhibit 2.1
SHAREHOLDERS AGREEMENT
DATED APRIL 15, 1998
AMONG
JTAG TECHNOLOGIES B.V.,
DATA I/O CORPORATION,
HARRY BLEEKER
AND
PETER VAN DEN EIJNDEN
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1. PURCHASE, SALE AND TERMS OF SHARES................................................... 1
1.1 THE SHARES................................................................. 1
----------
1.2 PURCHASE PRICE AND TRANSFER................................................ 1
---------------------------
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
EXISTING SHAREHOLDERS............................................................ 2
2.1 CORPORATE EXISTENCE AND POWER.............................................. 2
2.2 AUTHORITY.................................................................. 2
2.3 NO CONFLICT................................................................ 2
2.4 CAPITALIZATION............................................................. 3
2.5 FINANCIAL STATEMENTS....................................................... 3
2.6 TITLE TO ASSETS............................................................ 4
2.7 ACTIONS PENDING............................................................ 4
2.8 REQUIRED CONSENTS.......................................................... 4
2.9 TAXES AND SOCIAL SECURITY OBLIGATIONS...................................... 4
2.10 EMPLOYEE PLANS............................................................. 4
2.11 NO MATERIAL ADVERSE CHANGE................................................. 4
2.12 BROKERAGE FEES............................................................. 5
2.13 DISCLOSURE................................................................. 5
2.14 PROPRIETARY RIGHTS......................................................... 5
2.15 LICENSES................................................................... 5
2.16 MATERIAL AGREEMENTS........................................................ 5
2.17 TRANSACTIONS WITH AFFILIATES............................................... 6
2.18 EMPLOYEES.................................................................. 6
3. REPRESENTATIONS AND WARRANTIES OF DATA I/O........................................... 6
3.1 ORGANIZATION AND STANDING OF DATA I/O...................................... 6
3.2 AUTHORITY.................................................................. 6
3.3 FINANCING.................................................................. 6
3.4 DUE DILIGENCE............................................................... 7
3.5 [ * ] OPTION............................................................... 7
3.6 NO OTHER REPRESENTATIONS OR WARRANTIES..................................... 7
4. CONDITIONS PRECEDENT TO AGREEMENT.................................................... 7
4.1 REPRESENTATIONS AND WARRANTIES ACCURATE AS OF TRANSFER DATE................ 7
4.2 CONSENTS AND APPROVALS..................................................... 7
4.3 COMPANY STATUS............................................................. 7
4.4 AMENDED ARTICLES OF ASSOCIATION............................................ 8
4.5 EMPLOYMENT AGREEMENTS...................................................... 8
4.6 DISTRIBUTION AGREEMENT..................................................... 8
4.7 CONFIDENTIALITY AND INVENTION ASSIGNMENT AGREEMENTS........................ 8
4.8 COMPLIANCE WITH AGREEMENT AND RELATED AGREEMENTS........................... 8
4.9 PROCEEDINGS SATISFACTORY................................................... 8
4.10 CORPORATE DOCUMENTS........................................................ 8
4.11 APPROVAL OF BOARD.......................................................... 8
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[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
5. AFFIRMATIVE COVENANTS................................................................ 9
5.1 CORPORATE EXISTENCE........................................................ 9
5.2 PROPERTIES, BUSINESS AND INSURANCE......................................... 9
5.3 COMPLIANCE WITH LAWS....................................................... 9
5.4 EMPLOYEE CONFIDENTIALITY AND INVENTION ASSIGNMENT AGREEMENTS............... 9
5.5 KEEPING OF RECORDS AND BOOKS OF ACCOUNT.................................... 9
5.6 REPORTING REQUIREMENTS..................................................... 9
5.7 SIGNIFICANT TRANSACTIONS AND EVENTS....................................... 10
5.8 FURTHER ASSURANCES........................................................ 10
6. NEGATIVE COVENANTS.................................................................. 10
6.1 DEALINGS WITH AFFILIATES.................................................. 11
6.2 COMPENSATION.............................................................. 11
6.3 STOCK OPTIONS............................................................. 11
6.4 DIVIDENDS................................................................. 11
6.5 TRANSFERS OF INTELLECTUAL PROPERTIES...................................... 11
6.6 [ * ] OPTION.............................................................. 11
7. RIGHT OF FIRST REFUSAL.............................................................. 11
7.1 RIGHT OF FIRST REFUSAL.................................................... 11
7.2 FIRST REFUSAL NOTICE...................................................... 12
7.3 FURTHER SALE.............................................................. 12
8. OPTION TO PURCHASE SHARES........................................................... 12
8.1 OPTION TO PURCHASE SHARES................................................. 12
8.2 CONTINGENT OPTION PAYMENTS................................................ 13
8.3 OPTION CLOSING............................................................ 19
8.4 CONDITIONS TO OPTION CLOSING.............................................. 19
8.5 REPURCHASE RIGHTS......................................................... 20
8.6 EFFECT OF FAILURE TO EXERCISE RIGHTS...................................... 22
9. OTHER AGREEMENTS OF THE PARTIES..................................................... 22
9.1 KEY MAN INSURANCE......................................................... 22
9.2 VOLUNTARY LIQUIDATION..................................................... 22
10. INDEMNIFICATION..................................................................... 23
10.1 GENERAL INDEMNITY......................................................... 23
10.2 INDEMNIFICATION PROCEDURE................................................. 23
10.3 LIMITATION ON INDEMNIFICATION............................................. 24
11 TERMINATION; EXCLUSIVITY............................................................ 24
11.1 TERMINATION BEFORE TRANSFER DATE.......................................... 24
11.2 AUTOMATIC TERMINATION..................................................... 24
11.3 EFFECT OF TERMINATION..................................................... 25
11.4 EXCLUSIVITY............................................................... 25
12. MISCELLANEOUS....................................................................... 25
12.1 AMENDMENTS, WAIVERS AND CONSENTS.......................................... 25
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<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
12.2 PUBLICITY................................................................. 25
12.3 NOTICES................................................................... 26
12.4 FULL UNDERSTANDING........................................................ 26
12.5 ENTIRE AGREEMENT.......................................................... 27
12.6 MODIFICATION.............................................................. 27
12.7 NO WAIVER................................................................. 27
12.8 CAPTIONS AND CONSTRUCTION................................................. 27
12.9 SEVERABILITY.............................................................. 27
12.10 SURVIVAL.................................................................. 27
12.11 GOVERNING LAW; ARBITRATION................................................ 27
12.12 EXPENSES.................................................................. 27
12.13 EXECUTION IN COUNTERPARTS................................................. 27
12.14 INVALID PROVISIONS......................................................... 27
12.15 ATTORNEYS' FEES........................................................... 28
12.16 BINDING EFFECT; ASSIGNMENT................................................ 28
12.17 GOOD FAITH................................................................ 28
13. DEFINITIONS AND ACCOUNTING TERMS.................................................... 28
13.1 DEFINITIONS............................................................... 28
13.2 ACCOUNTING TERMS.......................................................... 30
</TABLE>
SCHEDULES
2.1 Branches, Affiliates and Subsidiaries
2.3 Conflicts
2.4 Capitalization
2.5 Financial Statements
2.6 Title to Assets
2.7 Actions Pending
2.8 Required Consents
2.10 Employee Benefit Plans
2.11 No Material Adverse Change
2.14 Proprietary Rights
2.16 Material Agreements
2.17 Transactions with Affiliates
2.18 Employee Agreements
3.4 Due Diligence
EXHIBITS
1.2(a) Shareholders Resolution and Agreement
4.4 Amended Articles of Association
4.5 Employment Agreements
4.6 Distribution Agreement
4.7 Evaluation and Non-Disclosure Agreement
8.2(a) Examples of Contingent Option Payments Under Section 8.2
8.2(c) Final Calculation of Catch-Up Goals Under Section 8.2(c)
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[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
SHAREHOLDERS AGREEMENT
This SHAREHOLDERS AGREEMENT (this "Agreement") is dated April 15, 1998,
among JTAG Technologies B.V., a Netherlands limited liability company (together
with its present and future subsidiaries, the "Company"), Harry Bleeker ("Mr.
Bleeker" or "Shareholder"), Peter van den Eijnden ("Mr. van den Eijnden" or
"Shareholder," and collectively with Mr. Bleeker, the "Existing Shareholders")
and Data I/O Corporation, a Washington corporation (together with its present
and future subsidiaries and any other holder of Shares (as hereinafter defined),
"Data I/O").
THE PARTIES HERETO AGREE AS FOLLOWS:
1. PURCHASE, SALE AND TERMS OF SHARES
1.1 THE SHARES. As of the Transfer Date (as hereinafter defined), the
Company will have authorized 2040 shares of Ordinary Shares, NLG 100 par
value (the "Ordinary Shares"), of which 1620 shares will be unissued, 140 shares
will be owned by Mr. Bleeker, 140 shares will be owned by Mr. van den Eijnden
and 140 shares will be owned by Data I/O (such shares of Data I/O having been
owned by Ronald van Maas ("Mr. van Maas") prior to the Transfer Date). The
rights and other terms and provisions of the Ordinary Shares are set forth in
the Amended Articles of Association of the Company attached as EXHIBIT 4.4
hereto and filed with the Netherlands Ministry of Justices (the "Amended
Articles of Association").
1.2 PURCHASE PRICE AND TRANSFER.
Pursuant to a notarial deed and in accordance with the Shareholders Resolution
and Agreement set forth as EXHIBIT 1.2(A) attached hereto, on the Transfer Date
Mr. van Maas has agreed to sell, transfer and assign to Data I/O and, in
consideration of and in express reliance upon such Shareholders Resolution and
Agreement, the representations, warranties and covenants of Mr. van Maas
contained in such notarial deed and the representations, warranties, covenants,
terms and conditions of this Agreement, Data I/O has agreed to purchase from Mr.
van Maas at the closing of the transfer of the Shares described in Section
1.2(b) (the "Transfer") the number of shares of Ordinary Shares representing
thirty-three and one-third percent (33-1/3%) of the shares of Ordinary Shares
outstanding on the Transfer Date (as hereinafter defined) (the "Transfer
Shares"), for an aggregate purchase price of NLG 2,000,000 (the "Purchase
Price"). For purposes of this Agreement, the Transfer Shares, the Option Shares
(as defined in Section 8.1(a)) and any other shares of capital stock of the
Company held by Data I/O from time to time shall be hereinafter together
referred to as the "Shares."
The Transfer shall take place at one of the civil law notaries of the law firm
Banning, Van Kemenade and Holland in Eindhoven, the Netherlands, between 9:00
a.m. and 11:00 a.m., Eindhoven time. The "Transfer Date" shall be April 15, 1998
(or such other date as Data I/O and the Company shall mutually agree upon). On
the Transfer Date, the Existing Shareholders will cause the Company to enter in
the Company's stock register the name of Data I/O (or its
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[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
nominee) and the number of Transfer Shares to be purchased by Data I/O,
against transfer of funds to the account of Mr. van Maas by wire transfer,
representing the Purchase Price.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND EXISTING SHAREHOLDERS
Each of the Company and the Existing Shareholders, to the best of their
knowledge, jointly and severally represent and warrant to Data I/O as follows:
2.1 CORPORATE EXISTENCE AND POWER. The Company is a limited liability
company duly organized, validly existing and in good standing under the
laws of the Netherlands and has all corporate power and authority to conduct its
business as now conducted and as proposed to be conducted, and is duly qualified
to transact business as a foreign corporation in any required jurisdiction. The
Company does not have any branches, affiliates or subsidiaries except as set
forth on SCHEDULE 2.1. The Amended Articles of Association have been duly
adopted by all necessary corporate action required by applicable law. The
rights, privileges and preferences of the Shares will be as stated in the
Amended Articles of Association.
2.2 AUTHORITY. The execution, delivery and performance by the Company of
this Agreement, the Amended Articles of Association, the Distribution
Agreement (as defined in Section 4.6), the Employment Agreements (as defined in
Section 4.5) and the Confidentiality Agreement (as defined in Section 4.7)
(collectively, including all amendments, modifications or supplements thereto,
the "Related Agreements"), and the consummation of the transactions contemplated
hereby or thereby are within the Company's corporate power and have been duly
authorized by all necessary corporate actions on the part of the Company and its
shareholders. This Agreement and each Related Agreement to which it is a party
when executed and delivered by the Company is a valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other similar laws relating to creditors' rights generally and
by general equitable principles. This Agreement and each Related Agreement to
which he is a party when executed and delivered by the respective Shareholder is
a valid and binding obligation of such Shareholder, enforceable against him in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws relating to
creditors' rights generally and by general equitable principles.
2.3 NO CONFLICT. Except as set forth on SCHEDULE 2.3, the execution,
delivery and performance of this Agreement and each Related Agreement to
which it is a party by the Company, and the consummation by the Company of the
transactions contemplated hereby and thereby does not and will not: (a)
contravene or conflict with the Amended Articles of Association or the internal
regulations of the Company's Management Board, (b) contravene or conflict with
or constitute a violation of any provision of any Netherlands law, rule,
regulation, order, judgment, injunction or decree binding upon or applicable to
the Company, any Shareholder or any of the Company's property or assets, (c)
constitute a default or breach under or give rise to any right of termination,
cancellation or acceleration of any right or obligation of the Company or any
Shareholder or to a loss of any benefit to which the Company is entitled under
any provision of any contract, agreement or understanding binding upon the
Company or to which the Company is a party by
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[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
which the Company or any of its assets are or may be bound, or constitute a
default or breach (or an event which, with the lapse of time or the giving of
notice, or both, would constitute a default or breach) thereunder, or violate
any license, franchise, permit or other similar authorization held by the
Company, (d) result in the creation or imposition of any lien, security
interest, charge or encumbrance of any nature on any property of the Company, or
(e) give to others any interest or rights, including rights of termination,
acceleration or cancellation, in or respect to any agreement to which the
Company or any Shareholder is a party or by which the Company or any Shareholder
is bound or by which any of the Company's property or assets are bound.
2.4 CAPITALIZATION. The authorized capital stock of the Company consists
of 2,040 shares of Ordinary Shares, par value NLG 100, of which 420 shares
are outstanding. Of such 420 outstanding shares of Ordinary Shares, each of the
Existing Shareholders owns and has good and marketable title to 140 shares, free
and clear of all liens and encumbrances. All of the outstanding shares of
Ordinary Shares have been duly authorized and validly issued under the laws of
the Netherlands, and are fully paid and nonassessable. Except for the rights
granted to [ * ] ("[ * ]") pursuant to that certain Transfer Agreement dated
November 1, 1993 (the "[ * ] Option") or as provided herein or in any of the
Related Agreements, there are no outstanding preemptive, conversion or other
rights, options, warrants or agreements granted or issued by or binding upon the
Company and/or the Existing Shareholders for the registration, purchase or
acquisition of any shares of capital stock of the Company or any other
securities convertible into, exchangeable for or evidencing the right to
subscribe for any shares of such capital stock. All outstanding shares of
capital stock, convertible securities, rights, options and warrants of the
Company were prior to the Transfer Date owned as specified on SCHEDULE 2.4.
Except as required in the Amended Articles of Association, the Company is not
subject to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of its capital stock or any convertible securities,
rights or options. Except as set forth herein or in the Amended Articles of
Association, neither of the Company or any Shareholder is a party to, and it or
he has no knowledge of, any agreement restricting the voting or transfer of any
shares of the capital stock of the Company. All outstanding securities of the
Company have been issued and, at the Transfer, the Transfer Shares will have
been sold and transferred to Data I/O in compliance with applicable securities
laws of the Netherlands.
2.5 FINANCIAL STATEMENTS. SCHEDULE 2.5 contains the final balance sheet
and the related income statements and statements of cash flows and changes
in shareholder's equity of the Company for the tax year 1996 and the preliminary
balance sheet and the related income statements and statements of cash flows and
changes in shareholder's equity of the Company for the tax year 1997
(collectively, the "Balance Sheets"). The Balance Sheets are true and complete
and accurate and fairly represent the financial condition of the Company at such
dates all in accordance with generally accepted accounting principles as applied
in the Netherlands and as in effect from time to time ("GAAP") consistently
applied, except, in the case of the interim financial statements referenced
above, for the absence of footnote disclosures. The Company has always filed its
annual accounts in accordance with the requirements of Netherlands law. At the
date hereof, the Company does not have any material liabilities (whether fixed
or contingent, including without limitation, any tax or social security
liabilities due or to become due) that were
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[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
not fully disclosed, reflected or provided for in the Balance Sheets other than
(i) liabilities incurred in the ordinary course of business subsequent to the
date of the Balance Sheets and (ii) obligations under contracts and commitments
incurred in the ordinary course of business and that are required under GAAP to
be reflected in the financial statements, which, individually or in the
aggregate, are not material to the financial condition or operating results of
the Company. The Company maintains and will continue to maintain a system of
accounting established and administered in accordance with GAAP.
2.6 TITLE TO ASSETS. The Company has good and marketable title to all of
the realand personal property owned by it, free and clear of any mortgages,
pledges, charges, liens, security interests, assessments, taxes or other
encumbrances, except those indicated on Schedule 2.6. The Company enjoys
peaceful and undisturbed possession under all leases under which it is
operating, and all such leases are valid and subsisting and in full force and
effect.
2.7 ACTIONS PENDING. Except as set forth on SCHEDULE 2.7, there is no
action, suit, investigation or legal or administrative proceeding pending
or threatened against the Company or any of its property or assets and the
Company is not aware of any facts which might form the basis for any such
action, suit, investigation or proceeding. There are no outstanding orders,
judgments, writs or decrees against the Company.
2.8 REQUIRED CONSENTS. Except as set forth on SCHEDULE 2.8, there are no
consents,approvals, authorizations, orders, registrations or qualifications
of or with any person, court, regulatory authority or governmental body which
are required for the consummation by the Company and/or any Shareholder of the
transactions contemplated by this Agreement and any Related Agreements.
2.9 TAXES AND SOCIAL SECURITY OBLIGATIONS. The Company has accurately
prepared and timely filed all tax returns required by applicable law to be
filed by it. The Company has not failed to timely pay any taxes, social security
liabilities or assessments. The Balance Sheets include adequate reserves for all
taxes and social security liabilities accrued but not yet payable. No tax
returns of the Company are currently being audited by any taxing authorities,
and the Company is not aware of any threatened or pending audits. No deficiency
assessment with respect to or proposed adjustment of the Company's taxes or
social security liabilities is pending or threatened.
2.10 EMPLOYEE PLANS. SCHEDULE 2.10 lists each employee benefit plan and any
other bonus, severance or termination pay, stock option or stock purchase,
retirement, incentive pay or other similar plan, program or arrangement covering
present or former employees of the Company which is maintained or contributed to
by the Company (the "Plans") and the Company is in compliance with all
applicable laws and regulations relating to the Plans.
2.11 NO MATERIAL ADVERSE CHANGE. Except as set forth on SCHEDULE 2.11,
since the date of the Balance Sheets, there has not been: (a) any material
adverse change in the condition (financial or otherwise), business, assets,
liabilities or prospects of the Company or any material decline in the rate of
sales of the Company; (b) any damage, destruction or loss of any of the assets
of the Company (whether or not covered by insurance) or any write-downs in the
value of
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[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
any material inventory or write-offs as uncollectible of any material notes or
accounts receivable; (c) any material increase in compensation payable to or for
the benefit of or committed to be paid to or for the benefit of, any director or
shareholder of the Company; or (d) any modification, waiver, change, amendment,
release, rescission, accord and satisfaction or termination of, or with respect
to, any material term, condition or provision of any Contract or material
license, other than any satisfaction by performance in accordance with the terms
thereof.
2.12 BROKERAGE FEES. No broker's, finder's or financial advisory fees or
commissions will be payable with respect to this Agreement, any Related
Agreement or the transactions contemplated hereby or thereby based on any
agreement, arrangement or understanding with the Company or any Shareholder.
2.13 DISCLOSURE. This Agreement, including all attachments hereto and any
certificates and written statements delivered pursuant hereto, when taken as a
whole, does not contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements contained herein and
therein not misleading in light of the circumstances under which they were made.
2.14 PROPRIETARY RIGHTS. SCHEDULE 2.14 sets forth a true and complete list
of all patents, patent applications, registrations, applications for
registration, assignments, license agreements (whether written or oral) and
other documents evidencing any patent, copyright, trademark, trade name, service
mark, computer software, trade secrets (including compositions, know-how,
drawings, specifications, designs and processes), inventions or other
intellectual property rights which are used in the conduct of the Company's
business (the "Intellectual Properties"). Except as set forth in SCHEDULE 2.14,
the Company possesses full right and authority to use all know-how, proprietary
information, copyrights, trademarks, patent rights and other proprietary and
intellectual properties used by the Company or necessary to the conduct of the
Company's business as presently conducted and as proposed to be conducted
without infringing or misappropriating the rights of others (whether or not
registered), including the Intellectual Properties, free and clear of all liens,
claims, options, charges, encumbrances, security interests or claims of
ownership of any person or of any obligation to pay royalties. Except as set
forth on SCHEDULE 2.14, the Company has not granted licenses or other rights to
any third party with respect to any Intellectual Properties. The Company has
taken reasonable steps and precautions to protect and preserve the
confidentiality of all of the trade secrets and confidential information of the
Company or others entrusted to the Company. The Company has not received notice
from any person alleging that such infringement or misappropriation has occurred
or is continuing.
2.15 LICENSES. The Company is not aware of the existence of any facts or
circumstances which might constitute any violation by the Company of any
requirement for a license, permit, or similar authority with regard to any
jurisdiction. No proceeding is pending or threatened regarding the revocation of
any such license, permit or similar authorization.
2.16 MATERIAL AGREEMENTS. SCHEDULE 2.16 sets forth a true and complete list
of all agreements, understandings, instruments, contracts or proposed
transactions, whether written or oral, to which the Company is a party or by
which it is bound which involve obligations of or
Page 5
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
payments to the Company in excess of NLG 100,000, including without limitation,
the [ * ] Option (the "Contracts"). True and complete copies of all written
Contracts, including without limitation, the [ * ] Option (with all amendments
and supplements thereto) have been delivered to Data I/O. The Company has
complied with all material provisions of the Contracts to which it is a party,
is not in arrears with respect to any amounts owed thereunder and is not
otherwise in default under any thereof nor has any party asserted that the
Company is in default under any thereof, and to the best knowledge of the
Company, no condition exists which with the passage of time or the giving of
notice would constitute a default under any thereof. All of the Contracts are
legal, valid, binding, in full force and effect, and enforceable by the Company
in accordance with their respective terms.
2.17 TRANSACTIONS WITH AFFILIATES. Except as set forth on SCHEDULE 2.17,
there are no loans, leases, agreements, contracts, or other continuing
transactions between any employee, consultant or director of the Company or any
individual, corporation, partnership, joint venture, trust, university, or
unincorporated organization, or a government or any agency or political
subdivision thereof ("Person") owning any capital stock of the Company or any
member of the immediate family of such employee, consultant, director or
shareholder, or any corporation or other entity controlled by such employee,
consultant, director or shareholder, or a member of the immediate family of such
employee, consultant, director or shareholder.
2.18 EMPLOYEES. The Company is not bound to any collective employment
arrangements and/or agreements covering any of its employees. Except as set
forth on SCHEDULE 2.18, the Company does not have any employment contract or
other agreement relating to the right of any employee, or consultant to be
employed or engaged by the Company.
3. REPRESENTATIONS AND WARRANTIES OF DATA I/O
Data I/O, to the best of its knowledge, hereby represents and warrants
to the Company as follows:
3.1 ORGANIZATION AND STANDING OF DATA I/O. Data I/O is a corporation duly
incorporated or organized, validly existing and in good standing under the laws
of Washington.
3.2 AUTHORITY. The execution, delivery and performance of this Agreement
and each Related Agreement to which it is a party by Data I/O, and the
consummation of the transactions contemplated hereby or thereby by Data I/O are
within its corporate power and have been duly authorized by all necessary
corporate actions on the part of Data I/O. This Agreement and each Related
Agreement to which it is a party when executed and delivered by Data I/O is a
valid and binding obligation of Data I/O, enforceable against Data I/O in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws relating to
creditors' rights generally and by general equitable principles.
3.3 FINANCING. Data I/O has sufficient funds and will have sufficient
funds at all times through the Transfer Date to consummate the transactions
contemplated hereby. Data I/O
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<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
will not be rendered insolvent by reason of its investments in the Company nor
will it be left with unreasonably small capital for purposes of operating its
businesses.
3.4 DUE DILIGENCE. Data I/O has requested and received true and complete
copies of current financial data, minutes, articles of association, stock
register, internal regulations of the Company's Management Board, contracts, and
other documentation concerning the Company, and has received additional
documentation and data as part of their on-site review and inspection of the
Company, and on that basis, Data I/O desires to purchase the Transfer Shares.
Data I/O has received and had the opportunity to review all data and documents
described in SCHEDULE 3.4.
3.5 [ * ] OPTION. Data I/O acknowledges that it has received a copy of the
[ * ] Option and that pursuant thereto, [ * ] has an option, exercisable
until October 31, 1998, to purchase shares of Ordinary Shares of the Company
from the Existing Shareholders and Data I/O such that [ * ] will own 10% of the
Company's outstanding share capital for a price of NLG [ * ].
3.6 NO OTHER REPRESENTATIONS OR WARRANTIES. There are no representations
or warranties that have been made to Data I/O that are not set forth in
this Agreement or any Related Agreement.
4. CONDITIONS PRECEDENT TO AGREEMENT
The obligations of Data I/O and the Existing Shareholders under this
Agreement are subject to the following conditions precedent, any or all of which
may be waived in writing by Data I/O in its sole discretion (except that Section
4.11 may only be waived in writing by the Existing Shareholders in their sole
discretion):
4.1 REPRESENTATIONS AND WARRANTIES ACCURATE AS OF TRANSFER DATE. The
representations and warranties made by the Company and the Existing
Shareholders contained in Section 2 shall be true, accurate and correct in all
material respects on and as of the Transfer Date. The Company and the Existing
Shareholders shall perform and comply with all agreements, obligations,
covenants and conditions contained in this Agreement and the Related Agreements
that are required to be performed by or complied with by the Company or Mr. van
Maas, as the case may be, on or before the Transfer Date. There shall have been
no material adverse change in the business, affairs, prospects, operations,
properties, assets or condition of the Company from the date of the 1996 Balance
Sheet to the Transfer Date.
4.2 CONSENTS AND APPROVALS. Certified true copies of all consents and
approvals required or advisable in connection with the execution, delivery,
performance, validity and enforceability of this Agreement and each Related
Agreement, if any, shall have been received by the Company, and such consents
and approvals shall be in full force and effect and be reasonably satisfactory
in form and substance to Data I/O.
4.3 COMPANY STATUS. The Company shall be registered with the Netherlands
Chamber of Commerce of Zuid Oost Brabant at Eindhoven and no application with
any court in
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<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
the Netherlands shall have been filed for suspension of payment, moratorium or
bankruptcy with respect to the Company.
4.4 AMENDED ARTICLES OF ASSOCIATION. Data I/O and the Company shall
receive evidence of the execution of the Amended Articles of Association
setting forth, without limitation, the special or relative rights and other
terms and conditions of the Ordinary Shares, in the form of EXHIBIT 4.4, which
shall have been filed with the Netherlands Ministry of Justices.
4.5 EMPLOYMENT AGREEMENTS. The Company and each of the Existing
Shareholders shall have entered into an Employment Agreement (the
"Employment Agreements") substantially in the form of EXHIBIT 4.5 attached
hereto.
4.6 DISTRIBUTION AGREEMENT. The Company and Data I/O shall have entered
into a Distribution Agreement (the "Distribution Agreement") substantially in
the form of EXHIBIT 4.6 attached hereto.
4.7 CONFIDENTIALITY AND INVENTION ASSIGNMENT AGREEMENTS. Each director and
employee of the Company shall have executed and delivered to the Company an
employee confidentiality and invention assignment agreement. The Company and
Data I/O shall have entered into an Evaluation and Non-Disclosure Agreement (the
"Confidentiality Agreement") substantially in the form of EXHIBIT 4.7 attached
hereto.
4.8 COMPLIANCE WITH AGREEMENT AND RELATED AGREEMENTS. The Company shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement or any Related
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Transfer.
4.9 PROCEEDINGS SATISFACTORY. All proceedings taken in connection with the
transfer and sale of the Transfer Shares and all documents and papers relating
thereto shall be satisfactory in form and substance to Data I/O. Data I/O shall
have received copies of such documents and papers as Data I/O may reasonably
request in connection with this Agreement and the Related Agreements.
4.10 CORPORATE DOCUMENTS. The Company shall provide a certificate signed by
a managing director of the Company certifying that all required resolutions have
been adopted by the Management Board of the Company and the general meeting of
shareholders of the Company approving this Agreement and the Related Agreements,
and authorizing specific individuals to execute all appropriate documents at the
Transfer.
4.11 APPROVAL OF BOARD. Data I/O shall provide a certificate of the
secretary of Data I/O certifying that resolutions have been adopted by the Board
of Directors of Data I/O approving this Agreement and the Related Agreements,
and authorizing specific individuals to execute all appropriate documents at the
Transfer.
Page 8
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
5. AFFIRMATIVE COVENANTS
Each of the Company and the Existing Shareholders jointly and severally
covenants and agrees that on and after the date hereof the Company and such
Existing Shareholder, as applicable, will:
5.1 CORPORATE EXISTENCE. Maintain the Company's corporate existence,
Intellectual Properties, other rights and franchises in full force and effect to
the extent appropriate in accordance with good business practice.
5.2 PROPERTIES, BUSINESS AND INSURANCE. Maintain the Company's property and
business, with financially sound and reputable insurers, insurance against such
casualties and contingencies and of such types and in such amounts as is
customary for companies of a similar size and financial condition similarly
situated within the same industry.
5.3 COMPLIANCE WITH LAWS. Comply with all applicable laws, rules,
regulations and orders.
5.4 EMPLOYEE CONFIDENTIALITY AND INVENTION ASSIGNMENT AGREEMENTS. Enter
into confidentiality and invention assignment agreements with each director and
employee employed by the Company at or subsequent to the date hereof.
5.5 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep adequate records and
books of account, in which complete entries will be made in accordance with GAAP
consistently applied, reflecting all financial transactions of the Company, and
in which, for each fiscal year, all proper reserves for depreciation, depletion,
obsolescence, amortization, taxes, bad debts and other purposes in connection
with its business shall be made.
5.6 REPORTING REQUIREMENTS. Furnish the following to Data I/O and permit
during normal business hours, upon reasonable request and reasonable notice (and
without unreasonable inconvenience to the Company), Data I/O or any officers,
key employees, agents or representatives thereof (including, without limitation,
Data I/O's independent accountants), to examine books of account of the Company
in order for Data I/O to verify any or all information provided to Data I/O
under this Section 5.6:
QUARTERLY REPORTS: as soon as available and in any event within thirty (30)
days after the end of each fiscal quarter of the Company, balance sheets of
the Company as of the end of such period and statements of income and
statements of cash flows of the Company for such period and for the period
commencing at the end of the previous fiscal year and ending with the end
of such period and including comparisons to the budget or business plan and
an analysis of the variances from the budget or plan, prepared in
accordance with GAAP consistently applied throughout the period from
calendar year 1997 through 2002; PROVIDED, HOWEVER, that notwithstanding
the foregoing, within seven (7) days after the end of each fiscal quarter,
the Company shall use its best efforts to furnish to Data I/O in good
faith, preliminary statements of income of the Company for such fiscal
quarter;
ANNUAL REPORTS: as soon as available and in any event within sixty
(60) days after the end of each fiscal year of the Company, consolidated
and consolidating balance sheets of the Company as of
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<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
the end of such fiscal year and statements of income and statements of cash
flows and changes in shareholders' equity of the Company for such fiscal
year, setting forth in each case in comparative form the corresponding
figures for the preceding fiscal year, all such statements to be duly
certified by a Managing Director of the Company and, if requested by
Data I/O, in which case Data I/O shall bear the expense thereof, an
independent public accountant of recognized national standing approved by
Data I/O, and all prepared in accordance with GAAP consistently applied
throughout the period from calendar year 1997 through 2002; PROVIDED,
HOWEVER, that notwithstanding the foregoing, within seven (7) days
after the end of each fiscal year, the Company shall use its best
efforts to furnish to Data I/O in good faith, preliminary statements
of income of the Company for such fiscal year;
ACCOUNTANT'S LETTERS: within twenty (20) days after receipt, copies of all
accountant's letters, reviews and reports to management;
BUDGETS AND OPERATING PLAN: as soon as available and in any event prior to
(i) the beginning of each fiscal year of the Company and (ii) approval
thereof by the Company's Management Board, a business plan and internal
operating budgets for the forthcoming fiscal year.
5.7 SIGNIFICANT TRANSACTIONS AND EVENTS. Subject to the Articles of
Association, promptly inform and consult with Data I/O prior to all
significant transactions, events and management decisions, including, without
limitation, the following: (i) determination of the Company's annual budget and
business plan; (ii) purchase of real property; (iii) an investment (by way of
equity participation, loans or otherwise) in excess of NLG 1,000,000 in or a
joint venture with a third party; (iv) incurrence of indebtedness in excess of
NLG 1,000,000; (v) termination of more than twenty-five percent (25%) of the
Company's employees; (vi) loans to any shareholder of the Company; and (vii)
amending, modifying, supplementing or extending in any material way the terms or
conditions of the Company's profit sharing and other benefit plans (or granting
or creating any new profit sharing or other benefit plan).
5.8 FURTHER ASSURANCES. From time to time after the Transfer Date, at Data
I/O's expense and without further consideration, execute and deliver such
documents, certificates or other instruments and take such other actions as Data
I/O may reasonably request in order to more effectively transfer to Data I/O the
Shares and/or to consummate the transactions contemplated herein.
6. NEGATIVE COVENANTS
Each of the Company and the Existing Shareholders jointly and severally
covenants and agrees that on and after the date hereof, without the prior
written consent of Data I/O, the Company and/or the Existing Shareholders will
not:
6.1 DEALINGS WITH AFFILIATES. Enter into any material transaction,
including without limitation, any loans or extensions of credit, release of
guarantee, management contract or royalty agreements, deferred or contingent
compensation agreement, consulting or other agreement with any employee,
consultant or director of the Company or any subsidiary or holder of five
percent (5%) or more of any class of capital stock of the Company or any
subsidiary, or any member of their
Page 10
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
respective immediate families or any corporation or other entity directly or
indirectly controlled by one or more of such employees, consultants, directors
or five percent (5%) shareholders or members of their immediate families
("Affiliate") except as set forth on SCHEDULE 2.17.
6.2 COMPENSATION. Pay to any Shareholder compensation (including salary and
bonus) in excess of reasonable and comparable industry standards for
similarly situated companies in the Netherlands.
6.3 STOCK OPTIONS. Grant or issue any option or warrant to purchase or
otherwise acquire shares of capital stock of the Company, including without
limitation, Ordinary Shares to any Person which, in the aggregate, exceeds ten
percent (10%) of the then-outstanding shares of Ordinary Shares (determined on
an "as if converted basis").
6.4 DIVIDENDS. Allow the Company's Management Board to declare or pay any
dividend or other distribution to the Company's shareholders in excess of
seventy-five percent (75%) of net profit (after payment of all taxes) of the
Company's preceding full fiscal year; provided, however, that the Company's
Management Board shall declare, in accordance with the laws of the Netherlands,
a dividend on its Ordinary Shares of a fixed amount of up to 75% of the
Company's net profit for the 1997 fiscal year, to be based upon the Company's
good faith estimate of such net profit amount; provided, further however, that
Data I/O shall not be entitled to receive any dividend declared or paid by the
Company with respect to the 1997 fiscal year and only the Existing Shareholders
shall be entitled to receive any such dividend.
6.5 TRANSFERS OF INTELLECTUAL PROPERTIES. Transfer, sell, dispose of,
assign, lease,license or donate any ownership or interest in, or material rights
relating to, any of its Intellectual Properties to any Person except in
connection with sales of products to customers in the ordinary course of
business.
6.6 [ * ] OPTION. Amend, modify, supplement or extend in any way the
expiration date or other terms or conditions of the [ * ] Option.
7. RIGHT OF FIRST REFUSAL.
The parties acknowledge that the rights and obligations of the parties
contained in this Section 7 shall remain in full force and effect and will
provide Data I/O and the Existing Shareholders with the opportunity to obtain
100%, or at least 90%, of the capital stock of the Company.
7.1 RIGHT OF FIRST REFUSAL. Notwithstanding any provision to the contrary
of the Articles of Association, whether in force on the date of execution of
this Agreement or later adopted, the Existing Shareholders hereby grant to Data
I/O, and Data I/O hereby grants to the Existing Shareholders, the right of first
refusal to purchase all or part of the shares of capital stock of the Company
owned by each of them prior to the bona fide sale, assignment, transfer,
hypothecation or pledge of such shares of capital stock to any third party (a
"Bona Fide Sale") other than an assignment or transfer permitted pursuant to
Section 12.16 (it being understood and agreed that an assignment or transfer not
specifically permitted pursuant to clause (i), (ii) or (iii) of Section
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<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
12.16 shall be subject to the right of first refusal contained in this Section
7.1). This right of first refusal shall be subject to the other provisions of
this Agreement.
7.2 FIRST REFUSAL NOTICE. In the event that an Existing Shareholder or Data
I/O, as the case may be (the "Offering Party") proposes to sell, assign,
transfer, hypothecate or pledge any shares of capital stock of the Company held
by it under Section 7.1, the Offering Party shall give the other party (the
"Receiving Party") written notice (the "First Refusal Notice") thereof
describing the number and class of shares of such capital stock, the type of
transaction and the consideration or price and terms of the transaction. On or
before the 20th day after the date of receipt of the First Refusal Notice, the
Receiving Party shall give the Offering Party written notice of the Receiving
Party's intention to exercise its right of first refusal hereunder, setting
forth the number and class of shares of capital stock it will purchase and the
appropriate price therefor, as follows: (i) if the Receiving Party is an
Existing Shareholder, the consideration to be paid by the Existing Shareholder
for such capital stock shall be the number of shares of such capital stock
multiplied by the "Per Share Price" (which shall mean the amount obtained by
dividing the Purchase Price by the number of Transfer Shares), plus interest at
a rate of ten percent (10%) per annum since the Transfer Date and (ii) if the
Receiving Party is Data I/O, the consideration to be paid by Data I/O for such
capital stock shall be the consideration or price and the payment terms
specified in the First Refusal Notice. The purchase by the Receiving Party of
any such shares of capital stock is subject in all cases to the preparation,
execution and delivery by the Offering Party and Receiving Party of a purchase
agreement relating to such shares reasonably satisfactory in form and substance
to the parties.
7.3 FURTHER SALE. In each case, any shares of capital stock not purchased
by the Receiving Party in accordance with Sections 7.1 and 7.2, or by other
Persons after the initial First Refusal Notice is made in accordance with
Section 7.2, may not be sold, assigned, transferred, hypothecated or pledged by
the Offering Party until they are again offered to the Receiving Party under the
procedures specified in this Section 7.
8. OPTION TO PURCHASE SHARES
8.1 OPTION TO PURCHASE SHARES. At any time on or after the date when
audited financial statements for fiscal year 1999 have been provided by the
Company to Data I/O pursuant to Section 5.6 and until the last day of the third
month after such date (the "Option Period"), Data I/O shall have the right (the
"Option") to purchase all the outstanding shares of Ordinary Shares and any
other shares of the Company's capital stock held by the Existing Shareholders
(the "Option Shares") for the Option Price (as hereinafter defined). It is
understood and agreed that the purpose of the Option is to enable Data I/O to
obtain the remaining outstanding capital stock of the Company such that the
Option Shares together with the other Shares owned by Data I/O will represent
100% (or, if [ * ] is a shareholder of the Company at such time, 90%) of the
then-outstanding
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<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
capital stock of the Company. Each Shareholder hereby covenants and agrees that
in the event that Data I/O exercises the Option, he will sell and transfer to
Data I/O all Ordinary Shares and other shares of capital stock of the Company
held by him. Data I/O may exercise the Option during the Option Period by
delivering to the Existing Shareholders written notice thereof (the "Option
Notice").
The "Tendered Percentage" shall mean the percentage ratio of the aggregate
number of Ordinary Shares owned by the Existing Shareholders to the total number
of the then-outstanding shares of capital stock of the Company. The "Option
Price" shall be equal to the product of (x) the sum of (A) [ * ] times the
Company's total revenues for fiscal year 1997 (which shall be accounted for on
an accrual basis in accordance with GAAP) plus (B) [ * ] times the Company's
total revenues for fiscal year 1999 (which shall be accounted for on an accrual
basis in accordance with GAAP) times (y) the Tendered Percentage.
The Option Price shall be paid as follows: (i) the product of (x) the sum of (A)
[ * ] times the Company's total revenues for fiscal year 1997 plus (B) the
Company's total revenues for fiscal year 1999 times (y) the Tendered Percentage
(the "Initial Option Payment") shall be payable at the Option Closing and (ii)
additional payments (the "Contingent Option Payments") in an aggregate amount
not to exceed the product of (x) the Company's total revenues for fiscal year
1999 times (y) the Tendered Percentage (the "Maximum Contingent Amount") shall
be paid in accordance with Section 8.2. By way of example only, if total
revenues for 1997 were NLG 2,000,000 and total revenues for 1999 were NLG
3,000,000 (and assuming [ * ] was not a shareholder so that the Tendered
Percentage would be sixty-six and two-thirds percent (66-2/3%)), then the
Initial Option Payment would be calculated as follows: (([ * ] x 2,000,000) +
3,000,000) x sixty-six and two-thirds percent (66-2/3%) = NLG [ * ].
8.2 CONTINGENT OPTION PAYMENTS. Data I/O shall pay the Contingent Option
Payments to the Existing Shareholders in the event that the Company attains
the Annual Revenue and Annual After-Tax Profit targets set forth below. The
"Option Year Amount" shall mean 33-1/3% of the Maximum Contingent Amount. The
period for attainment of these targets will be the three calendar years (each an
"Option Year") beginning with the first day of the year 2000 and ending with the
last day of the year 2002, after which no Contingent Option Payments will
accrue. If a Contingent
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<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
Option Payment calculation hereunder results in a negative number, in no event
shall the Existing Shareholders be required to make any payments to Data I/O.
The Annual Revenue and Annual After-Tax Profit targets and related Contingent
Option Payments are as follows:
CONTINGENT OPTION PAYMENTS(1)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PAYMENT 1 PAYMENT 2 PAYMENT 3
--------- --------- ---------
OPTION YEAR: 2000 2001 2002
CONTINGENT OPTION PAYMENT: (1) Option Year Amount Option Year Amount Option Year Amount
MINIMUM TARGETS(1)
Annual Revenue(2) [ * ] over 1999 [ * ] over 2000 [ * ] over 2001
calendar year calendar year calendar year
and
Annual After-Tax Profit(3) [ * ] of Annual [ * ] of Annual [ * ] of Annual
Revenue for 2000 Revenue for 2001 Revenue for 2002
</TABLE>
REQUIREMENTS:
(1) For the Option Year Amount to be paid in full, both the Annual Revenue
target and Annual After-Tax Profit target must be met for the Option
Year.
(2) For purposes of calculating the Contingent Option Payments made under
this Section 8, Annual Revenue shall mean the price of all goods and
services delivered during the Option Year accounted for on an accrual
basis in accordance with GAAP.
(3) For purposes of calculating the Contingent Option Payments made under
this Section 8, Annual After-Tax Profit shall mean the excess of revenue
minus all expenses, as customarily defined by GAAP (consistently applied
throughout the period from calendar year 1997 through 2002) for the
Option Year.
If the full Option Year Amount is not paid for an Option Year because either the
Annual Revenue target or the Annual After-Tax Profit target was not met in such
Option Year, then the following shall apply with respect to such Option Year:
(i) Data I/O shall pay to the Existing Shareholders a
Contingent Option Payment for such Option Year in an amount equal to the
sum of the Pro Rata Revenue Payment plus the Pro Rata Profit Payment
(each as hereinafter defined).
(ii) For purposes of this Agreement, "Pro Rata Revenue
Payment" shall mean the product of (A) [ * ] of the Option Year Amount,
times (B) the percentage of growth in Annual Revenue in such Option Year
over the prior calendar year, divided by [ * ], and "Pro Rata Profit
Payment" shall mean the product of (x) [ * ] of the Option Year Amount,
times (y) Annual After-Tax Profit percentage in such Option Year divided
by [ * ]; provided, however, that in no event shall either the Pro Rata
Revenue Payment or the Pro Rata Profit Payment exceed [ * ] of the
Option Year Amount. (See example in EXHIBIT 8.2(A) attached hereto.)
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<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
For Option Years 2000 and/or 2001 where the full Option Year Amount has not been
paid pursuant to either Section 8.2(a) or (b) (a "Missed Option Year"), the
following shall apply with respect to such Option Year:
(i) For purposes of this Agreement, "1999 Annual Revenue"
shall mean the Company's Annual Revenue for 1999 based upon its audited
financial statements.
(ii) Catch-Up Goals for each Option Year shall be
calculated by Data I/O and the Existing Shareholders in accordance with
the following formulas; provided, that upon exercise of the Option by
Data I/O, the Catch-Up Goals shall be definitively calculated and this
Agreement shall be amended to add calculations as SCHEDULE 8.2(C)
hereto:
OPTION YEAR: 2000 2001 2002
- ------------ ---- ---- ----
Catch-Up Revenue Goal: (1999 Annual (Catch-Up Revenue (Catch-Up
Revenue) x [ * ] Goal for 2000) Revenue Goal for
x [ * ] 2001) x [ * ]
Catch-Up Profit Goal: (Catch-Up (Catch-Up Revenue (Catch-Up
Revenue Goal for Goal for 2001) Revenue Goal for
2000) x [ * ] x [ * ] 2002) x [ * ]
Cumulative Catch-Up Catch-Up Profit Sum of Catch-Up Sum of Catch-Up
Profit Goal: Goal for 2000 Profit Goals for Profit Goals for
2000 and 2001 2000, 2001 and
2002
(iii) If the full Contingent Option Payment based on
Annual Revenue (i.e., [ * ] of the total Contingent Option Payment) for
2000 or 2001 is not earned in such year, it may be earned in any of the
subsequent Option Years if certain Catch-Up Revenue Goals are met as
follows:
(A) If Annual Revenue in a subsequent Option Year
equals or exceeds the Catch-Up Revenue Goal for such Option Year,
then any Missed Option Year's Contingent Option Payments based on
Annual Revenue will be payable in full.
(B) If Annual Revenue in a subsequent Option Year
is less than the Catch-Up Revenue Goal for such Option Year but
greater than the Catch-Up Revenue Goal for the prior Option Year,
then the catch-up amount payable for all Missed Option Years
where some or all of the Contingent Option Payments based on
Annual Revenue (i.e., [ * ] of the total Contingent Option
Payment) was missed will be:
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been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
Contingent Option Payment for Missed Option Year = Contingent Option
Payment based on Annual Revenue x [(Annual Revenue for Option Year -
Catch-Up Revenue Goal for prior Option Year) / (Catch-Up Revenue
Goal for prior Option Year)] / [ * ]
If the Contingent Option Payment already paid for
the Missed Option Year was less than the amount earned based on
the catch-up formula in a subsequent Option Year, then the
difference between such amounts will be earned and payable in
such Option Year. See examples in EXHIBIT 8.2(A) attached hereto.
(iv) If the full Contingent Option Payment based on Annual
After-Tax Profit (i.e., [ * ] of the total Contingent Option Payment)
for 2000 or 2001 is not earned in such year, it may be earned in a
subsequent Option Year if certain Catch-Up Profit Goals are met as
follows:
(A) If the cumulative Annual After-Tax Profit
through a subsequent Option Year equals or exceeds the cumulative
Catch-Up Profit Goal for such Option Year, then all Missed Option
Years' Contingent Option Payments based on Annual After-Tax
Profit will be payable in full.
(B) If Annual After-Tax Profit in a subsequent
Option Year exceeds the Catch-Up Profit Goal for such Option
Year, then the Surplus Profit (as hereinafter defined) for such
Option Year will be applied to any Missed Option Year where some
or all of the Contingent Option Payment based on Annual After-Tax
Profit was missed. The Surplus Profit will be added to the Annual
After-Tax Profit for a Missed Option Year where some or all of
the Contingent Option Payment based on Annual After-Tax Profit
was missed, and a revised amount earned will be calculated based
on the Catch-Up Profit Goal for such Missed Option Year and the
additional amount will become payable. "Surplus Profit" shall
mean Annual After-Tax Profit for the subsequent Option Year -
Catch-Up Profit Goal for such Option Year. See examples in
EXHIBIT 8.2(A) attached hereto.
(C) Notwithstanding anything to the contrary
contained herein, (1) the part of the Surplus Profit that has
been used shall not be applied more than once to any Missed
Option Year catch-up calculation pursuant to this Section 8.2 (c)
and (2) the total Contingent Option Payments based on Annual
After-Tax Profit shall not exceed [ * ] of the total Contingent
Option Payment.
All calculations of performance of the Company against the Annual Revenue and
Annual After-Tax Profit targets, and against the Catch-Up Revenue and Catch-Up
Profit Goals shall be determined by Data I/O and the Existing Shareholders in
good faith after the Company's audited financial statements for the applicable
Option Year have been provided to Data I/O in accordance with Section 5.6. Such
calculations by Data I/O shall be based on the foregoing and in accordance with
GAAP applied consistently. The parties shall provide to the other parties within
seventy-five (75) days of the end of each calendar year a report which shows,
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been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
in reasonable detail, the performance of the Company against the foregoing
targets, calculated in accordance with GAAP (to the extent applicable or
practical). Data I/O shall have the right to obtain from the Company, and the
Company shall furnish to Data I/O, any and all worksheets, reports and other
supporting documentation relating to the calculation of any amounts hereunder.
Contingent Option Payments shall accompany such reports to the extent then
payable in accordance with this Agreement and shall be due and payable within
ninety (90) days of the end of each calendar year.
Any Contingent Option Payments made by Data I/O to the Existing Shareholders
shall be shared equally, one-half to each of them (or, if a Shareholder has
died, to such Shareholder's heirs). Notwithstanding anything to the contrary
contained in this Agreement, in no event shall the total Contingent Option
Payments paid by Data I/O pursuant to this Section 8.2 exceed the Maximum
Contingent Amount. If, after Data I/O has exercised the Option and prior to
December 31, 2002, Data I/O (i) terminates the Employment Agreements of either
or both Existing Shareholder(s) without cause, (ii) ceases to use all or
substantially all of its assets relating to the operation of the programming
systems business or (iii) fails to offer the Company's products for distribution
pursuant to the Distribution Agreement through no fault of the Company or the
Existing Shareholders, then in each case the full amount of theunpaid Contingent
Option Payments shall become immediately due and payable by Data I/O to the
Existing Shareholders; provided, however, that an assignment or transfer of the
Shares permitted under Section 12.16 shall not, in and of itself, be deemed to
be an event described in clause (ii) above giving rise to the payment
obligations set forth in this Section 8.2(e). The death or disability of either
Mr. Bleeker or Mr. van den Eijnden, or both, shall not affect Data I/O's
obligation to pay the Contingent Option Payments, if any, pursuant to this
Section 8.2. The parties agree that after the Option has been exercised and
prior to December 31, 2002, if an event described in clauses (i), (ii) or (iii)
above occurs, payment of the full amount of theunpaid Contingent Option Payments
to the Existing Shareholders shall constitute the sole and exclusive remedy of
the Existing Shareholders and the Company against Data I/O with respect to such
event.
Except in connection with an assignment or transfer permitted under Section
12.16, if, after Data I/O has exercised the Option and prior to December 31,
2002, Data I/O sells or transfers more than 50% of the Shares to a third party
(a "Triggering Sale"), then the acceleration of the Contingent Option Payments
set forth in Section 8.2(e) shall not apply and in lieu thereof, the following
provisions of this Section 8.2(f) shall apply and control:
(i) For purposes of this Agreement: "Quarterly Revenue" shall
mean the price of all goods and services delivered during the calendar
quarter accounted for on an accrual basis in accordance with GAAP.
"Quarterly Profit" shall mean the excess of Quarterly Revenue minus all
expenses for the calendar quarter, as customarily defined by GAAP
(consistently applied throughout the calendar quarter). "Substitute
Option Year Revenue" shall mean the Quarterly Revenue for the four
completed calendar quarters immediately preceding the Triggering Sale
(the "Substitute Option Year"). "Prior Year Substitute Option Year
Revenue" shall mean the Quarterly Revenue for the four completed
calendar quarters immediately preceding the Substitute Option Year.
"Revenue Payout Percentage" with respect to a particular Option Year
shall mean the percentage obtained by dividing the quotient of (A) the
difference between the Substitute Option Year
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been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
Revenue and the Prior Year Substitute Option Year Revenue and (B) the
Prior Year Substitute Option Year Revenue, by [ * ]. "Profit Payout
Percentage" with respect to a particular Option Year shall mean the
percentage obtained by dividing (1) the quotient of (x) the Quarterly
Profit for the Substitute Option Year and (y) the Quarterly Revenue
for such Substitute Option Year, by (2) [ * ]. In no event shall either
the Revenue Payout Percentage or the Profit Payout Percentage exceed
100%.
(ii) If the Triggering Sale occurs during Option Year 2000, then
Data I/O will be obligated to pay to the Existing Shareholders the full
amount of the remaining unpaid Contingent Option Payments.
(iii) If the Triggering Sale occurs during Option Year 2001, then
Data I/O will be obligated to pay to the Existing Shareholders an amount
up to the full amount of the remaining unpaid Contingent Option Payments
for Option Years 2001 and 2002 calculated as follows:
(A) (Revenue Payout Percentage for Substitute Option Year x [
* ] of the Option Year Amount) x 2, PLUS
(B) (Profit Payout Percentage for Substitute Option Year x [ *
] of the Option Year Amount x 2.
(iv) If the Triggering Sale occurs during Option Year 2002, then
Data I/O will be obligated to pay to the Existing Shareholders an amount
up to the full amount of the remaining unpaid Contingent Option Payment
for Option Year 2002 calculated as follows:
(A) (Revenue Payout Percentage for Substitute Option Year x
[ * ] of the Option Year Amount), PLUS
(B) Profit Payout Percentage for Substitute Option Year x
[ * ] of the Option Year Amount).
(v) In connection with the Triggering Sale (and in accordance
with Section 12.16), Data I/O shall assign this Agreement and the
Related Agreements to which Data I/O is a party to the third party
assignee in such Triggering Sale, and such third party assignee shall
agree to assume all of Data I/O's obligations hereunder (including,
without limitation, under this Section 8.2) and thereunder. In
connection with a Triggering Sale occurring in Option Year 2001 or 2002,
such third party assignee shall calculate, in accordance with Sections
8.2(a), (b) and (c), the Contingent Option Payments due to the Existing
Shareholders, up to the Maximum Contingent Amount, with respect to the
Option Years. To the extent, if any, the Contingent Option Payments with
respect to a remaining Option Year that would be paid to the Existing
Shareholders based on such calculation exceed the Contingent Option
Payments made by Data I/O under Section
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which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
8.2(f)(iii) or (iv), as applicable, then the third party assignee shall
pay such excess amount to the Existing Shareholders in accordance with
the terms of Section 8.2 (d).
(vi) Notwithstanding anything to the contrary contained herein,
all Contingent Option Payments to be paid under this Section 8.2(f) by
Data I/O in a Triggering Sale shall be due and payable, within thirty
(30) days after the Triggering Sale by Data I/O.
(vii) The parties agree that after the Option has been exercised
and prior to December 31, 2002, if an event described in this Section
8.2(f) occurs, payment of the unpaid Contingent Option Payments to the
Existing Shareholders in accordance with this Section 8.2 (f) shall
constitute the sole and exclusive remedy of the Existing Shareholders
and the Company against Data I/O with respect to such event.
If, after the Option has been exercised but prior to December 31, 2002, Data I/O
sells or transfers 50% or less than 50% of the Shares to a third party, then,
not withstanding such sale or transfer, the provisions of Section 8.2(f) shall
not apply and Data I/O shall remain liable to perform its obligations under this
Agreement.
8.3 OPTION CLOSING. The date (the "Option Closing Date") of the closing of
the purchase and sale of the Option Shares (the "Option Closing") shall take
place no later than sixty (60) days after the Company receives the Option
Notice. The Option Closing shall take place at a time and place to be mutually
agreed upon by Data I/O and the Company. At the Option Closing, the Company
shall enter in the Company's stock register Data I/O's name (or its nominee's
name) and the number of Option Shares to be transferred to Data I/O, against
payment of the Initial Option Payment by Data I/O to the Existing Shareholders.
8.4 CONDITIONS TO OPTION CLOSING. The obligation of Data I/O to purchase
the Option Shares and pay the Initial Option Payment on the Option Closing Date
shall be subject to the following conditions (any or all of which may be waived
in writing by Data I/O in its sole discretion):
REPRESENTATIONS AND WARRANTIES OF COMPANY ACCURATE AS OF OPTION CLOSING DATE.
Unless otherwise waived or amended in writing by Data I/O in its sole
discretion, the representations and warranties made by the Company and the
Existing Shareholders contained in Section 2 (including all Schedules referenced
therein) shall be updated and shall be true, accurate and correct in all
material respects on and as of the Option Closing Date, except that: (i) the
references to the "Amended Articles of Association" in Sections 2.1 and 2.2.
shall be deleted; (ii) all references to the "Related Agreements" shall be
deemed to mean the agreements described in paragraphs (d), (e) and (f) below;
(iii) all references to the "Balance Sheets" shall be deemed to mean the most
recent two (2) balance sheets and statements of income and statements of cash
flows and changes in shareholders' equity provided to Data I/O by the Company
pursuant to Section 5.6; (iv) the references to "Transfer Shares" in Section 2.4
shall be changed to refer to "Option Shares"; and (v) the references to the
"Transfer" in Section 2.4 shall be changed to refer to the "Option Closing". The
Company shall perform and comply with all agreements, obligations, covenants and
conditions contained in this Agreement that are required to be performed or
complied with on or before the Option Closing Date. There shall have been no
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which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
material adverse change in the business, affairs, prospects, operations,
properties, assets or condition of the Company from the date of the Option
Notice to the Option Closing Date.
CONSENTS AND APPROVALS. Certified true copies of all consents and approvals
required or advisable in connection with the purchase and sale of the Option
Shares upon exercise of the Option, if any, shall have been received by the
Company, and such consents and approvals shall be in full force and effect and
be reasonably satisfactory in form and substance to Data I/O.
COMPANY STATUS. The Company shall be registered with the Netherlands Chamber of
Commerce of Zuid Oost Brabant at Eindhoven and no application with any court in
the Netherlands shall have been filed for suspension of payment, moratorium or
bankruptcy with respect to the Company.
EMPLOYMENT AGREEMENTS. The Employment Agreements shall be in full force and
effect and neither Mr. Bleeker nor Mr. van den Eijnden shall be in
breach thereof.
COMPLIANCE WITH AGREEMENT AND RELATED AGREEMENTS. The Company shall be in
compliance in all material respects with this Agreement and all Related
Agreements to which it is party.
PROCEEDINGS SATISFACTORY. All proceedings taken in connection with the transfer
and sale of the Option Shares and all documents and papers relating thereto
shall be satisfactory in form and substance to Data I/O. Data I/O shall have
received copies of such documents and papers as Data I/O may reasonably request
in connection with the exercise of the Option. The Existing Shareholders will
cause the Company to enter in the Company's stock register the name of Data I/O
and the number of Option Shares to be transferred to Data I/O.
CORPORATE DOCUMENTS. The Company shall provide a certificate of a managing
director of the Company certifying that all required resolutions have been
adopted by the Management Board of the Company and the general meeting of the
shareholders of the Company approving the transfer and sale of the Option Shares
by the Existing Shareholders to Data I/O pursuant to the exercise of the Option,
and authorizing specific individuals to execute all appropriate documents at the
Option Closing.
8.5 REPURCHASE RIGHTS.
UPON EXPIRATION OF THE OPTION PERIOD. If the Option is not exercised before the
end of the Option Period, for a period of six (6) months after the last day of
the Option Period (the "Repurchase Period") each of the Company and the Existing
Shareholders shall have the right to repurchase all of the Shares owned by Data
I/O for a purchase price (the "Repurchase Price") equal to the number of Shares
multiplied by the Per Share Price, plus interest at a rate of ten percent (10%)
per annum since the Transfer Date. Exercise of the repurchase right contained in
this Section 8.5(a) shall be effected by delivering written notice thereof to
Data I/O together with payment of the Repurchase Price prior to the expiration
of the Repurchase Period. If more than one such notice is received by Data I/O,
Data I/O shall be obligated to sell the Shares only to
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been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
the first party that delivers to Data I/O written notice together with payment
of the Repurchase Price in accordance with this Section 8.5(a). Data I/O shall
not have any liability to any other party with respect to any notice received
thereafter other than to return any accompanying payment received from such
party. After exercise of the repurchase right, Data I/O shall cause the Company
to enter in the Company's stock register the name of the purchasing party and
the number of Shares to be transferred to such party.
UPON CERTAIN BUSINESS EVENTS. At any time after the Transfer Date until the
earlier to occur of (i) delivery of the Option Notice to the Existing
Shareholders or (ii) the end of the Option Period (the "Buyback Period"), if (A)
Data I/O fails to offer the Company's products for distribution pursuant to the
Distribution Agreement through no fault of the Company or the Existing
Shareholders (a "Curable Event") or ceases to use all or substantially all of
its assets relating to the operation of the programming systems business (a
"Noncurable Event") or (B) Data I/O sells or transfers all of the Shares to a
third party assignee pursuant to Section 12.16 and such assignee either fails to
offer the Company's products for distribution pursuant to the Distribution
Agreement through no fault of the Company or the Existing Shareholders (also a
"Curable Event") or ceases to use all or substantially all of its assets
relating to the operation of the programming systems business (also a
"Noncurable Event"), then in the case of either (A) or (B), each of the Company
and the Existing Shareholders shall have the right to repurchase (the "Buyback
Right") all of the Shares owned by Data I/O (or its assignee, as the case may
be) for a purchase price (the "Buyback Price") equal to the number of Shares
multiplied by the Per Share Price, plus interest at a rate of ten percent (10%)
per annum since the Transfer Date, subject to the terms and conditions contained
in Sections 8.5(b), (c) and (d). After exercise of the Buyback Right and payment
of the Buyback Price, Data I/O shall cause the Company to enter in the Company's
stock register the name of the purchasing party and the number of Shares to be
transferred to such party. The parties agree that prior to the end of the
Buyback Period, if an event described in clause (A) or (B) above occurs,
exercise of the Buyback Right shall constitute the sole and exclusive remedy of
the Existing Shareholders and the Company with respect to such event.
In the case of exercise of the Buyback Right upon the occurrence of a Curable
Event, the provisions of this Section 8.5(c) shall apply. The Company or the
Existing Shareholders, as the case may be, must deliver written notice of its
intent to exercise the Buyback Right (the "Cure Notice") to Data I/O prior to
the expiration of the Buyback Period (which Cure Notice shall also refer
specifically to Sections 8.5(b) and (c) and set forth in reasonable detail the
basis giving rise to the Buyback Right). The Company or the Existing
Shareholders may exercise the Buyback Right only if Data I/O (or its assignee,
as the case may be) has not cured the alleged Curable Event or agreed upon a
written plan with the Company and the Existing Shareholders to cure such Curable
Event within sixty (60) days after receipt of the Cure Notice (the "Cure
Period"); provided, that the Company or the Existing Shareholders, as the case
may be, delivers written notice of the failure to cure (the "Buyback Notice") to
Data I/O together with payment of the Buyback Price on or prior to the sixtieth
(60th) day after the Cure Period expires. If, after receipt by Data I/O of the
Cure Notice but before the receipt by Data I/O of the Buyback Notice, Data I/O
receives an offer for a Bona Fide Sale relating to its Ordinary Shares, then the
provisions of Section 7 shall apply and control in lieu of Sections 8.5(b) and
(c). If more than one
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been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
Buyback Notice is received by Data I/O, Data I/O shall be obligated to sell the
Shares only to the first party that delivers to Data I/O a Buyback Notice
together with payment of the Buyback Price in accordance with this Section
8.5(c). Data I/O shall not have any liability to any other party with respect to
any Buyback Notice received thereafter other than to return any accompanying
payment received from such party.
In the case of exercise of the Buyback Right upon the occurrence of a Noncurable
Event, the provisions of this Section 8.5(d) shall apply. The Company or the
Existing Shareholders, as the case may be, must deliver the Cure Notice to Data
I/O prior to the expiration of the Buyback Period (which Cure Notice shall also
refer specifically to Sections 8.5(b) and (d) and set forth in reasonable detail
the basis giving rise to the Buyback Right) together with payment of the Buyback
Price. If more than one Cure Notice with respect to a Noncurable Event is
received by Data I/O, Data I/O shall be obligated to sell its Shares only to the
first party that delivers to Data I/O a Cure Notice together with payment of the
Buyback Price in accordance with this Section 8.5(d). Data I/O shall not have
any liability to any other party with respect to any Cure Notice received
thereafter other than to return any accompanying payment received from such
party.
8.6 EFFECT OF FAILURE TO EXERCISE RIGHTS. If Data I/O has not exercised the
Option prior to expiration of the Option Period, Data I/O shall not be entitled
to receive any dividend declared or paid on the Shares with respect to the 2000
fiscal year and any such dividend shall be paid into the Company's reserves. If
Data I/O has not exercised the Option prior to expiration of the Option Period
and the Existing Shareholders have not exercised the repurchase right prior to
expiration of the exercise period described in Section 8.5(a), none of Data I/O
or the Existing Shareholders shall be entitled to receive any dividend declared
or paid on the shares of the Company's capital stock held by them with respect
to the 2000 fiscal year or alternatively, a dividend shall be paid to each
Shareholder and Data I/O in their capacity as shareholders in proportion to
their respective ownership of the Company's capital stock.
9. OTHER AGREEMENTS OF THE PARTIES
9.1 KEY MAN INSURANCE. In addition to any insurance coverage which the
Company may maintain or provide regarding the Existing Shareholders, Data I/O
shall have the option, in its sole discretion, to purchase and maintain (at Data
I/O's expense) term life and disability insurance on the life of either Mr.
Bleeker or Mr. van den Eijnden, or both, on which Data I/O is named beneficiary.
Each Shareholder hereby covenants and agrees that in such event, he shall fully
cooperate with Data I/O in obtaining and maintaining such insurance.
9.2 VOLUNTARY LIQUIDATION. Data I/O hereby covenants and agrees that for a
period of five (5) years after the date of the Option Notice, it shall not
officially resolve for a voluntary liquidation of the Company; provided,
however, that notwithstanding the foregoing, Data I/O shall have the right to
dispose of any or all of the assets of the Company in accordance with the laws
of the Netherlands.
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been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
10. INDEMNIFICATION
10.1 GENERAL INDEMNITY. Each of the Company and the Existing Shareholders
jointly and severally agree to indemnify and save harmless Data I/O and its
directors, officers, affiliates, successors and assigns from and against any and
all losses, liabilities, deficiencies, costs, damages and expenses (including,
without limitation, reasonable attorneys' fees, charges and disbursements)
incurred by such persons as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company or any Shareholder
herein or in any of the Related Agreements. Data I/O agrees to indemnify and
save harmless the Company and its directors, affiliates, successors and assigns
from and against any and all losses, liabilities, deficiencies, costs, damages
and expenses (including, without limitation, reasonable attorneys' fees, charges
and disbursements) incurred by the Company as a result of any inaccuracy in or
breach of the representations, warranties or covenants made by Data I/O herein
or in any of the Related Agreements. Notwithstanding anything to the contrary
contained herein, in no event shall the indemnification obligations of the
Company and the Existing Shareholders exceed the sum of the Purchase Price and,
if the Option has been exercised, the Option Price.
10.2 INDEMNIFICATION PROCEDURE. Any party entitled to indemnification under
Section 10.1 will give written notice to the indemnifying party of any claim
with respect to which it seeks indemnification promptly after the discovery by
such party of any matters giving rise to a claim for indemnification; provided
that the failure of any party entitled to indemnification hereunder to give
notice as provided herein shall not relieve the indemnifying party of its
obligations under this Section 10, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any action,
proceeding or claim is brought against an indemnified party in respect of which
indemnification is sought hereunder, the indemnifying party shall be entitled to
participate in and, unless in the reasonable judgment of the indemnified party a
conflict of interest between it and the indemnifying party exists in respect of
such action, proceeding or claim, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified party. In the event that the
indemnifying party advises an indemnified party that it will contest such a
claim for indemnification hereunder, or fails, within thirty (30) days of
receipt of any indemnification notice to notify, in writing, such person of its
election to defend, settle or compromise, at its sole cost and expense, any
action, proceeding or claim (or discontinues its defense at any time after it
commences such defense), then the indemnified party may, at its option, defend,
settle or otherwise compromise or pay such action or claim. In any event, unless
and until the indemnifying party elects in writing to assume and does so assume
the defense of any such claim, proceeding or action, the indemnified party's
costs and expenses arising out of the defense, settlement or compromise of any
such action, claim or proceeding shall be losses subject to indemnification
hereunder. The indemnified party shall cooperate fully with the indemnifying
party in connection with any negotiation or defense of any such action or claim
by the indemnifying party and shall furnish to the indemnifying party all
information reasonably available to the indemnified party which relates to such
action or claim. The indemnifying party shall keep the indemnified party fully
apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. If the indemnifying party elects to defend
any such action or claim, then the indemnified party shall be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense. The
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been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
indemnifying party shall not be liable for any settlement of any action, claim
or proceeding effected without its written consent, provided, however, that the
indemnifying party shall not unreasonably withhold, delay or condition its
consent. Anything in this Section 10 to the contrary notwithstanding, the
indemnifying party shall not, without the indemnified party's prior written
consent, settle or compromise any claim or consent to entry of any judgment in
respect thereof which imposes any future obligation on the party or which does
not include, as an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party, a release from all liability in respect of
such claim. The indemnification required by this Section 10 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or expense, loss, damage or liability
is incurred. The indemnity agreements contained herein shall be in addition to
(a) any cause of action or similar right of the indemnified party against the
indemnifying party or others, and (b) any liabilities the indemnifying party may
be subject to pursuant to the law.
10.3 LIMITATION ON INDEMNIFICATION. Neither the Company nor the Existing
Shareholders shall be liable for any claims unless and until the aggregate
amount of such claims exceeds NLG 25,000, and then only to the extent of such
excess. In addition, neither the Company nor the Existing Shareholders shall be
liable for any claims relating to a breach of any representation or warranty
contained herein or in any Related Agreement pursuant to this Section 10 unless
a written notice under Section 10.2 is given by the indemnified party to the
indemnifying party with respect thereto on or before the second anniversary of
the Transfer Date.
11. TERMINATION; EXCLUSIVITY
11.1 TERMINATION BEFORE TRANSFER DATE. This Agreement may be terminated at
any time prior to the Transfer Date:
by mutual written consent of Data I/O and the Existing Shareholders;
by Data I/O, if the Transfer Date shall not have occurred on or before April 10,
1998, or if it is reasonably certain that any condition required of the Company
as set forth in Section 4 will not be satisfied by the Transfer Date; or
by the Company, if it is reasonably certain that any conditions required of Data
I/O as set forth in Section 4 will not be satisfied by the Transfer Date.
11.2 AUTOMATIC TERMINATION. After the Transfer Date, this Agreement will
automatically terminate if:
the Existing Shareholders, together with [ * ], own 100% of the outstanding
capital stock of the Company; or
Page 24
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
in 2003, after Data I/O has paid all amounts owed under Section 8.2 (but
notwithstanding such automatic termination, any Related Agreement shall continue
for its term set forth in such Related Agreement); or
if neither Data I/O nor the Existing Shareholders has exercised the Option or
repurchase right contained in Section 8.5(a), respectively, before expiration of
the periods for exercise of such Option or repurchase right, as the case may be.
11.3 EFFECT OF TERMINATION. In the event of termination of this Agreement
as provided in Section 11.1 or 11.2, this Agreement shall become void and there
shall be no liability or obligation on the part of the Existing Shareholders,
Data I/O, or the Company or their respective officers, directors or
representatives or shareholders; PROVIDED, that any such termination shall not
relieve any party from liability for any breach of this Agreement or any Related
Agreement. Upon termination of this Agreement pursuant to Section 11.1, 11.2(a)
or 11.2(c), (i) the Existing Shareholders shall have the right to change the
Articles of Association in such a way that all shareholder decisions can be made
by virtue of a common majority of votes unless applicable law prescribes a
supermajority, (ii) Data I/O hereby grants to the Existing Shareholders an
irrevocable power of attorney to take such action in order to vote on behalf of
Data I/O to adopt the Articles of Association in conformity with this Section
11.3 and (iii) this Section 11.3 shall remain in full force and effect after
termination of this Agreement.
11.4 EXCLUSIVITY. On and after the date hereof and until the earlier to
occur of (a) the Transfer Date or (b) termination of this Agreement pursuant to
Section 11.1 without the prior written consent of Data I/O, none of the Company,
the Existing Shareholders or their representatives shall, either directly or
indirectly, (i) solicit, initiate or encourage the submission of inquiries,
proposals or offers from any Person relating to any acquisition of stock or
assets, exchange offer, merger, consolidation, business combination, sale of
securities, liquidation, dissolution or similar transactions involving the
Company, or (ii) grant to any Person any distribution, sale or similar rights
with respect to any of the Company's products which would conflict with or
otherwise diminish any rights granted to Data I/O under the Distribution
Agreement, or (iii) enter into or participate in any discussions or negotiations
regarding any of the foregoing, or furnish to any other Person any information
with respect to the business, properties or assets of the Company, or (iv)
otherwise cooperate in any way with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other Person to do or seek any of the
foregoing.
12. MISCELLANEOUS
12.1 AMENDMENTS, WAIVERS AND CONSENTS. Any provision in the Agreement to
the contrary notwithstanding, and except as hereinafter provided, changes in,
termination or amendments of or additions to this Agreement may be made, and
compliance with any covenant or provision set forth herein may be omitted or
waived, with the written consent of the Company and Data I/O. Any waiver or
consent may be given subject to satisfaction of conditions stated therein and
any waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
12.2 PUBLICITY. The parties agree that no public release or announcement
concerning this Agreement, any Related Agreement or the transactions
contemplated hereby or thereby shall be issued by either party without the prior
consent of the other party, such consent
Page 25
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
not to be unreasonably withheld, except as such release or announcement may be
required by applicable law, rules or regulations.
12.3 NOTICES. All notices, demands and other communications called for or
required by this Agreement shall be in writing and shall be addressed to the
parties at their respective addresses stated below or to such other address as a
party may subsequently designate by ten (10) days' advance written notice to the
other parties. Communications hereunder shall be deemed to have been received
(i) upon delivery in person, (ii) five (5) days after mailing it by U.S.
certified mail, return receipt requested and postage prepaid, (iii) the second
business day after depositing it with a commercial overnight carrier which
provides written verification of delivery or (iv) the day of transmission by
telefacsimile if sent before 2:00 p.m. recipient's time provided that a copy of
such notice is sent on the same day by U.S. certified mail, return receipt
requested and postage prepaid, with an indication that the original was sent by
facsimile and the date of its transmittal.
To: Data I/O Corporation
Attention: Vice President, Chief Financial Officer
10525 Willows Road Northeast
P.O. Box 97046
Redmond, Washington 98073-9746
Phone: (425) 881-6444
Fax: (425) 881-2917
CC: General Counsel
To: JTAG Technologies B.V. or the Existing Shareholders
Attention: Harry Bleeker/Peter van den Eijnden
Boschdijk 50, 5612 AN Eindhoven,
The Netherlands
Phone: (011) 31-40-295-0870
Fax: (011) 31-40-246-8471
12.4 FULL UNDERSTANDING. In executing this Agreement and the Related
Agreements, each party fully, completely, and unconditionally acknowledges and
agrees that it (a) has had an equal opportunity to participate in drafting this
Agreement and the Related Agreements, (b) has consulted with, and had the advice
and counsel of a duly licensed and competent attorney and that it has executed
this Agreement after independent investigation, voluntarily and without fraud,
duress, or undue influence, (c) expressly consents that this Agreement and the
Related Agreements be given full force and effect according to each and every of
their express terms and provisions and (d) agrees that no ambiguity shall be
construed against any party based upon a claim that party drafted the applicable
language.
12.5 ENTIRE AGREEMENT. This Agreement, all exhibits and schedules hereto
and the Related Agreements contain all of the terms and conditions agreed upon
by the parties relating to the subject matter hereof and supersede and cancel
all other prior agreements, negotiations, correspondence, undertakings,
communications and understandings of the parties, whether written or oral,
respecting that subject matter.
Page 26
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
12.6 MODIFICATION. No waiver or modification of this Agreement or of any
provision contained herein shall be valid unless in writing and duly executed by
all parties hereto.
12.7 NO WAIVER. Failure or delay on the part of any party in exercising any
rights, power or privileges under this Agreement shall not be deemed a waiver of
any exercise of any right, power or privilege.
12.8 CAPTIONS AND CONSTRUCTION. Captions in this Agreement are for the
convenience of the reader and are not to be considered in the interpretation of
the terms.
12.9 SEVERABILITY. In the event any one or more provisions is found to be
invalid, the finding shall not affect the validity or enforceability of the
other provisions.
12.10 SURVIVAL. Neither the investigation by a party or the acceptance of
delivery of property hereunder shall constitute a waiver of any covenant,
representation, warranty, agreement, obligation or undertaking of a party
hereunder, and the same shall survive and continue after the date hereof.
12.11 GOVERNING LAW; ARBITRATION. This Agreement and all Related Agreements
(unless otherwise expressly set forth in a Related Agreement) shall be governed
by the laws of the Netherlands. Any dispute arising in connection with this
Agreement or any agreement resulting herefrom shall be finally settled in
accordance with the Rules of the Netherlands Arbitration Institute (Nederlands
Arbitrage Institute). The arbitral proceedings and all documents to be delivered
to or by the arbitrator shall be in English. The place of arbitration shall be
Rotterdam, the Netherlands. The arbitral tribunal shall comprise of one
arbitrator. The arbitrator shall decide in accordance with the rules of law.
Prior to initiating any proceeding to enforce this Agreement, the respective
Chief Executive Officers and/or applicable Vice President, Managing Director or
other senior managers of the Company and Data I/O by mutual negotiation shall
attempt to come to a reasonable settlement of the dispute, controversy or claim
within thirty (30) days from the first notification of the same in writing.
12.12 EXPENSES. Each of the parties shall each pay their respective
expenses, costs and fees (including, without limitation, attorneys' and
accountants' fees) incurred in connection with the negotiation, preparation,
execution and delivery of this Agreement and the Related Agreements and the
consummation of the transactions contemplated hereby.
12.13 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become a binding agreement when one or more counterparts have been
signed by each of the parties and either original or facsimile counterparts have
been delivered to the other party.
12.14 INVALID PROVISIONS. If any one or more of the provisions of this
Agreement, or the applicability of any such provision to a specific situation,
shall be held invalid or unenforceable, such provision shall be modified to the
minimum extent necessary to make it or its application valid and enforceable,
and the validity and enforceability of all other provisions of this Agreement
and all other applications of any such provision shall not be affected thereby.
Page 27
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
12.15 ATTORNEYS' FEES. If legal proceedings are brought to enforce or
interpret any provision of this Agreement, the most prevailing party shall be
awarded its reasonable attorneys' fees and costs in addition to any other relief
or remedy which may be available.
12.16 BINDING EFFECT; ASSIGNMENT. This Agreement shall not be assigned or
otherwise transferred by the Company or any Existing Shareholder without also
assigning the other Related Agreements to which the Company or such Existing
Shareholder (as the case may be) is a party and without the prior written
consent of Data I/O. This Agreement may be assigned or otherwise transferred by
Data I/O without the consent of the other parties hereto (i) in connection with
the sale of all or substantially all of the assets of Data I/O or a sale of all
or substantially all of Data I/O's assets relating to the programming systems
business, (ii) to any entity resulting from a merger, consolidation or other
reorganization to which Data I/O is a party or (iii) to any entity in which Data
I/O has a controlling interest or which is under common control with Data I/O;
provided, that in each case Data I/O (A) concurrently assigns or otherwise
transfers the Related Agreements to which it is a party and (B) the assignee or
transferee agrees in writing to assume Data I/O's obligations under this
Agreement (including, without limitation, Data I/O's obligations under Sections
8.2 and 8.5 regarding the Contingent Option Payments and certain repurchase
rights) and such Related Agreements; provided further, that in the case of (iii)
only, Data I/O shall remain liable for its obligations hereunder and under the
Related Agreements. Subject to the preceding two sentences, this Agreement and
each Related Agreement to which it is a party shall be binding upon and inure to
the benefit of each of the Company, the Existing Shareholders and Data I/O and
their respective heirs, successors and assigns. If Data I/O transfers or assigns
more than 50% of the Shares, then this Agreement and the Related Agreements to
which Data I/O is a party shall be assigned to such Person in conjunction with
the transfer or assignment of such Shares. The assignee or transferee of the
obligations hereunder of any party to this Agreement shall assume such
obligations and the obligations in any Related Agreement to which such party is
a party in writing and shall ensure that any further successor, assignee or
transferee will comply with this requirement. Data I/O and the assignee shall
notify the Company and the existing shareholder in writing of any such
assignment and shall provide the Company and the existing shareholders with a
certified copy of or an original of such assignment.
12.17 GOOD FAITH. All of the parties to this Agreement shall exercise their
duties, responsibilities and actions hereunder in good faith.
13. DEFINITIONS AND ACCOUNTING TERMS
13.1 DEFINITIONS. As used in this Agreement, the following terms shall have
the meaning stated in the Section referenced opposite the term:
DEFINITION SECTION
1999 Annual Revenue 8.2(c)(i)
Affiliate 6.1
Agreement Introduction
Amended Articles of Association 1.1
Page 28
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
Annual After-Tax Profit 8.2(a)
Annual Revenue 8.2(a)
Balance Sheets 2.6
Bona Fide Sale 7.1
Buyback Notice 8.5(c)
Buyback Period 8.5(b)
Buyback Price 8.5(b)
Buyback Right 8.5(b)
Catch-Up Goals 8.2(c)(ii)
Catch-Up Profit Goal 8.2(c)(ii)
Catch-Up Revenue Goal 8.2(c)(ii)
Company Introduction
Confidentiality Agreement 4.7
Contingent Option Payments 8.1(c)
Contracts 2.16
Curable Event 8.5(b)
Cumulative Catch-Up Profit Goal 8.2(c)(ii)
Cure Notice 8.5(c)
Cure Period 8.5(c)
Data I/O Introduction
Distribution Agreement 4.6
Employment Agreements 4.5
Existing Shareholders Introduction
First Refusal Notice 7.2
[ * ] 2.4
[ * ] Option 2.4
GAAP 2.5
Initial Option Payment 8.1(c)
Intellectual Properties 2.14
Maximum Contingent Amount 8.1(c)
Missed Option Year 8.2(c)
Mr. Bleeker Introduction
Mr. van den Eijnden Introduction
Mr. van Maas 1.1
Noncurable Event 8.5(b)
Offering Party 7.2
Option 8.1(a)
Option Closing 8.3
Option Closing Date 8.3
Option Notice 8.1(a)
Option Period 8.1(a)
Option Price 8.1(b)
Option Shares 8.1(a)
Option Year 8.2(a)
Option Year Amount 8.2(a)
Ordinary Shares 1.1
Per Share Price 7.2
Person 2.17
Plans 2.10
Page 29
<PAGE>
[ * ] Designates material for
which confidential treatment has
been requested, which material
has been omitted and has been
separately filed with the
Securities and Exchange
Commission.
Prior Year Substitute Option Year Revenue 8.2(f)(i)
Profit Payout Percentage 8.2(f)(i)
Pro Rata Profit Payment 8.2(b)(ii)
Pro Rata Revenue Payment 8.2(b)(ii)
Purchase Price 1.2(a)
Quarterly Profit 8.2(f)(i)
Quarterly Revenue 8.2(f)(i)
Receiving Party 7.2
Related Agreements 2.2
Repurchase Period 8.5(a)
Repurchase Price 8.5(a)
Revenue Payout Percentage 8.2(f)(i)
Shares 1.2(a)
Substitute Option Year 8.2(f)(i)
Substitute Option Year Revenue 8.2(f)(i)
Surplus Profit 8.2(c)(iv)(B)
Tendered Percentage 8.1(b)
Transfer 1.2(a)
Transfer Date 1.2(b)
Transfer Shares 1.2(a)
Triggering Sale 8.2(f)
13.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein
shall be construed in accordance with GAAP consistently applied, and all
financial data submitted pursuant to this Agreement, unless otherwise specified,
shall be prepared in accordance with GAAP.
Page 30
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
JTAG TECHNOLOGIES B.V.
By://s//Harry Bleeker
Harry Bleeker
Title: Managing Director
By://s//Peter van den Eijnden
Peter van den Eijnden
Title: Managing Director
EXISTING SHAREHOLDERS
//s//Harry Bleeker
Harry Bleeker
/ss/Peter van den Eijnden
Peter van den Eijnden
DATA I/O CORPORATION
By: //s//Joel S.Hatlen
Name: Joel S. Hatlen
Title: Vice President
Chief Financial Officer
Page 31
<PAGE>
OMITTED SCHEDULES AND EXHIBITS FROM EXHIBIT 2.1
The following Schedules and Exhibits have been omitted from Exhibit 2.1 in
accordance with Item 601(b) (2) of Regulation S-K. The Registrant will furnish
supplementally a copy of any omitted Schedule or Exhibit to the Commission upon
request.
SCHEDULE NUMBER DESCRIPTION
2.1 Branches, Affiliates and Subsidiaries
2.3 No Conflict
2.4 Capitalization
2.5 Financial Statements
2.6 Title to Assets
2.7 Actions Pending
2.8 Required Consents
2.10 Employee Benefit Plans
2.11 No Material Adverse Change
2.14 Proprietary Rights
2.16 Material Agreements
2.17 Transaction with Affiliates
2.18 Employee Agreements
3.4 Due Diligence
EXHIBIT NUMBER DESCRIPTION
1.2(a) Shareholders Resolution and Agreement
4.4 Amended Articles of Association
4.5 Employment Agreements
4.6 Distribution Agreement
4.7 Evaluation and Non-Disclosure Agreement
8.2(a) Examples of Contingent Option Payments under Section 8.2
8.2(c) Final Calculation of Catch Up Goals Under Section 8.2(c)
Page 32
<PAGE>
Exhibit 99.1
[DATA I/O GRAPHIC OMITTED]
10525 Willows Road N.E.
Redmond, WA 98052
Tel: (425) 881-6444
Fax:(425) 881-6856
For further information please contact:
Dave Bullis Joel Hatlen
President & CEO VP/Finance
Data I/O Corporation Data I/O Corporation
425/881-6444 425/881-6444
[email protected] [email protected]
DATA I/O ANNOUNCES SECOND QUARTER FINANCIAL RESULTS, RESTRUCTURE
AND SEARCH FOR NEW BUSINESS OPPORTUNITIES
REDMOND, WASH. (JULY 30, 1998) -Data I/O Corporation (NASDAQ: DAIO) today
announced revenues from continuing operations for the second quarter of 1998 of
$8.8 million compared with $11.4 million for the second quarter of 1997.
Revenues from continuing operations for the first half of 1998 were $17.2
million compared with $23.3 million for the same period in 1997.
The loss from continuing operations for the second quarter was ($2.6) million,
or ($0.36) per share, compared with income of $2.0 million or $0.29 per share,
in the same period of 1997. (The second quarter of 1997 included a gain of $2.3
million from the sale of the Company's headquarters property.) Including
discontinued operations, for the second quarter, the Company recorded a net loss
of ($2.1) million, or ($0.29) per share, and for the first half of 1998 ($3.6)
million, or ($0.51) per share, compared with net income of $1.4 million, or
$0.20 per share, and $1.4 million, or $0.20 per share, in the same periods of
1997.
REVENUES
Second quarter revenues were impacted by generally softer demand for the
Company's automated programming systems products. Also, as previously announced,
the Company has been unable to record revenue on certain of its new ProMaster
970 Automated Fine Pitch Programming System units that were delivered to
customers during the second
Page 1
<PAGE>
quarter of 1998 and previous quarters. These systems, for which payments of
$1.5 million have been received by the Company, have not yet been accepted
pending completion of certain configuration options and performance
enhancements. The Company continues to work on these issues, but does not expect
to recognize revenue on these systems in the third quarter. In addition, the
Company recognized revenue and received payment of approximately $900,000 in
1997 on two ProMaster 970 units.
GROSS MARGINS AND OPERATING EXPENSES
Gross margins as a percent of sales decreased to 40% compared with the same
quarter of the prior year of 49%, due primarily to the lower sales volume and
relatively fixed production expenses. Operating expenses were up $427,000 over
the same quarter in the previous year.
STRATEGIC PLANS AND RESTRUCTURING
During the past quarter the Company conducted a strategic planning process
designed to assess: (1) the future of the programming equipment market; (2) the
strengths and vulnerabilities of its leading industry competitors; and (3) the
Company's current product research and development programs.
Data I/O's research indicates the overall market for programming equipment is
flat or declining, and the market is fragmented with several suppliers serving
small market subsets. Possible exceptions to these trends are the high-end
automated programmer market, which appears to continue to grow, and the
in-system programming market, which is just beginning to emerge.
As a result of these assessments, continuing delays in completion of new
products, the high costs associated with these projects, and price pressures
from competitors, the Board of Directors has elected to focus future R&D efforts
on the ProMaster 970, in-system programming products and sustaining engineering
for the existing products. The company will discontinue R&D on the ProMaster 870
and the application of DataSite technology in the general purpose programmer
market.
"We will continue development of the DataSite technology for use with the
ProMaster 970," said Data I/O Chief Executive Officer Dave Bullis.
"Substantially more R&D investment would be needed to apply these technologies
to the broader, general purpose programmer market. In addition, we have
determined that the PM 870 product misses the price point required for this
market segment."
Page 2
<PAGE>
Data I/O also announced it has started to implement a restructuring that will
include a downsizing of its work force by approximately 1/3 by the fourth
quarter of 1998, consolidation of its facility, and other steps to reduce
operations to a level consistent with the lower sales it is experiencing.
"Moving forward with these reductions in our work force was a very difficult
decision for the Board of Directors to make," Bullis said. The Company expects
to record a charge in the third quarter of 1998 in the range of approximately
$2.5 to $3.3 million to reflect the cost of this restructure consisting
primarily of severance costs, write-downs of certain assets, and facility
consolidation costs. The Company estimates that these steps, when completed,
could result in quarterly savings of approximately $2 million by the first
quarter of 1999. The Company expects that during each of the quarters and for
the year ended December 31, 1998, it will continue to experience year over year
declines in revenue and that it will incur losses from operations.
Once day-to-day operating expenses are minimized through staff reductions and
reprioritization of R&D efforts, Bullis and the Board intend to focus much of
their energy on identifying means to improve the Company's competitive position.
"Data I/O's strong cash position enables us to pursue a variety of strategic
initiatives," Bullis said. These may include (1) the pursuit of business
opportunities in parallel markets; (2) acceleration of efforts to offer
in-system programming solutions; (3) acquisitions or arrangements with partners
which bring technologies or strategic relationships helpful to Data I/O
customers; or (4) business combinations to enhance shareholder value.
FORWARD-LOOKING STATEMENTS
Statements in this news release concerning development, introduction and
shipment of new products, expected future expenses, the pursuit of new markets
and strategic alternatives, and any other statement that may be construed as a
prediction of future performance or events are forward-looking statements which
involve known and unknown risks, uncertainties and other factors which may cause
actual results to differ materially from those expressed or implied by such
statements. These factors include the possible inability of the Company to
overcome technical challenges in the development of new products, timely
development, production release and market acceptance of new products and
upgrades to existing products, possible delays or non-deliveries of key
components by suppliers, changes in economic conditions and market demand,
pricing and other activities by competitors, retention of key personnel,
retention of third party sales channels, and other risks including those
described from time to time in the Company's filings with the Securities and
Exchange Commission (SEC), press releases and other communications.
CORPORATE INFORMATION
Data I/O Corporation, which celebrated its 25th anniversary in 1997, is the
world leader in device programming and handling solutions, providing the most
comprehensive product offering from design through manufacturing of programmable
integrated circuits. It is the first device programming systems supplier to
receive ISO 9001 certification. The company, which is publicly traded (NASDAQ:
DAIO), is headquartered in Redmond, Wash., and has sales and service offices
worldwide. The company's worldwide web address is HTTP://WWW.DATA-IO.COM.
# # #
Page 3
<PAGE>
DATA I/O CORPORATION
COMPARATIVE STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Second Quarter Six Months Ended
------------------------------- -----------------------------
Percent Percent
Change Change
6/25/98 6/26/97 6/25/98 6/26/97
------------------------------- -----------------------------
Net sales $8,782 $11,398 -23.0% $17,208 $23,265 -26.0%
Gross margin 3,528 5,596 -37.0% 7,184 11,554 -37.8%
Gross margin as percent of sales 40.2% 49.1% -8.9% 41.8% 49.7% -7.9%
Operating expenses:
Research & development 2,397 1,963 22.1% 4,811 4,035 19.2%
Selling, general and administrative 3,760 3,767 -0.2% 7,099 7,062 0.5%
----------------------- ------------------
Operating income (2,629) (134) (4,726) 457
Non-operating income (expense):
Interest, net 350 80 787 89
Foreign currency exchange (2) (29) (3) (14)
Minority Interest 15 - 15 -
Gain/(loss) on disposition (352) 2,347 (355) 2,347
----------------------- ------------------
Income/(loss) from continuing operations (2,618) 2,264 (4,282) 2,879
before taxes
Income tax expense 7 247 36 430
----------------------- ------------------
Income/(loss) from continuing operations (2,625) 2,017 (4,318) 2,449
Income/(loss) from discontinued operations 527 (639) 707 (1,023)
======================= ==================
Net income/(loss) ($2,098) $1,378 ($3,611) $1,426
======================= ==================
Diluted earnings per share
From continuing operations $(0.36) $.29 $(0.61) $.35
From discontinued operations 0.07 (0.09) 0.10 (0.15)
======================= ==================
Total diluted earnings per share $(0.29) $0.20 $(0.51) $0.20
======================= ==================
Diluted weighted average shares outstanding 7,148 7,018 7,128 6,966
</TABLE>
CONDENSED BALANCE SHEET
(IN THOUSANDS)
6/25/98 12/25/97
---------------------
Cash and cash equivalents $ 3,956 $ 8,113
Short-term investments 22,104 24,855
Accounts receivable, net 5,603 5,678
Inventories 8,358 8,158
Current deferred tax asset and other assets 4,203 5,900
Land, building and equipment 3,876 3,389
Long-term deferred tax asset 593 1,111
Other long-term assets 1,272 532
=====================
Total assets $ 49,965 $ 57,736
=====================
Current liabilities, excluding current
portion of funded debt $ 14,186 $ 17,478
Total funded debt 568 2,000
Other long-term payables - 561
Deferred gain on sale of property 2,919 3,083
Shareholders' equity 32,292 34,614
=====================
Total liabilities and shareholders' equity $ 49,965 $ 57,736
=====================
Page 4
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000351998
<NAME> Data I/O Corporation
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-25-1997
<PERIOD-START> DEC-26-1997 DEC-27-1996
<PERIOD-END> JUN-25-1998 JUN-26-1997
<CASH> 3,956 8,113
<SECURITIES> 22,104 24,855
<RECEIVABLES> 5,994 6,072
<ALLOWANCES> 391 394
<INVENTORY> 8,358 8,158
<CURRENT-ASSETS> 44,224 52,704
<PP&E> 22,013 21,576
<DEPRECIATION> 18,137 18,187
<TOTAL-ASSETS> 49,965 57,736
<CURRENT-LIABILITIES> 14,754 19,478
<BONDS> 0 0
0 0
0 0
<COMMON> 16,981 16,412
<OTHER-SE> 15,311 18,202
<TOTAL-LIABILITY-AND-EQUITY> 49,965 57,736
<SALES> 17,208 23,265
<TOTAL-REVENUES> 17,208 23,265
<CGS> 10,024 11,711
<TOTAL-COSTS> 11,895 11,079
<OTHER-EXPENSES> (493) (2,531)
<LOSS-PROVISION> 15 18
<INTEREST-EXPENSE> 49 109
<INCOME-PRETAX> (4,282) 2,879
<INCOME-TAX> 36 430
<INCOME-CONTINUING> (4,318) 2,449
<DISCONTINUED> 707 (1,023)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,611) 1,426
<EPS-PRIMARY> (.51) .20
<EPS-DILUTED> (.51) .20
</TABLE>
