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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 25, 1997 Commission File No. 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0864123
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10525 Willows Road N.E., Redmond, Washington, 98052
(address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (206) 881-6444
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (No Par)
Series A Junior Participating Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Aggregate market value of voting stock held
by non-affiliates of the registrant as of March 2, 1998
$39,240,613
7,134,657 shares of no par value Common Stock outstanding as of March 2, 1998
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Proxy Statement relating to its May 12, 1998,
Annual Meeting of Stockholders are incorporated into Part III of this
annual report on Form 10-K.
Page 1 of 128
Exhibit Index on Page 56
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<PAGE>
DATA I/O CORPORATION
FORM 10-K
For the Fiscal Year Ended December 25, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
Part I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Stockholders 16
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 17
Item 6. Selected Five-Year Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 45
Part III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 45
Item 13. Certain Relationships and Related Transactions 45
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46
Signatures 55
Exhibit Index 56
</TABLE>
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PART I
Item 1. Business
General
Data I/O(R) Corporation ("Data I/O" or the "Company") was incorporated in the
State of Washington in 1969. The Company manufactures programming systems for
semiconductor manufacturers and users of programmable integrated circuits ("IC"
or "ICs"). Within its programming systems product group the Company offers three
major product lines: (1) non-automated programming systems; (2) non-automated
parallel programming systems; and (3) automated programming and handling
systems.
The Company markets products to thousands of customers worldwide in a broad
range of industries including computers, communications, test and measurement,
medical, consumer electronics, military, transportation, aerospace and
semiconductors. All of these customers either manufacture ICs or design or
manufacture products which incorporate programmable ICs. The Company's
programming systems are used primarily by electronic equipment manufacturers in
the design and manufacturing of equipment for industrial, commercial and
military applications. The Company estimates that during 1997, it sold products
to approximately 5,000 customers throughout the world, none of which accounted
for more than 10% of the Company's net sales. None of the Company's independent
distributors, resellers or OEMs accounted for more than 5% of the Company's net
sales.
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, product development and introduction
plans, the Company's expectations for growth, estimates of future revenue,
expenses, profit, cash flow, balance sheet items, sell-through or backlog,
forecasts of demand or market trends for the Company's 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 or implied in such forward-looking
statements. Readers of this report should consider, along with other relevant
information, the risk factors identified by the Company under the caption "Risk
Factors" in Item I and elsewhere in this report, and other risks identified from
time to time in the Company's filings with the Securities and Exchange
Commission, press releases and other communications. 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.
Strategic Transactions
During the fourth quarter of 1997 the Company completed two strategic
transactions and one agreement in principle aimed at enhancing and refining its
corporate focus on programming systems technology.
In November 1997, the Company's semiconductor equipment product group, which was
organized and managed as its Semiconductor Equipment Division, Reel-Tech(TM),
was sold to General Scanning Inc., headquartered in Watertown, Massachusetts,
for consideration of $15.5 million. Under the terms of the sale, General
Scanning, which supplies laser systems to Reel-Tech and the Company, will
maintain a continuing product development agreement with Data I/O for handler
technology. Reel-Tech was originally acquired by Data I/O in August of 1995 to
supply additional handler technology for Data I/O's line of automated
programming systems. While owned by Data I/O, Reel-Tech generated over $12
million in revenue for the Company (see Revenue History by Segment). The
transaction resulted in a pre-tax gain of approximately $10.4 million in the
fourth quarter of 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of Part II below.
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In November 1997 the Company also announced that it had entered into a licensing
agreement and a purchase agreement for certain assets with MINC Incorporated, an
electronic design automation (EDA) software company based in Colorado Springs,
Colorado. Under this agreement MINC has integrated Data I/O's universal
Synario(R) product, as well as its ABEL(R) and ECS products, into the MINC line
to create a broad line of EDA tools aimed at the personal computer market. MINC
now controls the day-to-day operations of the former Synario Design Automation
Division including the sale and distribution of the Synario products as well as
software development and marketing. Most of the Synario Division staff joined
MINC to support these functions. Data I/O will retain certain licensing revenues
until December 31, 1999.
The Company believes that the dispositions of the Semiconductor Equipment and
Synario Design Automaton Divisions will allow management of the Company to focus
its attention on the Company's core programming systems business. The operating
results of these business segments have been accounted for as discontinued
operations in the accompanying financial statements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of Part II below.
In November 1997 the Company also signed an Agreement in Principle with JTAG
Technologies, a Netherlands-based manufacturer and developer of boundary scan
test and programming solutions. Boundary scan programming, which enables
manufacturers of a wide range of electronics equipment to program IC's after
installation on a circuit board, is one of the fastest-growing segments of the
programming market. The Agreement in Principle contemplates that the Company
will be authorized to sell JTAG Technologies boundary scan in-system programming
products under the Data I/O name to engineering and manufacturing markets. JTAG
Technologies will continue to sell its test products under its own name to the
test and measurement instrument markets. Founded in 1993, JTAG Technologies was
the first company to offer in-system programming solutions based on the standard
established by the Boundary Scan Standard (IEEE 1149.1) established by the IEEE
(Institute of Electrical and Electronics Engineers). Conclusion of arrangements
with JTAG is subject to negotiation and execution of definitive agreements which
had not been completed as of the date of this report. If formal arrangements are
concluded, the Company anticipates initial sales of the JTAG products under the
Data I/O name in mid-1998. The Company believes that this strategic relationship
with JTAG Technologies will enhance the Company's position in the programming
systems market by offering its customers a broader choice of programming
solutions. However, there can be no assurance that these arrangements with JTAG
will be established.
Industry Overview
Rapid advances in semiconductor technology over the past few decades have
contributed to the widespread adoption of ICs in the electronics manufacturing
industry. The semiconductor industry has evolved during this period to the point
where some combination of fixed and programmable ICs are used in virtually all
electronic equipment produced today. Fixed ICs have specific functions
incorporated into them when they are manufactured, whereas a programmable IC can
be programmed at the discretion of the electronics design engineer to perform a
variety of functions. Programmable ICs are increasingly being used in
high-volume manufacturing situations as the cost of programmable ICs has
declined relative to that of fixed ICs, and as the competitive environment in
the electronic equipment industry has caused the time-to-market for their
products to be increasingly critical.
The advances made in programmable logic IC technology have enabled electronics
design engineers to fit an increasing number of complex functions into smaller,
more delicate programmable IC devices. These advances have increased the need
for automated equipment used to handle these miniaturized device packages during
the IC manufacturing process, as well as after the ICs are completed and sold to
electronic equipment manufacturers. Such automated handling equipment is
critical for minimizing damage of the delicate lead pins of the ICs and to
increase the speed of transferring ICs into and out of the protective media used
for transporting them (tubes, trays, and tape and reel).
The Company believes that 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 a significant market need for more
sophisticated programmers will continue. The Company currently has development
projects underway for a new generation of programmer technology to address the
needs created by these technology changes.
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Revenue History by Segment
The table below details the contribution the Company's three principal business
segments made to total net sales for the last three fiscal years (in thousands
of Dollars):
<TABLE>
<CAPTION>
Programming Systems Semiconductor Equipment Synario Design Automation
Division (1) Division (2) (3) Division (1) (4) Total Sales
---------------------------- --------------------------- --------------------------- -----------------
Percent Percent Percent Percent Percent Percent Percent
Year Amount Growth of Total Amount Growth of Total Amount Growth of Total Amount Growth
- ---- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $46,284 (5.3%) 75.8% $7,640 104% 12.5% $7,172 (8.3%) 11.7% $61,096 1.1%
1996 $48,860 (15.0%) 80.9% $3,744 500% 6.2% $7,819 (1.2%) 12.9% $60,423 (8.5%)
1995 $57,496 7.6% 87.1% $625 N/A 0.9% $7,910 (1.4%) 12.0% $66,031 7.4%
</TABLE>
- ----------
(1) Prior year's figures have been reclassified for comparability.
(2) Semiconductor Equipment Division 1995 net sales are for four months. The
Semiconductor Equipment Division was sold in November 1997 and has been
accounted for in the financial statements as discontinued operations. See
"Strategic Transactions."
(3) Excludes inter-segment sales to the Programming Systems Division of
$1,876,000 and $322,000 in 1996 and 1995, respectively.
(4) The Company disposed of its Synario Design Automation Division in November
1997. The Synario Design Automation Division has been accounted for in the
financial statements as discontinued operations. See "Strategic
Transactions."
Programming System Products
Data I/O's broad line of programming systems includes a wide variety of systems,
modules and accessories, which can be grouped into three general categories:
non-automated programming systems, non-automated parallel programming systems,
and automated programming and handling systems. Its non-automated programming
systems are single IC programmers, whereas its non-automated parallel
programming systems program multiple ICs at the same time, providing higher
throughput. Its automated programming and handling systems program multiple ICs
simultaneously, and also handle, test and mark the ICs in high volumes. To
accommodate the expanding variety of programmable ICs being manufactured today,
programming systems must have the capability to program the type of IC
technology (how it physically accepts the information), the specific IC's set of
features and functions, while also accommodating the IC's package type,
including its specific size, pin arrangement and number of pins. With their
broad range of capabilities, Data I/O's systems can program more than 7,000
programmable ICs, which is the vast majority of the different types of
programmable ICs currently on the market for both engineering (prototyping) and
manufacturing applications.
Because semiconductor manufacturers continually develop new programmable ICs,
the Company works closely with all major manufacturers of programmable ICs to
update its programming systems line to provide support for the major new
programmable ICs. In addition to incorporating new programmable IC support into
the latest versions of its products, the Company packages and sells support
updates to allow customers to keep their existing programmers current. Many
semiconductor manufacturers endorse Data I/O programming systems as equipment
they recommend for end-user applications as well as for use in their own
development and production environments.
The Company is the world's leading provider of programming systems for
programmable ICs. However, the programming systems market is highly competitive.
Important competitive factors include product features, price, quality,
reliability, throughput, distribution channels, availability, IC support,
post-sales support, service and the timely response to rapid technological
change with new and improved products. The Company believes its competitiveness
depends on offering the most effective combination of these capabilities.
Non-automated Programming Systems
The Company's line of non-automated programming systems provides engineering and
manufacturing programming solutions at a variety of price points. The
UniSite(TM) Universal Programmer is the Company's top-of-the-line non-automated
programming system and allows any pin of any programmable IC to perform any
programming function. This gives the
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programming system its universality. The Company's 3900 and 2900 Programming
Systems sell at price points below that of the UniSite, and are targeted for
engineering and manufacturing applications requiring less functionality. The
UniSite, 3900 and 2900 Programming Systems feature the Company's proprietary
socketing technology, which permits the programming of the programmable ICs in
small and delicate surface-mount packages, reduces the need for costly and
less-efficient adapters, and reduces programming errors and IC damage.
The Company's LabSite(TM) Programming System was introduced in June 1997 and
combines and supersedes the Company's 2700 Programming System and Chiplab(R)
Project Programmer. The LabSite is the Company's lowest priced proprietary
non-automated programming system, which was designed and priced for individual
engineers purchasing a programmer for a specific project.
In June 1997 the Company also began selling a line of low-priced non-automated
IC programmers under a worldwide distribution agreement with ICE Technology(R),
Ltd. Like the LabSite Programming System, this new line of low-priced products,
sold under the brand name ChipWriter(TM), provide Data I/O with a new entry to
improve its competitive position in the low-priced segment of the programmer
market. The Chipwriter programmer is a 48-pin universal programmer which
supports a full range of memory, microcontroller and programmable logic devices.
The Chipwriter(TM) Portable is a lightweight, battery-operated, fully portable
40-pin universal programmer, ideal for field engineering and service
applications. The Chipwriter(TM) Gang is a high-speed production programmer
supporting a wide range of memory devices.
The UniSite, 3900, 2900 and LabSite share a similar software architecture and
are supported by Data I/O's proprietary algorithm development tool. This tool,
licensed by Data I/O to leading semiconductor manufacturers, allows Data I/O and
the manufacturers to work together to develop support for new programmable ICs.
The semiconductor manufacturers use this tool to develop programming
instructions for Data I/O programmers, enhancing both the time-to-market of
their programmable ICs, and Data I/O's support and enhancement efforts.
The Company is redesigning its entire proprietary non-automated programming
system product line with a new generation of programmer technology which, at the
date of this report, is expected to be available in the second half of 1998.
These new products, based on a new proprietary programming architecture called
DataSite(TM), are planned to include a family of single socket solutions for
engineering applications, a multi-socket solution for use in production and
programming support for the Company's new high-volume programming and handling
systems. See "Risk Factors."
Markets, Customers and Competition
In terms of total revenue, the Company believes that the worldwide market for
conventional non-automated programming systems for engineering applications has
been slightly declining or flat over the last several years due to a decline in
average selling prices offset by a slow growth in the number of units sold. The
unit sales growth has been primarily in the lower end products. Over the last
several years technological improvements in personal computers and design
software tools have caused engineering design teams to shift away from hardware
tools to software design tools. Further, within the remaining hardware tools
market, demand has shifted toward lower-priced, project-specific programming
systems and single-point solutions. These industry changes are adversely
affecting the Company, especially because in the past, Data I/O's product line
has been heavily oriented toward hardware tools and, within hardware tools,
toward the higher-priced universal programming systems. The Company expects
these trends in the conventional programming systems for the engineering market
will continue for the foreseeable future. In response to these market
developments, the Company has recently enhanced its lower-priced product
offerings (LabSite and Chipwriter) and is in the process of redesigning its
entire non-automated programming system product line with a new generation of
programmer technology. However, there can be no assurance that this trend toward
lower-priced, project specific programming systems and single point solutions
will continue as anticipated, that the Company will be able to complete
development of its new generation of programming products, that its new products
will experience strong demand, that the Company will be able to anticipate and
respond to changes in customer needs and new technologies or that the Company
will otherwise effectively compete in the future.
Although independent market information is not available, the Company believes
that it has approximately 25% of the worldwide market share of revenue for
non-automated programming systems including both the engineering and the
parallel programming segments. This is based on information from studies
performed and estimates made each year internally by the Company. For the design
engineering segment of the market for non-automated programming systems the
Company has identified two groups of competitors. Based on information gathered
internally, the Company believes approximately 10% to 20% of this market is
served by vendor-specific non-automated programming systems supplied by the
semiconductor
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manufacturers themselves. The remainder of the market is divided among several
dozen, mostly regional, competitors. The most significant of these competitors
are BP Microsystems, Stag Microsystems, SMS, System General, Hi-Lo and Minato.
The Company believes that the principal competitive factors in the market for
non-automated programming systems include the breadth of programmable IC support
and price. Most new entrants compete based on price alone, because competing
against the more established companies' IC support is quite expensive.
The Company believes that maintaining close relationships with all major
programmable IC manufacturers, superior service, expertise in programming
applications, broad programmable IC support and the critical mass of a large
installed base will enable Data I/O to compete in the market for non-automated
programming systems. However, growth in the market may be limited, because much
of the remaining market is fragmented both geographically and technologically.
This situation will continue to allow smaller niche suppliers to exist and, in
some markets, to thrive. See "Management's Discussion and Analysis of Financial
Position and Results of Operations" in Item 7 below.
Interest in on-board or in-circuit programming techniques has continued to grow
within the engineering and manufacturing communities. The Company believes that
increasing numbers of manufacturers are using or considering using their
expensive test equipment to program ICs after they have been installed on
printed circuit boards. This process is known as in-circuit programming. The
Company believes that the high cost of in-circuit test equipment may be a major
disadvantage and has evaluated an alternative more cost-effective on-board
programming technique. Through an anticipated strategic relationship with JTAG
Technologies B. V. of The Netherlands (see "Strategic Transactions"), the
Company during 1998 intends to begin to exploit the alternative method, thereby
broadening the Company's product offering to include on-board programming as
well as automated and non-automated programming systems. (See "Risk Factors -
Technological Change.")
Non-automated Parallel Programming Systems
The Company's non-automated parallel programming systems provide high-speed gang
programming for maximizing throughput and minimizing cost per device. Its
PSX1000(TM) and PSX500(TM) Programming Systems serve the needs of mid- and
high-volume manufacturing users of programmable memory and microcontroller ICs.
The PSX1000 and PSX500 can duplicate twenty or ten programmable ICs at a time,
respectively, and support numerous package types using Data I/O's proprietary
socketing technology of low-cost interchangeable modules. The PSX400(TM), the
Company's low-cost non-automated parallel programmer able to program eight ICs
at a time, addresses low-volume manufacturing and engineering applications in
which designers use several ICs on a single board and want to program them all
in a single operation. The Company's BoardSite(R) In-Circuit Programmer is a
unique product that is designed to program or reprogram an entire circuit board
full of programmable ICs while they are mounted on the board. This allows
circuitry to be updated in the field and also provides an alternative way for
manufacturing operations to deal with programmable ICs.
Markets, Customers and Competition
The Company does not have independent market information but has commissioned
studies to obtain limited market data for the non-automated parallel programming
systems market. Principal competitors in the non-automated parallel programming
systems market are BP Microsystems, Elan, Minato, Hi-Lo, System General,
Needhams Electronics and SMS. The Company believes that other firms,
particularly in specific geographic regions, hold the dominant share of this
market. The Company believes this is primarily due to the Company historically
not having competitive products at the low-cost end of this market. The Company
believes that it has the largest market share in the high-volume end of the
non-automated parallel programming system market.
Automated Programming Systems
Data I/O's ProMaster(R) Automated Programming Systems line of products provide
electronic equipment manufacturers with an automated method for handling,
programming, testing and marking programmable ICs whether the ICs are housed in
conventional throughhole or surface-mount packages. During manufacturing, the
ProMaster's "pick-and-place" technology feeds the programmable ICs out of their
protective media (trays or tubes); places them into the socket of the
programmer; triggers programming; applies a label or marks the IC with a laser;
sorts out the ICs that could not be programmed correctly; and loads correctly
programmed ICs back into trays, tubes or onto special tape which is rolled onto
reels. The ICs are then ready to be attached to printed circuit boards using
other automated equipment.
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The ProMaster(R) 3000, ProMaster(R) 7000 and ProMaster(R) 7500 Automated
Programming Systems address medium- to high-volume manufacturing applications
for programming, testing and marking programmable ICs. These products support
conventional throughhole and surface-mount packages with proprietary socketing
technology that offers customers highly reliable production capacity at a
relatively low-cost per IC. The Company's AutoSite(TM) Production Programmer,
designed specifically to be integrated with a handling system, connects to the
ProMaster 3000, 7000 and 7500 and performs the programming function within these
automated programming and handling systems. The ProMaster 7500 offers higher
speed and capacity by extending the ProMaster 7000 to include a second AutoSite
programmer allowing it to program two ICs at a time.
The ProMaster(R) 2500 Automated Programming System, introduced in September
1993, was the world's first fully-integrated system for programming, handling,
testing and marking programmable ICs. Designed for medium-volume manufacturing
applications, the ProMaster 2500 supports both conventional throughhole and
surface-mount IC packages. The ProMaster 2500 internalized and integrated the
programmer inside the system unlike the ProMaster 3000, 7000, and 7500 models
that connect an AutoSite programmer. It is the Company's entry-level priced
automated programming and handling system.
The ProMaster(R) 9500 Automated Fine Pitch Programming System, introduced in
February 1995, is a highly flexible automated programming and handling system
for programming, testing and marking fine-pitch programmable ICs. The ProMaster
9500 was created to address extremely high-volume manufacturing of the new
generation of highly miniaturized and fragile programmable ICs. The Company's
handling technology results in the ProMaster 9500 touching the delicate pins of
each IC only once, thereby greatly reducing the risk of damage that can be
caused by even moderate handling. Its programming module features Data I/O's
PSX(TM) parallel programming technology and can program up to 16 ICs
simultaneously. The ProMaster 9500's flexible, modular design allows the user to
create the configuration needed for the specific manufacturing operation.
The Company introduced its ProMaster(R) 970 Automated Fine Pitch Programming
System in February 1997. The ProMaster 970 is designed to be a high-speed,
highly flexible automated programming and handling system designed for today's
most demanding manufacturing applications. It integrates the Company's latest
programming technology in configurations of either eight, ten or twelve
programming sites, and supports memory, microcontroller and logic devices in
most package types. The ProMaster 970 features two laser aligned pick-and-place
heads to optimize throughput at any programming time, supports tray, tube and
tape input and output, and has an optional laser marking system. The Company
anticipates that the ProMaster 970 will be available in production quantities in
the second quarter of 1998. See "Risk Factors - Development, Introduction and
Shipment of New Products."
The Company introduced the ProMaster(R) 870 Automated Fine Pitch Programming
System in March 1998. The ProMaster 870 is designed to be a highly flexible,
automated programming and handling system designed for low- to mid-volume
manufacturing applications. Its state-of-the-art technology efficiently and
reliably programs, sorts, and marks a medium volume of fine-pitch devices. A
universal programming system supports memory, microcontroller and logic devices
in many package types. Available with two or four programming sites, the system
is designed to accommodate conventional input/output media. Device marking
options include labeling or laser marking. The Company anticipates that the
ProMaster 870 will be available in production quantities in the second half of
1998. See "Risk Factors - Development, Introduction and Shipment of New
Products."
The Company also provides a complete line of labels for use with its automated
programming and handling systems. These labels are custom manufactured by Data
I/O for the ProMaster 2500, the ProMaster 3000 and their predecessors, the
ProMaster 2000 and the AutoLabel 1000.
Markets, Customers and Competition
The Company believes that in the electronic manufacturing market, the expanded
use of programmable integrated circuits in the mid- to high-volume manufacturing
environment and the proliferation of hard-to-handle surface-mount packages in a
variety of types is causing a worldwide trend toward automation and integration
of manufacturing processes. The Company believes this trend is attributable to a
reduction in the cost of programmable ICs compared to fixed ICs, manufacturers'
desire to improve the time-to-market for new and improved products, and
increased functionality and miniaturization of programmable ICs. The Company's
participation in this growth depends upon the market's acceptance of its new
products, its ability to understand and meet the changing needs of this market,
and its response to and development of changes in
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technology. In addition, service, corporate reputation and product reliability
are considered key decision making factors for customers considering automated
systems.
The market for automated programming and handling systems used in automated
manufacturing operations is shared primarily by Data I/O, BP Microsystems in
cooperation with Quad Systems, and Unmanned Solutions in cooperation with SMS.
In addition, Exatron manufactures handling systems that can be combined with a
programmer which can be configured by the customer. Although independent market
information is not available, the Company believes that it has approximately 65%
of the worldwide market share of revenue for automated programming systems. The
Company believes that increased competition, particularly in areas where new
Data I/O product introductions have been delayed, such as the ProMaster 970 and
ProMaster 870, or are not scheduled to occur until 1998, has affected its share
of the market. Data I/O believes the breadth of its line of non-automated
parallel programming systems and automated programming and handling systems, as
well as the products under development, its worldwide service capabilities and
technology leadership will enable the Company to respond to the trend toward
automation and integration of manufacturing processes. However, there can be no
assurance that this trend toward automation will continue as anticipated, that
the Company will be able to complete development of its new generation of
programming products, that its new products will experience strong demand, that
the Company will be able to anticipate and respond to changes in customer needs
and new technologies or that the Company will otherwise effectively compete in
the future.
Software
In connection with the disposition of the Company's Synario Design Automation
Division in November 1997, the Company retained certain rights to distribute
ABEL(R) (Advanced Boolean Expression Language), which was first released in
March 1984, and the ECS product. ABEL is a behavioral design entry software tool
for PLDs and CPLDs. The Company believes that ABEL is the most "universal" tool
in its market with support for the architectures of most major programmable
logic manufacturers. See "Strategic Transactions". The Company does not expect
significant revenues in future periods from this product.
Product Pricing
The U.S. manufacturer's suggested list prices for Data I/O's non-automated
programming systems range from approximately $1,000 for the ChipWriter to
$27,000 for a fully configured UniSite Universal Programmer. The ProMaster 2500
automated programming and handling system sells for approximately $47,000, while
the ProMaster 9500 configured with tray, tube and tape and reel along with
programming modules, sells for approximately $600,000. The U.S. manufacturer's
suggested retail price for the ABEL software ranges from $500 for an entry-level
version to $2,000 for the latest Windows(R) version.
Sales
The Company markets and sells its products through a combination of direct and
indirect sales representatives, distributors, value added resellers (VARs) and
internal telesales. The Company continually evaluates its sales channels against
its evolving markets and customers.
U.S. Sales
The Company markets its products throughout the U.S. using a variety of sales
channels including its own direct field sales personnel, direct telesales
organization, independent sales representatives, OEMs, and VARs. The Company's
U.S. independent sales representatives obtain orders on an agency basis, with
shipments made directly to the customer by the Company. OEMs and VARs purchase
products directly from the Company for resale to customers. Sales are recognized
by the Company at the time of shipment.
Foreign Sales
Foreign sales represented approximately 52% of net sales of programming systems
in 1997, 52% in 1996, and 46% in 1995 (see Note 15 of "Notes to Consolidated
Financial Statements"). Foreign sales are made through the Company's wholly
owned subsidiaries in Japan, Germany, Canada, Singapore, as well as independent
distributors, VARs and sales
Page 9
<PAGE>
representatives located in 32 other countries. Sales made through foreign
subsidiaries are denominated in local currency and recognized when the
subsidiary ships to the end-user. The Company's independent foreign distributors
and VARs purchase Data I/O products in U.S. Dollars for resale; and the sale is
recognized at the time of shipment to the distributor or VAR. Distributors and
VARs are allowed to return a portion of their Data I/O product inventory for
credit on future purchases, subject to limitations. As with U.S. sales
representatives, sales made by international sales representatives are on an
agency basis with shipments made directly to the customer by the Company. These
sales are denominated in U.S. Dollars and are recognized at the time of
shipment.
Total foreign sales are determined by the geographic area into which the
products are sold and delivered, and include not only sales by foreign
subsidiaries but also export sales from the U.S. to the Company's foreign
distributors, VARs and representatives' customers. Foreign sales do not include
transfers between the Company and its foreign subsidiaries. Export sales are
subject to U.S. Department of Commerce regulations. The Company has not,
however, experienced any difficulties to date as a result of these requirements.
Fluctuating exchange rates and other factors beyond the Company's control, such
as international monetary stability, tariff and trade policies, and U.S. and
foreign tax and economic policies, affect the level and profitability of foreign
sales. The Company is unable to predict the effect of such factors on its
business. The Company does hedge against certain currency exposures in order to
minimize their impact.
Manufacturing and Backlog
During 1997, Data I/O operated two principal manufacturing operations. Its
principal facility in Redmond, Washington manufactures automated and
non-automated programming systems including component parts assembly, final
assembly and testing. This facility was sold during 1997 and leased back from
the purchaser for a period of 10 years with an option to renew the lease for an
additional 10 years. The Company's second manufacturing facility, located in
Indianapolis, Indiana, which manufactures semiconductor equipment, was also sold
during 1997 with the sale of the Company's Reel-Tech Division (see "Strategic
Transactions").
In its manufacturing processes, the Company uses a combination of standard
components, proprietary custom ICs and fabricated parts manufactured to Data I/O
specifications. Most components used are available from a number of different
suppliers and subcontractors but certain items, such as some handler and
programmer subassemblies, custom ICs, hybrid circuits and connectors, are
purchased from single sources. The Company's policy is to maintain substantial
inventories of most single-source components. It believes that additional
sources could be developed for present single-source components without
significant difficulties in obtaining supplies. There can, however, be no
assurance that single-source components will continue to be readily available.
Most programming systems and software product orders are scheduled for delivery
within one to 60 days after receipt of order. The ProMaster 9500 is generally
scheduled for delivery within 60 to 90 days after receipt of order. The
Company's backlog of pending orders was approximately $5.7 million and $4.1
million as of December 25, 1997 and December 26, 1996, respectively.
In accordance with industry practices, generally all orders are subject to
cancellation prior to shipment without penalty except for contracts calling for
custom configuration. To date, such cancellations have not had a material effect
on the Company's sales volume. To meet customers' fast delivery requirements,
Data I/O manufactures certain of its products based upon a combination of
backlog and anticipated orders. The size of backlog at any particular date is
not necessarily a meaningful indicator of the trend of the Company's business.
Research and Development
Because Data I/O's future growth is, to a large extent, dependent upon the
timely development and introduction of new products and its extensive support of
the latest programmable ICs, the Company is committed to a substantial research
and development program. Research and development activities include applied
research, design of new products and continual enhancement and support of
existing products. Data I/O has focused its efforts on applied rather than basic
research, concentrating on technical innovation for long-term product
requirements. The Company made expenditures for research and
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<PAGE>
development related to its Programming Systems Division of $7,807,000,
$8,121,000 and $6,581,000 in 1997, 1996 and 1995, respectively, representing
16.9%, 16.6%, and 11.4% of net sales, respectively. The percentage of research
and development spending remained high in 1997 because of the development of the
new generation of products, particularly in programming systems.
During 1997 and 1996 the Company directed its main product development efforts
toward a new programming technology for a new generation of programming systems
and for its automated programming and handling system products, enhancements to
its semiconductor equipment products, and enhancements for its EDA software
products. Substantial engineering resources are also devoted to developing
updates and upgrades for both programming systems and software products and
providing IC support for new programmable ICs as they are introduced by
semiconductor manufacturers.
Patents, Copyrights, Trademarks and Licenses
Intellectual property rights applicable to various Data I/O products include
patents, copyrights, trade secrets and trademarks. However, rather than depend
on patents and copyrights, which are frequently outdated by rapid technological
advancements in the electronics industry, Data I/O relies primarily on product
development, engineering, manufacturing and marketing skill to establish and
protect its market position.
The Company attempts to protect its rights in proprietary software products by
retaining the title to and copyright of the software and documentation, by
including appropriate contractual restrictions on use and disclosure in its
licenses and by requiring its employees to execute non-disclosure agreements.
The Company's software products are shipped in sealed packages on which notices
are prominently displayed informing the end-user that, by breaking the seal of
the packaging, the end-user agrees to be bound by the license agreement
contained in the package. The license agreement includes limitations on the
end-user's authorized use of the product, as well as restrictions on disclosure
and transferability. The legal and practical enforceability and extent of
liability for violations of license agreements that purport to become effective
upon opening of a sealed package are unclear. The Company is not aware of any
situation where a license agreement restricting an end-user's authorized use of
a licensed product resulted in enforcement action.
Because of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, there is a possibility that portions of the
Company's products might infringe upon existing patents or copyrights, and the
Company may therefore be required to obtain licenses or discontinue the use of
the infringing technology. The Company believes that any exposure it may have
regarding possible infringement claims is a reasonable business risk similar to
that being assumed by other companies in the electronic equipment and software
industries. However, any claim of infringement, with or without merit, could be
costly and a diversion of management's attention, and an adverse determination
could adversely affect the Company's reputation, preclude it from offering
certain products, and subject it to substantial liability.
Employees
As of December 25, 1997, the Company had 328 total employees, of which 33 were
located outside the U.S. Many of Data I/O's employees are highly skilled and the
Company's continued success will depend in part upon its ability to attract and
retain employees who are in great demand within the industry. At times, the
Company, along with most other electronic equipment manufacturers and software
developers, experiences difficulty in hiring and retaining experienced
personnel, particularly in technical areas. There is no assurance that the
Company will be able to attract and retain qualified personnel in the future.
None of the Company's employees are represented by a collective bargaining unit
and the Company believes relations with its employees are favorable.
Environmental Compliance
The Company's facilities are subject to numerous laws and regulations concerning
the discharge of materials or otherwise relating to the environment. Compliance
with environmental laws has not had, nor is it expected to have, a material
effect on capital expenditures, the financial position, the results of
operations or the competitive position of the Company.
Page 11
<PAGE>
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of the
Company as of March 11, 1998:
Name Age Position
---- --- --------
James J. David 54 President
Susan S. Webber 43 Vice President
Customer Service, Quality and
Human Resources
Domenico Picone 59 Vice President
Operations
Joel S. Hatlen 39 Vice President
Finance
Chief Financial Officer
Secretary and Treasurer
Richard A. Mayes 51 Vice President
Marketing
Acting Vice President
Engineering
Mark L. Edelsward 41 Vice President
Worldwide Sales
James J. David resigned from his position of Vice President of Worldwide Sales
and Marketing in December 1997, but returned to the Company as President in
January 1998. Mr. David joined the Company in May 1996 as Vice President of
Worldwide Sales, Programming Systems Division, and became Vice President of
Worldwide Sales and Marketing in December 1996. From 1992 until joining the
Company, Mr. David served as Vice President of U.S. Operations for Aldus
Corporation, a software company. From 1989 until 1992, Mr. David was employed by
ButtonWare, Inc., a software company, where in his last position he served as
President. Prior to ButtonWare, Mr. David served in sales and marketing
management positions with Egghead, Inc. and IBM.
Susan S. Webber joined the Company in April 1994 as Director of Quality and was
given the responsibility for Human Resources in November of 1994. In December
1995, Ms. Webber was promoted to Vice President of Quality and Human Resources.
In July 1997 she was given responsibility for Customer Service. From 1985 until
joining the Company, Ms. Webber was employed by AG Communication Systems, a
designer and manufacturer of telecommunications systems. Her most recent
position was Quality Director. Prior to AG Communication Systems, Ms. Webber was
with Motorola and was an Assistant Professor at the University of Nebraska.
Domenico Picone joined the Company in May 1995 as Director of Operations. In
December 1996, Mr. Picone was promoted to Vice President of Operations. From
1994 until joining the Company, Mr. Picone was employed by Spacelabs Medical, a
manufacturer of emergency room medical electronics. His most recent position was
Manufacturing and Engineering Director. From 1979 to 1994, Mr. Picone was
employed by Eldec Corporation, a manufacturer of avionics, where his last
position was Director of Operations. Prior to Eldec Corporation, Mr. Picone held
various manufacturing management positions at Diagnostic Information, Inc., Sony
Corporation and Tektronix, Inc.
Joel S. Hatlen joined the Company in September 1991 as a Senior Tax Accountant
and became Tax Manager in December of 1992. He was promoted to Corporate
Controller in December 1993. In February 1997, he was named Chief Accounting
Officer and Corporate Controller. In January 1998, he was promoted to Vice
President of Finance and Chief Financial Officer, Secretary and Treasurer. From
September 1981 until joining the Company, Mr. Hatlen was employed by Ernst &
Young LLP where his most recent position was Senior Manager.
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Richard A. Mayes joined the Company in February 1996 as Director of Strategic
Planning, and was given the responsibility as Director of Marketing in June
1996. He was promoted to Vice President of Strategic Marketing in December 1997.
Prior to joining the Company, Mr. Mayes was Director of Marketing at Advanced
Technology Laboratories, Inc. From 1977 to 1993, he was employed by
Hewlett-Packard Company, including positions as Marketing Manager for a
Workstation Division and the San Diego Division.
Mark L. Edelsward joined Data I/O Canada as Distribution Manager in 1987. He has
held a variety of sales related positions with the Company, including European
and USA Sales Management roles. Mr. Edelsward has most recently had
responsibility for Asia, Latin America and Canada as the Director of Sales of
the Pacific region. From 1978 until joining the Company, Mr. Edelsward was
employed by Allan Crawford Associates, a Canadian distributor of test and
measurement and scientific instrumentation.
Risk Factors
In addition to the other information in this report, the following risk factors
should be carefully considered in evaluating the Company. See also the sections
captioned "Forward-Looking Statements" in Item 1 and Item 7.
Development, Introduction and Shipment of New Products
The Company is scheduled to complete development of, introduce and ship several
key new engineering and automated programming system products in 1998. 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. For example, introduction of a new
family of non-automated programming systems and of certain key configurations of
new automated programming systems is dependent on completion of development of
the Company's new DataSite programming system. Also, the ability of DataSite to
program a sufficient number of programmable devices to make the new system
competitive is dependent on translation of a large number of algorithms into the
new DataSite operating system. The schedule for completion of the DataSite
development project has been delayed on several occasions due to technical and
other difficulties. In addition, the Company needs to hire additional qualified
software engineers to accelerate the DataSite algorithm development project.
Also, the Company relies on third parties for key portions of the robotics used
in the new ProMaster 970 Automated Fine Pitch Programming System. The Company
believes that its sales in 1997 were adversely affected by the delay in
completion of DataSite and other key new products as customers withheld orders
for old products in anticipation of availability of new products and as
competitors captured orders from customers with requirements which could not
wait for new product availability. Accordingly, delays in the completion and
shipment of new products, or unfavorable customer acceptance of such products,
will likely result in a decline in sales in 1998.
Variability in Quarterly Operating Results
The Company's quarterly operating results have in the past varied and may in the
future vary significantly depending on factors such as increased competition,
timing of new product announcements, releases and pricing changes by the Company
or its competitors, market acceptance or delays in the introduction of new
products, production lead times, production constraints, timing of significant
orders, seasonal factors, capital budgets of customers, foreign currency
exchange rates, and economic conditions, as well as all of the other risk
factors discussed in this report. Historically, a substantial portion of the
Company's revenue in each quarter results from orders booked in that quarter.
The Company's expense levels are based, in part, on its expectations as to
future revenue. If anticipated shipments in any quarter do not occur or are
delayed, expenditure levels could be disproportionately high, and the Company's
operating results for that quarter would be adversely affected. As a result, the
Company's results of operations for any quarter are not necessarily indicative
of results for any future period. Due to all of the foregoing factors, it is
possible that in some future quarter the Company's operating results will be
below expectations of analysts and investors.
Technological Change
The markets for the Company's programming systems are characterized by rapid
technological change and evolving industry standards, and are highly competitive
with respect to timely product innovation. The introduction of products
embodying new technology and the emergence of new industry standards can render
existing products obsolete and unmarketable. New and changed technologies may
result in products that contain defects or errors which may give rise to product
liability claims or be detrimental to market acceptance of such products. The
Company's success depends on its ability to anticipate changes in
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technology, IC package types, electronics equipment manufacturing practices,
software platform preferences and industry standards and to develop and
successfully introduce new and enhanced products on a timely basis. For example,
widespread use of in-circuit programming would likely have an adverse effect on
sales of the Company's traditional programming systems. Also, to the extent that
more rigid standards are established in the programmable IC industry, the
value-added element of the Company's products and support services could be
decreased. If such decreases occur, or if the Company is unable, for
technological or other reasons, to develop products in a timely manner in
response to changes in the industry or if products or product enhancements that
the Company develops contain defects or errors or do not achieve market
acceptance, the Company's business, financial condition and results of
operations will be materially and adversely affected.
Economic and Market Conditions
The Company's business depends on capital spending and other economic cycles
that affect the users and manufacturers of ICs. This industry is highly cyclical
and characterized by rapid technological change, short product life cycles,
fluctuations in manufacturing capacity and pricing and gross margin pressures.
Segments of this industry, in each of the United States, Europe and Japan, have
from time to time experienced significant economic downturns characterized by
decreased product demand, reductions in capital expenditures, production
over-capacity, price erosion, work slowdowns and layoffs. In addition, portions
of this industry have experienced downturns at different times. The Company's
operations may in the future reflect substantial fluctuations from
period-to-period as a consequence of such industry patterns, general economic
conditions affecting the timing of orders from major customers, and other
factors affecting capital spending. There can be no assurance that such factors
will not have a material adverse effect upon the Company's business, financial
condition and results of operations.
Competition
The markets for the Company's products are highly competitive. Advances in
technology have reduced the barriers of entry into the programming systems
markets, resulting in new competitors who compete for certain market niches. The
Company expects competition to increase from both established and emerging
companies. Recent delays in product development projects have enabled certain
competitors to improve their competitive position by increasing their market
share. There can be no assurance that the Company will be able to compete
successfully against current and future sources of competition or that the
competitive pressures faced by the Company will not adversely affect its
profitability or financial performance.
Dependence on IC manufacturers
The Company maintains close working relationships with semiconductor
manufacturers to ensure that the Company's programming systems use programming
methodology that complies with each semiconductor manufacturer's specifications.
In addition, many semiconductor manufacturers endorse Data I/O programming
systems as equipment that they recommend for end-user applications as well as
for use in their own development and production environments. These
relationships enable Data I/O to keep its programming systems product line
up-to-date with the latest technology and to provide end-users with broad and
current programmable IC support. Any adverse change in the relationships that
the Company maintains with semiconductor manufacturers could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Suppliers
Certain components used in the Company's products, including but not limited to
robotics and certain other custom components, are currently available only from
single sources, and other components are available from only a limited number of
sources. To date the Company has been able to obtain adequate supplies of these
components and maintain inventories of its more critical components, in certain
instances through negotiated contractual relationships or parts allocations from
suppliers. However, the Company's inability in the future to develop alternative
sources or to obtain sufficient single or limited-source components could result
in delays or reductions in product introductions or shipments, which could have
a material adverse effect on the Company's operating results. The Company has
limited ability to avoid or offset future price increases by suppliers of key
components. Accurate production forecasts are required to ensure that adequate
component supplies are available in a timely manner, particularly in those
instances where component suppliers require long lead times. There can be no
assurance that the Company will be able to accurately forecast its production
schedule in the future. If the Company were to experience significant delays,
interruptions or reductions in its supply of key components, or unfavorable
price terms, its business, financial condition and results of operations could
be materially adversely affected.
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Reliance on Third Party Distribution Channels
The Company has limited internal sales personnel. The Company is dependent on
third party manufacturers' representatives, OEMs, VARs and international
distributors (collectively, "Third Party Distributors") for the majority of its
domestic and international sales. Accordingly, the Company is dependent upon the
continued viability and financial stability of these Third Party Distributors.
Because most of the Company's products are used by highly skilled professional
engineers, effective Third Party Distributors must possess sufficient technical,
marketing and sales resources and must devote their resources to sales efforts,
customer education, training and support. Only a limited number of potential
Third Party Distributors meet these criteria. In addition, the Company's
relationship with its Third Party Distributors is usually established through a
formal contractual agreement, which generally may be terminated by either party
without cause upon minimal notice. There can be no assurance that the Company
will be able to attract and retain a sufficient number of qualified Third Party
Distributors to successfully market the Company's products, and the failure to
do so would have a material adverse effect on the Company's business, financial
condition and results of operations.
International Operations
International sales represented approximately 52% of the Company's total revenue
for the fiscal year ended December 25, 1997, and the Company expects that
international sales will continue to account for a significant portion of its
net revenue in future periods. International sales are subject to inherent
risks, including unexpected changes in regulatory requirements, tariffs and
taxes, difficulties in staffing and managing foreign operations, longer payment
cycles, greater difficulty in accounts receivable collection, compliance with
any applicable export licensing requirements and other trade barriers, as well
as political and economic instability. The European Community and European Free
Trade Association have established certain electronic emission and product
safety requirements ("CE"). Certain of the Company's new products have not yet
met these requirements. Failure to obtain either a CE mark or a waiver for any
products may prevent the Company from marketing such products in Europe.
Moreover, gains and losses on the conversion to U.S. Dollars of receivables and
payables arising from international operations may contribute to fluctuations in
the Company's results of operations. In addition, if for any reason exchange or
price controls or other restrictions on their currencies were imposed, the
Company's business, financial condition and results of operations could be
adversely affected. Moreover, currency exchange fluctuations in countries in
which the Company has wholly owned subsidiaries may have a material adverse
effect on the Company's investment in those subsidiaries.
Protection of Intellectual Property
Refer to the section captioned "Patents, Copyrights, Trademarks and Licenses"
above.
Management of Growth
The Company plans to continue to expand its product lines, focus increased
efforts on marketing and distribution and pursue strategic acquisitions and
relationships. The Company's growth plans will present management, competitive
and other challenges to the Company's executive management and employees. There
can be no assurance that the Company will be able to achieve its planned
expansion goals or manage its growth effectively. The Company's failure to
manage growth effectively could have a material adverse effect on its business,
financial condition and results of operations.
Future Acquisitions
The Company may in the future pursue acquisition of complementary technologies,
product lines or businesses. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt and amortization expenses related to goodwill and intangible
assets that could adversely affect the Company's profitability. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations and products of the acquired company, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. In the event that such
an acquisition does occur, there can be no assurance as to its effect on the
Company's business or operating results.
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Dependence on Key Personnel
Refer to the section captioned "Employees" above.
Potential Volatility of Stock Price
There has been significant volatility in the market price of securities of
technology companies. The Company believes factors such as announcements of new
products by the Company or its competitors and quarterly variations in financial
results could cause the market price of the Company's Common Stock to fluctuate
substantially. In addition, the stock market has experienced volatility that has
particularly affected the market prices for many technology companies' stock and
that often has been unrelated to the operating performance of such companies.
These market fluctuations may continue in the future and may adversely affect
the price of the Company's Common Stock.
Item 2. Properties
In May 1997, The Company completed the sale of the land and building comprising
its Redmond, Washington corporate headquarters and is currently leasing the
96,000 square foot building back on a 10 year lease-back agreement with an
option to renew the lease for an additional 10 years. See Note 6 of "Notes to
Consolidated Financial Statements". In addition, approximately 15,000 square
feet is leased at four foreign sales and service locations.
Item 3. Legal Proceedings
Nothing to report.
Item 4. Submission of Matters to a Vote of Stockholders
No matters were submitted for a vote of stockholders of the Company during the
fourth quarter of the fiscal year ended December 25, 1997.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The following table shows, for the periods indicated, the market sales price
range for the Company's common stock as reported by the Nasdaq National Market
tier of The Nasdaq Stock Market (Nasdaq symbol is DAIO).
Period High Low
------ ---- ---
1997 Fourth Quarter $8.00 $6.13
Third Quarter 7.63 4.63
Second Quarter 6.50 4.50
First Quarter 5.50 4.38
1996 Fourth Quarter $5.63 $4.00
Third Quarter 6.00 4.38
Second Quarter 6.88 5.13
First Quarter 7.75 5.38
The approximate number of shareholders of record and approximate number of
beneficial shareholders of record at March 2, 1998 was 927 and 4100
respectively.
Except for a special cash dividend of $4.15 per share paid on March 8, 1989, the
Company has not paid cash dividends on its common stock and does not anticipate
paying regular cash dividends in the foreseeable future. The Company's U.S. line
of credit agreement restricts the payment of cash dividends through a
requirement for minimum levels of tangible net worth.
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Item 6. Selected Five-Year Financial Data
<TABLE>
<CAPTION>
Year Ended
- -----------------------------------------------------------------------------------------------------------------------------
Dec. 25, Dec. 26, Dec. 28, Dec. 29, Dec. 30,
(in thousands, except employee and per share data) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For The Year:
Net sales $46,284 $48,860 $57,496 $53,456 $55,147
Gross margin 23,536 22,926 30,110 27,772 25,801
Research and development 7,807 8,121 6,581 6,282 6,600
Selling, general and administrative 13,924 14,618 15,719 15,627 22,369
Provision for business restructuring (1) 6,120
Operating income (loss) 1,805 187 7,810 5,863 (9,288)
Non-operating income (expense) 2,757 (59) 125 (134) (2,218)
Income (loss) from continuing operations before income
taxes and cumulative effect of accounting change 4,562 128 7,935 5,729 (11,506)
Income tax (expense) benefit (176) (121) (892) (975) 700
Income (loss) from continuing operations before
cumulative effect of accounting change 4,386 7 7,043 4,754 (10,806)
Income (loss) from discontinued operations (2) 7,114 (1,108) (2,282) (2,028) (851)
Cumulative effect of accounting change (3) 400
Net income (loss) 11,500 ($1,101) $4,761 $2,726 ($11,257)
- -----------------------------------------------------------------------------------------------------------------------------
At Year-end:
Working capital $33,226 $10,054 $12,005 $10,038 $3,582
Total assets $57,736 $39,319 $44,776 $43,487 $43,025
Long-term debt $1,500 $1,500 $1,500 $1,500
Total debt $2,000 $1,605 $1,617 $1,940 $3,867
Stockholders' equity $34,614 $22,559 $25,929 $24,343 $21,183
Number of employees from continuing operations 328 332 349 345 414
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock Data (4):
Basic earnings per share:
From continuing operations $0.63 $0.00 $0.94 $0.65 ($1.45)
Net income (loss) $1.66 ($0.16) $0.64 $0.37 ($1.57)
Diluted earnings per share:
From continuing operations $0.62 $0.00 $0.89 $0.64 ($1.45)
Net income (loss) $1.62 ($0.16) $0.60 $0.37 ($1.57)
Book value per share at year end $4.92 $3.33 $3.66 $3.28 $2.92
Shares outstanding at year end 7,039 6,778 7,084 7,432 7,250
Weighted average shares outstanding 6,909 6,857 7,515 7,354 7,170
Weighted average and potential shares outstanding 7,087 7,035 7,879 7,420 7,170
- -----------------------------------------------------------------------------------------------------------------------------
Key Ratios:
Current ratio 2.7 1.7 1.7 1.6 1.2
Gross margin to sales 50.9% 46.9% 52.4% 52.0% 46.8%
Operating income (loss) to sales 3.9% 0.4% 13.6% 11.0% (16.8%)
Income (loss) from continuing operations to sales 9.5% 0.0% 12.2% 8.9% (19.6%)
Return on average stockholders' equity (5) 16.8% 0.0% 26.9% 21.4% (36.4%)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes:
(1) For further discussion, see Note 3 of "Notes to Consolidated Financial
Statements."
(2) For further discussion, see Note 2 of "Notes to Consolidated Financial
Statements."
(3) Cumulative effect of a change in accounting for income taxes to SFAS 109.
(4) All amounts restated to comply with SFAS 128, Earnings Per Share. See Note
12 of "Notes to Consolidated Financial Statements."
(5) Computed based on income (loss) from continuing operations before
cumulative effect of accounting change.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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, product development and introduction
plans, the Company's expectations for growth, estimates of future revenue,
expenses, profit, cash flow, balance sheet items, sell-through or backlog,
forecasts of demand or market trends for the Company's 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 product development or
production difficulties or delays due to supply constraints, technical problems
or other factors; technological changes; the effect of global, national an
regional economic conditions; changes in operating system platforms of
preference; the impact of competitive products and pricing; 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 this report, and other risks identified from time to
time in the Company's filings with the Securities and Exchange Commission, press
releases and other communications. 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.
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 year's figures have been reclassified for
comparability.
NET SALES
<TABLE>
<CAPTION>
(in thousands) Years Ended Years Ended
-------------------------------------- --------------------------------------
Net sales 1997 1996 % Change 1996 1995 % Change
- -------------------------------------------- ------------- ------------ ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Non-automated programming systems $30,498 $33,767 (9.7%) $33,767 $37,891 (10.9%)
Automated programming systems 15,786 15,093 4.6% 15,093 19,605 (23.0%)
------------- ------------ ----------- ------------- ------------- ----------
Total Programming Systems Division $46,284 $48,860 (5.3%) $48,860 $57,496 (15.0%)
<CAPTION>
Years Ended Years Ended
-------------------------------------- --------------------------------------
Net sales by location 1997 1996 % Change 1996 1995 % Change
- -------------------------------------------- ------------- ------------ ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States $22,290 $23,554 (5.4%) $23,554 $31,125 (24.3%)
% of total 48.2% 48.2% 48.2% 54.1%
International $23,994 $25,306 (5.2%) $25,306 $26,371 (4.0%)
% of total 51.8% 51.8% 51.8% 45.9%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 vs. 1996
The Company experienced an overall decline in sales and orders for the Company's
Programming Systems Division products during 1997. Orders declined approximately
4.7% to $48.4 million in 1997, compared with $50.8 million in 1996.
Page 19
<PAGE>
Sales for the Programming Systems Division are expected to continue to
experience pressure due primarily to delays in new product introductions by the
Company. The Company believes that increased competition in the areas where new
Data I/O product introductions are not scheduled to occur until 1998, or where
these new products will not be available in production volumes until 1998, or
where products are nearing the end of their product life cycles, adversely
affected sales in 1997 and will continue to do so. In addition, the declines in
non-automated programming systems also reflect the continuing market shift away
from the Company's traditional line of higher-price IC programmers for the
engineering market, toward lower-price programmers. As a result, the Company
believes that until its new products are released and shipping in production
quantities, overall demand for its programming systems will likely be flat or
may decrease in 1998. 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 currently has development projects underway for
new programmer and automation technology designed to address the needs perceived
by the Company to be created by these technology changes. In addition, the
Company released four new low-cost programming products late in the second
quarter, consisting of the ChipWriter(TM), the ChipWriter(TM) Portable, the
ChipWriter(TM) Gang and the LabSite(TM) Programming System. There can be no
assurance that the Company will complete development of planned new products as
scheduled or that new products will generate significant sales. See "Risk
Factors" in Item 1 of Part I above.
During 1997 international sales were slightly lower as compared to 1996. Sales
decreased in Europe, Canada and Japan, but increased slightly in other parts of
the world. The foreign currency exchange rate changes reduced sales by
approximately $1.1 million during 1997 compared to 1996. These declines were due
primarily to exchange rate changes for the German Mark and the Japanese Yen.
When the U.S. Dollar is stronger, sales of the Company's products in local
currency translate into fewer U.S. Dollars. However, offsetting the revenue
translation impact is the translation of local currency costs and expenses.
1996 vs. 1995
The decline in overall automated handling systems sales and orders in 1996 was
primarily due to a slowdown in capital spending by electronics manufacturing
companies. However, the Company believes that increased competition in areas
where new Data I/O product introductions were not scheduled to occur until
future periods, or where products are nearing the end of their life cycles, also
had a negative affect on sales in 1996.
The Company believes the declines in non-automated programming systems also
reflect the continuing market shift away from the Company's traditional line of
higher-priced IC programmers for the engineering market, toward lower-priced
programmers. This shift has been caused in part by advances in semiconductor
processing technology that have lowered the barriers to entry in the programmer
business over the last several years. This has caused new market entrants to
appear regularly, each trying to carve out a niche. New entrants cause downward
price pressure, and each cycle of new competitors lowers the acceptable price of
a conventional IC programmer in the customer's view. In addition, the Company
believes that technological improvements in personal computers and design
software tools have caused a shift in the demand for IC design tools by
engineering design teams away from hardware tools in favor of increased software
design tools. These industry changes had, and are continuing to have, an adverse
effect on the Company's IC programmer sales and gross margins, especially
because the Company's products historically have been oriented toward hardware
tools and, within hardware tools, toward higher-priced IC programmers.
The Company experienced a small decrease in international sales during 1996 due
to lower sales in Europe due to the slowdown in capital spending by electronics
manufacturing companies and the negative impact of foreign currency exchange
rate changes, which were partially offset by increased sales in Asia. The
foreign currency exchange rate changes reduced sales by approximately $1.0
million during 1996 compared to 1995. These declines were due primarily to rate
changes for the German Mark and the Japanese Yen. When the U.S. Dollar is
stronger, sales of the Company's products in local currency translate into fewer
U.S. Dollars. However, offsetting the revenue translation impact is the
translation of local currency costs and expenses.
Page 20
<PAGE>
GROSS MARGIN
<TABLE>
<CAPTION>
(in thousands) 1997 Change 1996 Change 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross margin $23,536 2.7% $22,926 (23.9%) $30,110
Percentage of net sales 50.9% 46.9% 52.4%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 vs. 1996
The gross margin increased in Dollars and as a percentage of sales during 1997
compared to 1996. The increase in gross margin is due primarily to less
inventory reserves recorded in 1997, offset by lower volumes and lower product
margins in 1997. The relatively high fixed component of cost of goods sold
causes any shift in total volume to have a significant impact on gross margin.
The shift in mix of product revenues from higher-priced and higher-margin
non-automated programming systems to the lower-priced alternatives has lowered
the overall product gross margins. Also contributing to the decline of gross
margin was the strengthening of the U.S. Dollar in relation to the Japanese Yen
and the German Mark, in which approximately 21% of the Company's 1997 sales were
denominated.
1996 vs. 1995
The gross margin decreased in Dollars and as a percentage of sales during 1996
compared to 1995. The decrease in gross margin was due primarily to lower
volumes, lower product margins and increases in inventory reserves in 1996. The
shift in mix of product revenues from higher-priced and higher-margin
non-automated programming systems to the lower-priced alternatives also lowered
the overall product gross margins. Also contributing to the decline of gross
margin was the strengthening of the U.S. Dollar in relation to the Japanese Yen
and the German Mark, in which approximately 18% of the Company's sales were
denominated.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
(in thousands) 1997 Change 1996 Change 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Research and development $7,807 (3.9%) $8,121 23.4% $6,581
Percentage of net sales 16.9% 16.6% 11.5%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 vs. 1996
Research and development spending decreased in amount but increased as a
percentage of sales in 1997 compared to 1996. The spending decrease is primarily
due to reduced spending on materials related to development projects and open
job positions. The increase as a percentage of sales is due to lower sales
volume. The Company expects to continue its significant investment in research
and development, especially for projects related to planned 1998 product
introductions.
The Company believes it is essential to invest in research and development to
support its existing products and to create new products as markets develop and
technologies change. The Company is focusing its research and development
efforts in its strategic growth markets, namely new programming technology and
automated handling systems for the manufacturing environment. The Company
expects to continue this focus in the future and believes that it is essential
to invest in research and development to support its existing products and to
create new products as markets develop and technologies change.
1996 vs. 1995
Research spending increased both in Dollars and as a percentage of sales. The
increase was primarily due to additional product development projects, including
those related to products introduced in 1997, and additional engineering staff
compensation costs.
Page 21
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
(in thousands) 1997 Change 1996 Change 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selling, general
and administrative $13,924 (4.8%) $14,618 (7.0%) $15,719
Percentage of net sales 30.1% 29.9% 27.3%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 vs. 1996
The decrease in selling, general and administrative expenses during 1997 as
compared to 1996 is primarily due to decreased costs related to the 1996 closure
of the UK office, decreased travel costs and decreased Dollar costs in the
Company's foreign offices due to the strengthened US Dollar, offset by increased
commissions due to an increased number of sales representatives in the US and
Canada.
1996 vs. 1995
The decrease in selling, general and administrative expenditures during 1996
relative to 1995 was primarily due to decreased commissions, incentive
compensation and decreased expenses in the Company's foreign offices, due in
part to currency rate changes.
INTEREST
<TABLE>
<CAPTION>
(in thousands) 1997 Change 1996 Change 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $760 281.9% $199 (50.0%) $398
Interest expense $219 (14.5%) $256 (6.2%) $273
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 vs. 1996
Interest income increased during 1997 compared with 1996, primarily due to an
increase in the average level of funds available for investment primarily due to
the sale of the Company's headquarters property in May 1997 (see "Sale of
Headquarters Property") and a decrease in the average investment interest rates.
1996 vs. 1995
Interest income decreased during 1996 compared with 1995, primarily due to a
decrease in the average level of funds available for investment and a decrease
in the average investment interest rates.
INCOME TAXES
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense $176 $121 $892
Effective tax rate 3.9% 94.5% 11.2%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 vs. 1996
The effective income tax rate for 1997 differed from the expected provision at
the statutory 35% tax rate primarily due to the reversal of tax valuation
reserves. The adjustments to the valuation reserves were due to an ability to
record a benefit for the offset of reversing temporary differences against 1997
taxable income. See Note 14 of "Notes to Consolidated Financial Statements."
The Company had valuation allowances of $164,000 at December 25, 1997 compared
to $3,238,000 at December 26, 1996 and $2,292,000 at December 28, 1995. The
valuation reserves may increase should the Company incur future losses or
reverse as the Company recognizes income.
Page 22
<PAGE>
1996 vs. 1995
The effective income tax rate for 1996 differed from the expected provision at
the statutory 34% tax rate primarily due to the addition of tax valuation
reserves. The increase in valuation reserves was due to an inability to record a
benefit for foreign tax credit carryforwards and alternative minimum tax credit
carryforwards as well as the reduced ability to offset reversing temporary
differences against 1995 taxable income after carrying back the 1996 tax loss.
See Note 14 of "Notes to Consolidated Financial Statements."
SALE OF HEADQUARTERS PROPERTY
On May 13, 1997 the Company announced the completion of the sale of land and
building comprising its Redmond, Wash., corporate headquarters and excess land
that had been held for resale for approximately $13.8 million, less net
transaction related expenses and reimbursements of approximately $400,000. The
sale includes a 10 year lease-back of the building to the Company, with an
option to renew the lease for an additional 10 years. The Company realized
approximately $12 million in cash after payment of transaction fees and taxes.
The sale resulted in an overall pre-tax gain of approximately $5.6 million, of
which approximately $2.3 million related to the excess land was recognized in
the second quarter of 1997. The remainder will be amortized over the life of the
lease.
INCOME AND EARNINGS PER SHARE
(in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
Income from continuing operations $4,386 $7 $7,043
Percentage of net sales 9.5% 0.0% 12.2%
Earnings per share from continuing operations
Basic Earnings per share $0.63 $0.00 $0.94
Diluted earnings per share $0.62 $0.00 $0.89
- --------------------------------------------------------------------------------
1997 vs. 1996
The increase in income and earnings per share from continuing operations in 1997
compared with 1996 is primarily due to the sale of the Company's headquarters
property (see "Sale of Headquarters Property"), increased gross margins and
lower operating expenses, offset by a decreased sales volume.
1996 vs. 1995
The decrease in income and earnings per share from continuing operations in 1996
compared with 1995 is primarily due to a combination of decreased sales volume,
a lower gross margin percentage, increased spending on new development projects
and recording of deferred tax valuation reserves.
Page 23
<PAGE>
DISCONTINUED OPERATIONS
Semiconductor Equipment Division
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc., for $15.5 million,
consisting of $12 million in cash, $2 million in common stock of General
Scanning Inc. and $1.5 million in assumed liabilities. The assets of Reel-Tech,
Inc. were purchased by the Company in August 1995. Operating results of the
Semiconductor Equipment Division and the gain on the sale of this segment are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net Sales (1) $7,640 $3,744 $625
======== ======== ========
Income (loss) from operations before income taxes 926 225 (890)
Income tax expense (109)
-------- -------- --------
Income (loss) from operations 926 116 (890)
-------- -------- --------
Gain on disposal before income taxes 10,422
Income tax expense (2,093)
-------- -------- --------
Gain on disposal 8,329
-------- -------- --------
Total income (loss) on discontinued segment $9,255 $116 ($890)
======== ======== ========
</TABLE>
(1) Excludes inter-segment sales to the Programming Systems Division of
$1,876,000 and $322,000 in 1996 and 1995, respectively.
Synario(R) Design Automation Division
Also in November 1997, the Company entered into a licensing agreement and an
agreement to sell certain assets of its Synario Design Automation Division.
Under this licensing agreement, the Company's Electronic Design Automation (EDA)
products are being integrated and sold with the EDA product line of MINC
Incorporated. This transaction discontinues the Synario Design Automation
Division operations of the Company. However, the Company is entitled to receive
and may realize certain licensing revenues related to its ABEL and ECS products
through December 31, 1999. Also, the Company negotiated a settlement to the OEM
Agreement with Synopsys Inc., which is reflected in the loss on disposal.
Operating results and the loss on the disposal of this segment are as follows:
(in thousands) 1997 1996 1995
------- ------- -------
Net Sales (1) $7,172 $7,819 $7,910
======= ======= =======
Loss from operations before income taxes (2,088) (1,224) (1,392)
Income tax benefit 730
------- ------- -------
Loss from operations (1,358) (1,224) (1,392)
------- ------- -------
Loss on disposal before income taxes (1,205)
Income tax benefit 422
------- ------- -------
Loss on disposal (783)
------- ------- -------
Total loss on discontinued segment (2,141) (1,224) (1,392)
======= ======= =======
(1) Includes net sales of $851,000 for retained licensing rights recognized
after the disposition in 1997.
INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
Historically, the Company has been able to offset the impact of inflation
through efficiency increases and price adjustments. Increasing price
competition, especially in IC programmers, is currently diminishing and may
continue to diminish the Company's ability to offset the impacts of inflation in
the future.
Sales and expenses incurred by foreign subsidiaries are denominated in the
subsidiary's local currency and translated into U.S. Dollar amounts at average
rates of exchange during the year. To date the foreign currency rate changes
have not significantly impacted the Company's profitability. This is because
approximately 25% of the Company's sales are made by foreign subsidiaries and
independent currency fluctuations tend to minimize the translation effect of any
individual currency exchange fluctuations, and the
Page 24
<PAGE>
effect of individual rate changes on sales and expenses tend to offset each
other. Additionally, the Company hedges its foreign currency exposure on sales
of inventory and certain loans to its foreign subsidiaries through the use of
foreign exchange contracts. See Note 1 of "Notes to Consolidated Financial
Statements."
Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
(in thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
Working capital $33,226 $23,712 $10,054 ($1,951) $12,005
Total debt $2,000 $395 $1,605 ($12) $1,617
- --------------------------------------------------------------------------------
Working capital increased significantly during 1997 primarily due to funds
received from the sale of the Company's Semiconductor Equipment Division (see
"Discontinued Operations") and the sale of the corporate headquarters property
(see "Sale of Headquarters Property").
The Company's trade accounts receivable related to continuing operations
decreased by approximately $1.5 million during 1997 primarily due to more
successful collections toward year-end and decreased sales volume in 1997. The
Company increased its inventory level by $618,000 during 1997, primarily due to
the ProMaster 970 beta units in inventory at year-end 1997. Other current assets
increased $3.3 million in 1997 primarily due to accounts receivable related to
the Reel-Tech and Synario Design Automation Divisions which were not sold as a
part of the disposals of these divisions in November 1997.
Accounts payable and accrued expenses increased by $4.2 million primarily due to
accrual of additional contingent payments related to the 1995 acquisition of
Reel-Tech, accrued incentive compensation, income taxes payable, and accrued
employee separation and relocation costs and remaining accounts payable and
accruals related to the disposed business segments.
As of December 25, 1997, the Company had total debt of $2.0 million or
approximately 6% of its $34.6 million in equity. Of this current debt, $1.5
million was for the balance of the purchase price of the CAD/CAM Group that was
paid in January 1998 and the balance was borrowings on its foreign line of
credit. At December 25, 1997, the Company also had an unused $8.0 million U.S.
line of credit maturing in May 1998 under which borrowings would incur interest
at the bank's published prime rate or the LIBOR rate plus 110 basis points.
The foreign line of credit of $1.3 million matures in August 1998. Historically,
this debt and the U.S. line of credit, have been structured as short-term and
have been renewed on their maturity dates. The Company expects to be able to
renew these lines of credit on maturity under substantially the same terms as
those presently in place. No assurances can be made, however, in regard to the
renewal of these agreements.
The Company estimates that capital expenditures for property, plant and
equipment during 1998 will be approximately $2.1 million. Such expenditures are
expected to be funded from internally generated funds and, if necessary,
borrowings from the Company's existing credit lines. Although the Company fully
expects that such expenditures will be made, it has commitments for only a small
portion of these amounts.
At December 25, 1997, the Company's material short-term unused sources of
liquidity consisted of approximately $33.0 million in cash, cash equivalents and
marketable securities and available borrowings of $8.0 million under its U.S.
line of credit and approximately $769,000 under its foreign line 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.
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,
Page 25
<PAGE>
through block purchases or in privately negotiated transactions. Purchases may
commence or be discontinued at any time. As of December 25, 1997, the Company
had repurchased 1,016,200 shares 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 cost is estimated at approximately $1 million, which
includes approximately $200,000 for new hardware that will be capitalized and
approximately $800,000 that will be expensed as incurred. As of December 25,
1997, the Company had incurred and expensed approximately $300,000 related to
this project.
The Company believes that the project should be completed by June 30, 1998,
which is prior to any anticipated impact on its operating systems. 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 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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
See pages 27 through 44.
Page 26
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Data I/O Corporation
We have audited the accompanying consolidated balance sheets of Data I/O
Corporation as of December 25, 1997, and December 26, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 25, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Data
I/O Corporation at December 25, 1997, and December 26, 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 25, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Seattle, Washington /s/ ERNST & YOUNG LLP
February 10, 1998 ERNST & YOUNG LLP
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
The Management of Data I/O Corporation is responsible for the preparation and
integrity of the Company's consolidated financial statements and related
information that appears in this Annual Report on Form 10-K. Management believes
that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of its operations in conformity with generally accepted accounting
principles. Management has included in the Company's financial statements
amounts that are based on estimates and judgments, which it believes are
reasonable under the circumstances.
The Company maintains a system of internal control which is designed to
safeguard the Company's assets and ensure that transactions are recorded in
accordance with Company policies.
The Board of Directors of the Company has an Audit Committee composed of
non-management Directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing and financial reporting matters.
/s/ JAMES J. DAVID /s/ JOEL S. HATLEN
JAMES J. DAVID JOEL S. HATLEN
President Vice President Finance
Chief Financial Officer
Secretary and Treasurer
Page 27
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
==============================================================================================
Dec. 25, Dec. 26, Dec. 28,
FOR THE YEARS ENDED 1997 1996 1995
- ----------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net sales $46,284 $48,860 $57,496
Cost of goods sold 22,748 25,934 27,386
-------- -------- --------
Gross margin 23,536 22,926 30,110
Operating expenses:
Research and development 7,807 8,121 6,581
Selling, general and administrative 13,924 14,618 15,719
-------- -------- --------
Total operating expenses 21,731 22,739 22,300
-------- -------- --------
Operating income 1,805 187 7,810
Non-operating income (expense):
Interest income 760 199 398
Interest expense (219) (256) (273)
Foreign currency exchange (51) (2)
Net gain on dispositions 2,267
-------- -------- --------
Total non-operating income (expense) 2,757 (59) 125
-------- -------- --------
Income from continuing operations
before income taxes 4,562 128 7,935
Income tax expense (176) (121) (892)
-------- -------- --------
Income from continuing operations 4,386 7 7,043
Discontinued operations net of income taxes (Note 2):
Loss from operations, net of income tax benefit (432) (1,108) (2,282)
Gain on disposals, net of income taxes 7,546
-------- -------- --------
Income (loss) from discontinued operations 7,114 (1,108) (2,282)
-------- -------- --------
Net income (loss) $11,500 ($1,101) $4,761
======== ======== ========
Basic earnings (loss) per share:
From continuing operations $0.63 $0.00 $0.94
From discontinued operations 1.03 (0.16) (0.30)
-------- -------- --------
Total basic earnings per share $1.66 $(0.16) $0.64
======== ======== ========
Diluted earnings (loss) per share:
From continuing operations $0.62 $0.00 $0.89
From discontinued operations 1.00 (0.16) (0.29)
-------- -------- --------
Total diluted earnings per share $1.62 $(0.16) $0.60
======== ======== ========
Weighted average shares outstanding 6,909 6,857 7,515
======== ======== ========
Weighted average and potential shares outstanding 7,087 7,035 7,879
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
Page 28
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Dec. 25, Dec. 26,
1997 1996
- -------------------------------------------------------------------------------------
(in thousands, except share data)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $8,113 $4,048
Marketable securities 24,855
Trade accounts receivable, less allowance for
doubtful accounts of $394 and $362 5,678 7,168
Inventories 8,158 7,540
Recoverable income taxes 474
Deferred income taxes 1,990 762
Other current assets 3,910 630
Current assets from discontinued operations 3,715
-------- --------
TOTAL CURRENT ASSETS 52,704 24,337
Land held for sale 2,437
Property, plant and equipment - net 3,389 8,866
Other assets 532 1,016
Deferred income taxes 1,111
Other assets from discontinued operations 2,663
-------- --------
TOTAL ASSETS $57,736 $39,319
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,760 $1,606
Accrued compensation 2,958 2,220
Deferred revenue 4,795 4,509
Other accrued liabilities 3,117 2,095
Accrued costs of business restructuring 312
Income taxes payable 2,848 777
Notes payable and current maturities of long-term debt 2,000 105
Current liabilities from discontinued operations 2,659
-------- --------
TOTAL CURRENT LIABILITIES 19,478 14,283
Long-term debt 1,500
Long-term other payables 561 503
Deferred gain on sale of property 3,083
Deferred income taxes 474
-------- --------
TOTAL LIABILITIES 23,122 16,760
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, 7,038,786
and 6,777,720 shares 16,412 15,247
Retained earnings 18,345 6,845
Unrealized loss on marketable securities (732)
Cumulative translation adjustment 589 467
-------- --------
TOTAL STOCKHOLDERS' EQUITY 34,614 22,559
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $57,736 $39,319
======== ========
</TABLE>
See notes to consolidated financial statements.
Page 29
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Dec. 25, Dec. 26, Dec. 28,
For the years ended 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $4,386 $7 $7,043
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 1,740 2,968 3,503
Net gain on dispositions (2,267)
Deferred income taxes (459) (129) 120
Deferred revenue 286 (60) 150
Amortization of deferred gain on sale (213)
Net change in:
Trade accounts receivable 1,547 3,993 (2,378)
Inventories (618) 262 (960)
Other current assets (3,277) (22) 762
Business restructure (312) (653) (855)
Accounts payable and accrued liabilities 4,185 (1,481) (434)
-------- -------- --------
Cash provided by operating activities of continuing operations 4,998 4,885 6,951
Cash used by operating activities of discontinued operations (3,839) (761) (843)
-------- -------- --------
Net cash provided by operating activities 1,159 4,124 6,108
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,197) (1,819) (2,369)
Net proceeds on sale of property 13,430
Additions to other assets (14) (104)
Purchases of marketable securities (45,687)
Proceeds from sales of marketable securities 20,100
Proceeds from sale of discontinued operations 15,525
Net investing activities of discontinued operations (492) (2,340)
-------- -------- --------
Cash provided by (used in) investing activities 2,157 (2,311) (4,813)
FINANCING ACTIVITIES:
Additions to (repayment of) notes payable 412 (9) (351)
Sale of common stock 344 321 333
Proceeds from exercise of stock options 824 426 585
Repurchase of common stock (3) (3,028) (4,119)
Net financing activities of discontinued operations (854) (570)
-------- -------- --------
Cash provided by (used in) financing activities 723 (2,290) (4,122)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 4,039 (477) (2,827)
Effects of exchange rate changes on cash 26 29 44
Cash and cash equivalents at beginning of year 4,048 4,496 7,279
======== ======== ========
Cash and cash equivalents at end of year $8,113 $4,048 $4,496
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $152 $120 $121
Income taxes $1,748 $564 $923
</TABLE>
See notes to consolidated financial statements.
Page 30
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Common Stock Loss on Cumulative
---------------------------- Retained Marketable Translation
Shares Amount Earnings Securities Adjustment
----------- ----------- ----------- ----------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at December 29, 1994 7,431,901 $20,729 $3,185 $429
Net income 4,761
Stock options exercised 118,125 585
Issuance of stock through
Employee Stock Purchase Plan 96,199 333
Purchase of Common Stock (562,400) (4,119)
Cumulative translation adjustment 26
----------- ----------- ----------- ----------- -----------
Balance at December 28, 1995 7,083,825 17,528 7,946 455
Net loss (1,101)
Stock options exercised 81,500 426
Issuance of stock through
Employee Stock Purchase Plan 65,695 321
Purchase of Common Stock (453,300) (3,028)
Cumulative translation adjustment 12
----------- ----------- ----------- ----------- -----------
Balance at December 26, 1996 6,777,720 15,247 6,845 467
Net income 11,500
Stock options exercised 168,125 735
Issuance of stock through Directors Fee Plan 13,508 89
Issuance of stock through
Employee Stock Purchase Plan 79,933 344
Purchase of Common Stock (500) (3)
Unrealized loss on marketable
securities ($732)
Cumulative translation adjustment 122
----------- ----------- ----------- ----------- -----------
Balance at December 25, 1997 7,038,786 $16,412 $18,345 ($732) $589
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 31
<PAGE>
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Data I/O Corporation (the "Company") manufactures hardware products for users of
programmable integrated circuits. The Company's principal customers use the
Company's programming systems to design and manufacture electronic equipment for
industrial, commercial and military applications. Customers for the Company's
programming system products are located around the world, primarily in the
United States, Europe and the Far East. All of the Company's manufacturing
operations are located in the United States. During 1997 the Company disposed of
its Semiconductor Equipment and Synario Design Automation Divisions, which
removed Electronic Design Software (EDA) software products and semiconductor
equipment products from the Company's product offerings. See Note 2 -
Discontinued Operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Data I/O
Corporation and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reporting Period
The Company reports on a fifty-two, fifty-three week basis. Results of
operations for 1997, 1996 and 1995 are for fifty-two week periods.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of the Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation. Accordingly, the Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation cost for stock options is measured as the excess,
if any, of the fair value of the Company's Common Stock at the date of the grant
over the stock option price.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenues, costs and expenses are
translated at average rates of exchange prevailing during the year. Translation
adjustments resulting from this process are charged or credited to stockholders'
equity, net of taxes. Realized and unrealized gains and losses on foreign
currency transactions are included in non-operating expense as Foreign Currency
Exchange.
In an effort to minimize the effect of exchange rate fluctuations on the results
of its operations, the Company hedges certain portions of its foreign currency
exposure through the use of forward exchange contracts, none of which are
speculative. At December 25, 1997, the Company had approximately $375,000 in
foreign exchange contracts outstanding, with the contract exchange rates being
approximately equal to the market exchange rates. These contract terms range
from 7 to 60 days.
Page 32
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with insignificant
interest rate risk. The Company invests in the highest grade commercial paper
with original maturities of three months or less and conservative money market
funds. Interest earned is reported in non-operating income as interest income.
Marketable Securities
Marketable securities are primarily money market funds and high-grade commercial
paper, all of which are classified as available-for-sale and recorded at fair
value, as defined below. Unrealized holding gains and losses are recorded, net
of any tax effect, as a component of stockholders' equity. Interest earned is
reported in non-operating income as interest income. Marketable securities are
classified in the balance sheet as current and noncurrent based on maturity
dates and the Company's expectation of sales and redemptions in the following
year.
Fair value of Financial Instruments
The carrying value of cash, cash equivalents and marketable securities
approximates fair value because of the short-term maturity of those instruments.
The fair value of the Company's marketable securities is based upon the quoted
market price on the last business day of the fiscal year plus accrued interest,
if any.
Inventories
Inventories are stated at the lower of cost or market with cost being the
currently adjusted standard cost, which approximates cost on a first-in,
first-out basis.
Property, Plant and Equipment
Property, plant and equipment, including leasehold improvements, are stated at
cost and depreciation is calculated over the estimated useful lives of the
related assets or lease terms on the straight-line basis.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment or customer
acceptance, if an acceptance clause is specified in the sales terms. Revenue
from software products licensed to original equipment manufacturers is
recognized when earned per the terms of the contracts. Revenue from the sale of
service and update contracts is recorded as deferred revenue and recognized on a
straight-line basis over the contractual period.
Research and Development
Research and development costs are expensed as incurred. No software development
costs have been capitalized due to immateriality.
Advertising Expense
The Company expenses advertising costs as incurred. Total advertising expenses
related to continuing operations were $1,676,000, $2,052,000, and $1,663,000 in
1997, 1996 and 1995, respectively.
Warranty Expense
The Company warrants its products against defects for periods ranging from
ninety days to one year. The Company provides for the estimated cost which may
be incurred under its product warranties.
Page 33
<PAGE>
Income Taxes
Income tax expense includes U.S., state and foreign income taxes. Certain items
of income and expense are not reported in both the tax returns and financial
statements in the same year. The Company accounts for income taxes under the
liability method. Under the liability method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings
Per Share. SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods presented have been restated to
conform to the SFAS 128 requirements and such effects were not material.
Diversification of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. The Company's cash, cash
equivalents and marketable securities consist of high quality financial
instruments. The Company's trade receivables are geographically dispersed and
include customers in many different industries. Management believes that any
risk of loss is significantly reduced due to the diversity of its end-customers
and geographic sales areas. The Company performs on-going credit evaluations of
its customers' financial condition and requires collateral, such as letters of
credit and bank guarantees, whenever deemed necessary.
Reclassifications
Certain prior years' balances have been reclassified to conform to the current
year presentation.
Recently Issued Accounting Pronouncements
The FASB issued SFAS 130, Reporting Comprehensive Income and SFAS 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS 130
established standards for reporting comprehensive income in annual and interim
financial statements. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
adopt SFAS 130 and 131 in 1998 and does not anticipate any impact on the
Company's consolidated results of operations, financial position or cash flows.
NOTE 2 - DISCONTINUED OPERATIONS
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc., for $15.5 million,
consisting of $12 million in cash, $2 million in stock and $1.5 million in
assumed liabilities. The consolidated financial statements include the results
of operations of Reel-Tech, Inc. since the acquisition of this business on
August 31, 1995. Also in November 1997, the Company entered into a licensing
agreement and an agreement to sell certain assets of its Synario(R) Design
Automation Division. Under this licensing agreement, the Company's Electronic
Design Automation (EDA) products are being integrated and sold with the EDA
product line of MINC Incorporated. This transaction discontinues the Synario
Design Automation Division operations of the Company. However, the Company is
entitled to receive and may realize certain licensing revenues related to its
ABEL and ECS products through December 31, 1999.
Page 34
<PAGE>
The income from operations of these discontinued segments have been accounted
for as discontinued operations, and accordingly, their operations are segregated
in the accompanying statements of operations. Operating results of the
discontinued segments and the gain on the sale of these segments are as follows:
<TABLE>
<CAPTION>
Semiconductor Equipment Division
- --------------------------------
(in thousands) 1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Net sales (1) $7,640 $3,744 $625
=========== ========== ===========
Income (loss) from operations before income taxes 926 225 (890)
Income tax expense (109)
----------- ---------- -----------
Income (loss) from operations 926 116 (890)
----------- ---------- -----------
Gain on disposal before income taxes 10,422
Income tax expense (2,093)
----------- ---------- -----------
Gain on disposal 8,329
----------- ---------- -----------
Total income (loss) from discontinued segment $9,255 $116 ($890)
=========== ========== ===========
</TABLE>
(1) Excludes inter-segment sales to the Programming Systems Division of
$1,876,000 and $322,000 in 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Synario Design Automation Division
- ----------------------------------
(in thousands) 1997 1996 (2) 1995 (2)
----------- ---------- -----------
<S> <C> <C> <C>
Net sales (1) $7,172 $7,819 $7,910
=========== ========== ===========
Loss from operations before income taxes (2,088) (1,224) (1,392)
Income tax benefit 730
----------- ---------- -----------
Loss from operations (1,358) (1,224) (1,392)
----------- ---------- -----------
Loss on disposal before income taxes (1,205)
Income tax benefit 422
----------- ---------- -----------
Loss on disposal (783)
----------- ---------- -----------
Total loss from discontinued segment (2,141) (1,224) (1,392)
=========== ========== ===========
</TABLE>
(1) Includes net sales of $851,000 for retained licensing rights recognized
after the disposition in 1997.
(2) Includes sales and operations of the ABEL product which was previously
reported as part of the Programming Systems Division.
The disposition transactions of these segments were completed prior to December
25, 1997. The Company retained the existing trade accounts receivable and
certain liabilities related to the disposed segments, which are classified as
other current assets and other current liabilities in the Consolidated Balance
Sheet at December 25, 1997. The components of assets and liabilities of these
discontinued segments included in the Consolidated Balance Sheet at December 26,
1996, are as follows:
(in thousands)
Trade accounts receivable $2,628
Inventory 720
Other current assets 367
------------
Total current assets 3,715
------------
Properties, plant and equipment, net 564
Other assets 2,099
------------
Total assets 6,378
------------
Accounts payable and accrued expenses 1,674
Deferred revenue 985
------------
Total current liabilities 2,659
------------
Net assets of discontinued operations $3,719
============
Page 35
<PAGE>
NOTE 3 - PROVISION FOR BUSINESS RESTRUCTURING
During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1
million related to the restructure of its sales and distribution channels,
downsizing its operations to a level consistent with anticipated lower sales and
product margins, and consolidation and outsourcing of certain manufacturing
processes. Of the total $6.1 million restructuring charge, the Company paid
approximately $1.5 million in cash in 1993, $2.1 million in 1994, $855,000 in
1995, $653,000 in 1996 and $312,000 in 1997. In addition, since inception of the
restructuring, the Company recorded approximately $800,000 in asset write-downs
related to its restructuring.
NOTE 4 - MARKETABLE SECURITIES
Marketable securities as of December 25, 1997 consist of the following (in
thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Corporate bonds $2,774 $2,774
Medium- and short-term notes 2,934 2,934
Euro-dollar bonds 16,629 16,629
Taxable auction securities 500 500
General Scanning Inc. common stock 2,000 ($732) 1,268
Cash held in escrow 750 750
------------ ------------- ------------ --------------
$25,587 ($732) $24,855
============ ============= ============ ==============
</TABLE>
Certain of the bonds, notes and securities held have maturity dates beyond one
year. However, the Company does not anticipate holding these investments for
more than one year and have therefore classified them all as short-term,
available-for-sale investments as of December 25, 1997.
The Company received 75,118 shares of General Scanning Inc. common stock as
consideration in the sale of the assets of the Company's Semiconductor Equipment
Division in November 1997 (see Note 2 - Discontinued Operations). As of December
25, 1997, the market value of the General Scanning Inc. common stock had
decreased. This unrealized loss has been reported as a separate component of
shareholders equity, net of tax. Also in connection with the Company's sale of
the assets of its Semiconductor Equipment Division, $750,000 of the proceeds
were placed in escrow for a period of one year after the transaction date.
NOTE 5 - INVENTORIES
Net inventories consisted of the following components (in thousands):
Dec. 25, Dec. 26,
1997 1996
------------------ -----------------
Raw material $2,965 $3,523
Work-in-process 2,470 2,184
Finished goods 2,723 1,833
------------------
=================
$8,158 $7,540
================== =================
Page 36
<PAGE>
NOTE 6 - SALE OF LAND
The Company announced on May 13, 1997, the sale of the land and building
comprising its Redmond, Washington, corporate headquarters for $13.8 million,
less net transaction related expenses and reimbursements of approximately
$400,000. The sale includes a 10 year lease-back of the building to the Company,
with an option to renew the lease for an additional 10 years.
The Company realized $12 million in cash after payment of transaction fees and
taxes. The sale represents an overall pre-tax gain to the Company of $5.6
million. Of this amount, $2.3 million was recognized in 1997 with the remainder
to be amortized over the life of the lease.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Dec. 25, Dec. 26,
1997 1996
--------------- ---------------
Land $ 910
Building and improvements $ 83 7,539
Equipment 21,493 20,372
--------------- ---------------
21,576 28,821
Less accumulated depreciation 18,187 19,955
--------------- ===============
Property, plant and equipment - net $3,389 $8,866
=============== ===============
NOTE 8 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
Dec. 25, Dec. 26,
1997 1996
--------------- ---------------
Long-term lease deposits $ 220 $ 234
Investment in product lines 3,749 3,749
--------------- ---------------
3,969 3,983
Less accumulated amortization 3,437 2,967
--------------- ===============
Other assets - net $532 $1,016
=============== ===============
Total amortization recorded for 1997, 1996 and 1995 was $470,000, $475,000 and
$669,000, respectively.
Investment In Product Lines: Quality Automation
On September 25, 1992, the Company exercised options acquired in 1990 to
purchase the assets, technology and rights in the products of Quality Automation
Inc., and Q.A. Engineering, Inc. (both herein combined and referred to as
"Quality Automation" or "QA"). Of the total acquisition cost, approximately $3.8
million of various identifiable intangible assets were reported as Other Assets
in the accompanying balance sheets and are being amortized ratably over the
economic life of the specific assets acquired (three to five years). The net
book value of the assets capitalized in Other Assets related to this acquisition
is $310,000 and $780,000 at December 25, 1997, and December 26, 1996,
respectively.
Page 37
<PAGE>
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable as of December 25, 1997 and December 26, 1996 consisted of
borrowings under a $1.3 million unsecured foreign revolving line of credit
maturing in November 1998 with variable interest rates of 1.8% to 3.5% and
weighted-average interest rates of 2.4% and 1.8% at December 25, 1997 and
December 26, 1996, respectively.
Current maturities of long-term debt and long-term debt as of December 25, 1997
and December 26, 1996 relate to an unsecured note payable for $1.5 million,
which matured and was repaid on January 19, 1998, with variable interest rates
based on one-year U.S. Treasury Bills (5.4% at December 25, 1997 and 5.5% at
December 26, 1996).
The Company also has a U.S. unsecured revolving line of credit of $8 million
maturing May 31, 1998 with variable interest rates of the lender's prime rate or
LIBOR plus 1.1% at the Company's option.
Historically, the U.S. and foreign lines of credit have been structured as
short-term and have been continuously renewed on their maturity dates. The
Company anticipates renewing these lines of credit in 1998 under substantially
the same terms. No assurance can be made, however, in regard to the renewal of
these agreements if the Company again experiences losses.
NOTE 10 - COMMITMENTS
The Company has commitments under non-cancelable operating leases and other
agreements, primarily for factory and office space, with initial or remaining
terms of one year or more as follows (in thousands):
1998 $1,435
1999 1,233
2000 1,183
2001 1,167
2002 1,244
Thereafter 5,032
Lease and rental expense was $1,060,000, $809,000, and $967,000 in 1997, 1996
and 1995, respectively. The Company has renewal options on substantially all of
its major leases.
NOTE 11 - STOCK AND RETIREMENT PLANS
Stock Option Plans
At December 25, 1997, there were 1,058,250 shares of common stock reserved for
issuance and 141,250 shares available for future grant under the Company's
employee stock option plans. Pursuant to these plans, options are granted to
officers and key employees of the Company with exercise prices equal to the fair
market value of the common stock at the date of grant and generally vest over
four years. Options granted under the plans have a maximum termination date of
six years from the date of grant.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, eligible employees may purchase shares
of the Company's common stock at six-month intervals at 85% of the lower of the
fair market value on the first or the last day of each six-month period.
Employees may purchase shares having a value not exceeding 10% of their gross
compensation during an offering period. During 1997, 1996 and 1995, a total of
79,933, 65,695 and 96,199 shares were purchased under the plan at average prices
of $4.30, $4.88 and $3.46 per share, respectively. At December 25, 1997, a total
of 404,812 shares were reserved for future issuance.
Stock Appreciation Rights Plan
The Company has a Stock Appreciation Rights Plan ("SAR") under which each
director, executive officer or holder of 10% or more of the Company's common
stock has a SAR with respect to each exercisable stock option. The SAR entitles
the SAR holder to receive cash from the Company for the difference between the
market value of the stock and the exercise price of the option in lieu of
exercising the related option. SARs are only exercisable following a tender
offer or exchange offer for the Company's stock, or following approval by
stockholders of the Company of any merger, consolidation, reorganization or
other transaction providing for the conversion or exchange of more than 50% of
the common shares outstanding. As no event
Page 38
<PAGE>
has occurred which would make the SARs exercisable, no compensation expense has
been recorded under this plan.
Retirement Savings Plan
The Company has a savings plan that qualifies as a cash or deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the plan,
participating U.S. employees may defer up to 17% of their pre-tax salary,
subject to the annual IRS limitation. In fiscal years 1997, 1996 and 1995, the
Company contributed one Dollar for each Dollar contributed by a participant,
with a maximum contribution of 4% of a participant's earnings. The Company's
matching contribution expense for the savings plan was approximately $432,000,
$478,000 and$455,000 in 1997, 1996 and 1995, respectively.
Director Fee Plan
The Company has a Director Fee Plan which provides for the payment of the annual
retainer fees to directors who are not employees of Data I/O Corporation by
delivery of shares of the Company's common stock. The number of shares is
determined by dividing the fee by the share price on the first trading day of
the year or as of the date such Director is elected to the Board of Directors. A
total of 200,000 shares were authorized in 1996 for the plan. During 1997 a
total of 13,508 shares were issued at a weighted-average price of $6.58 for fees
related to 1996, and during 1998 a total of 20,932 shares will be issued at a
weighted-average price of $5.13 for fees related to 1997. Compensation expense
recorded in 1997 and 1996 related to these shares was approximately $107,000 and
$89,000, respectively.
Share Repurchase Program
On May 13, 1997 the Company's Board of Directors extended the Share Repurchase
Program. This extension authorizes the repurchase of up to an additional 14.5%
(approximately 1,000,000 shares) of the Company's outstanding common stock
through open market purchases at prevailing market prices or through block
purchases or through privately negotiated transactions. During 1997, the Company
repurchased 500 shares of its common stock under the Share Repurchase Program.
Purchases may commence or be discontinued at any time and the Board of Directors
may withdraw this authorization at any time.
NOTE 12 - 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Income from continuing operations $4,386 $7 $7,043
Income (loss) from discontinued operations 7,114 (1,108) (2,282)
========== ========== ==========
Net income (loss) $11,500 ($1,101) $4,761
========== ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 6,909 6,857 7,515
Employee stock options (1) 178 178 364
---------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 7,087 7,035 7,879
========== ========== ==========
Basic earnings (loss) per share
From continuing operations $0.63 $0.00 $0.94
From discontinued operations 1.03 (0.16) (0.30)
---------- ---------- ----------
Total basic earnings per share $1.66 ($0.16) $0.64
========== ========== ==========
Diluted earnings (loss) per share
From continuing operations $0.62 $0.00 $0.89
From discontinued operations 1.00 (0.16) (0.29)
---------- ---------- ----------
Total diluted earnings per share $1.62 ($0.16) $0.60
========== ========== ==========
</TABLE>
(1) Excludes employee stock options which were antidilutive of 71,000, 374,000,
and 249,000 in 1997, 1996 and 1995, respectively.
Page 39
<PAGE>
NOTE 13 - STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options, employee stock purchase plan options and directors fee
shares under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Employee Stock Employee Stock Director
Options Purchase Plan Options Fee Plan
---------------------------- ------------------------- ---------------
1997 1996 1995 1997 1996 1995 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk-free interest rates 6.23% 6.40% 5.94% 5.58% 5.39% 5.95% 5.98% 5.33%
Volatility factors 1.28 0.49 0.49 1.28 0.49 0.49 1.28 0.49
Expected life of the option in years 5.06 4.75 4.75 0.50 0.50 0.50 1.00 1.00
Expected dividend yield None None None None None None None None
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
granted, which is estimated to be $2.75, $2.68 and $4.01 per share for 1997,
1996 and 1995, respectively, is amortized to expense over the options' vesting
period. During the phase in period of Statement 123, which has been applied only
for options granted after 1994, the effects of applying the Statement for
providing pro forma disclosure are not indicative of future amounts until the
new rules are applied to all outstanding nonvested awards. The Company's pro
forma information follows (in thousands, except per share data):
1997 1996 1995
------- ------- ------
Net income (loss) - as reported $11,500 ($1,101) $4,761
Net income (loss) - pro forma $10,144 ($1,582) $4,574
Diluted earnings per share - as reported $1.62 ($0.16) $0.60
Diluted earnings per share - pro forma $1.43 ($0.22) $0.58
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
December 25, 1997 December 26, 1996 December 28, 1995
--------------------------- --------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 912,000 $5.22 859,125 $5.03 816,000 $3.39
Granted 542,000 5.01 246,250 5.42 280,750 8.21
Exercised (168,125) 3.46 (81,500) 4.03 (118,125) 3.02
Expired or Forfeited (368,875) 6.70 (111,875) 5.15 (119,500) 3.49
-------- ----- -------- ----- -------- -----
Outstanding - end of year 917,000 $4.82 912,000 $5.22 859,125 $5.03
======== ======== ========
Exercisable at end of year 433,313 $4.74 349,875 $4.13 267,250 $3.55
</TABLE>
The following table summarizes information about stock options outstanding at
December 25, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices 12/25/97 Life in Years Price 12/25/97 Price
-------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$2.44 - $3.75 219,000 2.31 $3.17 179,625 $3.12
$4.56 - $4.56 235,250 3.93 $4.56 70,938 $4.56
$4.69 - $5.00 332,250 5.62 $4.99 105,000 $5.00
$5.56 - $8.63 130,500 4.42 $7.63 77,750 $8.33
------------- ------- ---- ----- ------ -----
$2.44 - $8.63 917,000 4.23 $4.82 433,313 $4.74
======= =======
</TABLE>
Page 40
<PAGE>
NOTE 14 - INCOME TAXES
<TABLE>
<CAPTION>
(in thousands) Year Ended December
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Components of income (loss) from continuing operations before taxes:
U.S. operations $4,034 ($842) $6,985
Foreign operations 528 970 950
------- ------- -------
$4,562 $128 $7,935
======= ======= =======
Income tax expense (benefit) consists of:
Current tax expense (benefit)
U.S. federal $506 $247 $606
State 58 (11) 77
Foreign 71 14 89
------- ------- -------
635 250 772
Deferred tax expense (benefit)
U.S. federal (459) (129) 105
Foreign 0 0 15
------- ------- -------
(459) (129) 120
------- ------- -------
Total income tax expense $176 $121 $892
======= ======= =======
</TABLE>
For federal income tax purposes, a deduction is received for stock option
compensation gains. The benefit of this deduction, which is recorded in common
stock, was $158,000, $98,000, and $222,000 in 1997, 1996 and 1995, respectively.
A reconciliation of the Company's effective income tax rate and the U.S. federal
tax rate is as follows:
Year Ended December
----------------------------
1997 1996 1995
----- ----- -----
Statutory rate 35.0% 34.0% 34.0%
Foreign Sales Corporation tax benefit (3.6%) (139.9%) (3.2%)
State and foreign income tax, net of
federal income tax benefit 1.5% (57.8%) .9%
Valuation allowance for deferred tax assets (26.0%) 443.5% (19.2%)
Other (3.0%) (185.3%) (1.3%)
----- ----- -----
3.9% 94.5% 11.2%
===== ===== =====
Page 41
<PAGE>
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
Dec. 25, Dec. 26,
1997 1996
------- -------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts $ 113 $ 114
Inventory and product return reserves and basis differences 1,298 1,470
Land basis 1,509
Compensation accruals 235 277
Intercompany profit 187 174
Pension and retirement accruals 206 240
Accrued liabilities 1,308 347
Book over tax depreciation and amortization 157
Foreign net operating loss carryforwards 4 184
Tax credit carryforwards 9 283
Other, net 54 267
------- -------
3,571 4,865
Valuation allowance (164) (3,238)
------- -------
Total deferred income tax assets 3,407 1,627
------- -------
Deferred income tax liabilities:
Tax over book depreciation and amortization 1,072
Foreign currency translation 306 267
------- -------
Total deferred income tax liabilities 306 1,339
======= =======
Net deferred income tax assets $ 3,101 $ 288
======= =======
Balance sheet classification:
Current assets $ 1,990 $ 762
Noncurrent assets 1,111
Noncurrent liabilities (474)
======= =======
$ 3,101 $ 288
======= =======
</TABLE>
The valuation allowance for deferred tax assets decreased $3,074,000 during the
year ended December 25, 1997 due primarily to the taxable income generated in
1997, and increased $946,000 during the year ended December 26, 1996 due
primarily to the loss generated in 1996 and the inability to utilize foreign tax
credits. The net deferred tax assets recorded were limited to the estimated
carryback benefit available from temporary differences at the time of their
expected reversal.
Page 42
<PAGE>
NOTE 15 - GEOGRAPHIC SEGMENT INFORMATION
Historically, Data I/O Corporation and its subsidiaries operated within three
major divisions: (1) electronic programming systems used by customers to handle,
program, test and mark programmable ICs; (2) semiconductor equipment used to
handle, transport and mark integrated circuits (Reel-Tech); and (3) electronic
design automation software used to create designs for programmable ICs (Synario
Design Automation). The Reel-Tech and Synario Design Automation Divisions were
discontinued during 1997. See Note 2 for further discussion of these
discontinued operations including results of these operations and related
balance sheet accounts.
No one customer accounted for more than 10% of the Company's revenues in 1997,
1996 and 1995. Major operations outside the U.S. include sales and service
support subsidiaries in Japan, Germany, Canada, Singapore and, through the end
of 1996, the United Kingdom.
Geographic information for the three years ended December 25, 1997 is presented
in the table that follows. Net sales, as shown in the table below, are based
upon the geographic area into which the products were sold and delivered. As
such, U.S. export sales of $21,207,000, $20,214,000 and $18,914,000 in 1997,
1996 and 1995, respectively, have been excluded from U.S. reported net sales.
Transfers between geographic areas are made at prices consistent with rules and
regulations of governing tax authorities. The profit on transfers between
geographic areas is not recognized until sales are made to non-affiliated
customers. For purposes of the table below, the profit on the transfers between
geographic areas has been shown in operating income in the geographic area where
the final sale to non-affiliated customers took place. Certain general corporate
expenses are charged to the U.S. segment. Identifiable assets are those assets
that can be directly associated with a particular geographic area.
<TABLE>
<CAPTION>
Year Ended December
------------------------------------
(in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales:
U.S $ 22,290 $ 23,554 $ 31,125
Europe 11,548 12,963 15,373
Other 12,446 12,343 10,998
-------- -------- --------
$ 46,284 $ 48,860 $ 57,496
======== ======== ========
Operating income (loss) from continuing operations:
U.S ($ 219) ($ 2,254) $ 3,425
Europe 1,323 1,279 2,517
Other 701 1,162 1,868
-------- -------- --------
$ 1,805 $ 187 $ 7,810
======== ======== ========
Identifiable assets of the continuing operations:
U.S $ 51,539 $ 26,039 $ 29,390
Europe 2,737 2,852 5,049
Other 3,460 4,050 4,114
-------- -------- --------
$ 57,736 $ 32,941 $ 38,553
======== ======== ========
</TABLE>
Page 43
<PAGE>
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth unaudited selected quarterly financial data for
the Company for 1997 and 1996. Although the Company's business is not seasonal,
growth rates of sales and earnings have varied from quarter to quarter as a
result of factors such as stocking orders from international distributors, the
timing of new product introductions, business acquisitions, and short-term
industry and general U.S. and international economic conditions. Information as
to any one or more quarters is therefore not necessarily indicative of trends in
the Company's business or profitability.
<TABLE>
<CAPTION>
(in thousands except per share data) 1997
-------------------------------------------------------
For the quarters ended: Mar. 27 June 26 Sept. 25 Dec. 25
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $11,867 $11,398 $11,762 $11,257
Gross margin 5,958 5,596 6,320 5,662
Income from continuing operations 432 2,018 1,436 500
Income (loss) from discontinued operations (384) (639) (452) 8,589
Net income 48 1,379 984 9,089
Earnings per share from continuing operations:
Basic $0.06 $0.29 $0.21 $.07
Diluted $0.06 $0.29 $0.20 $.07
Total earnings per share :
Basic $0.01 $0.20 $0.14 $1.30
Diluted $0.01 $0.20 $0.14 $1.26
Market price per share:
High $5.50 $6.50 $7.63 $8.00
Low $4.38 $4.50 $4.63 $6.13
<CAPTION>
(in thousands except per share data) 1996
-------------------------------------------------------
For the quarters ended: Mar. 28 June 27 Sept. 26 Dec. 26
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $12,819 $12,732 $11,525 $11,784
Gross margin 5,882 5,999 4,977 6,068
Income (loss) from continuing operations 365 (79) (559) 280
Income (loss) from discontinued operations (303) (627) 301 (479)
Net income (loss) 62 (706) (258) (199)
Earnings (loss) per share from continuing operations:
Basic $0.05 ($0.01) ($0.08) $0.04
Diluted $0.05 ($0.01) ($0.08) $0.04
Total earnings (loss) per share:
Basic $0.01 ($0.10) ($0.04) ($.03)
Diluted $0.01 ($0.10) ($0.04) ($.03)
Market price per share:
High $7.75 $6.88 $6.00 $5.63
Low $5.38 $5.13 $4.38 $4.00
</TABLE>
The Company completed the sale of its headquarters property resulting in a $2.3
million pre-tax gain recognized during the second quarter of 1997. The Company
disposed of its Semiconductor Equipment and Synario Design Automation Divisions
resulting in a gain from discontinued operations of $7.5 million net of tax
during the fourth quarter of 1997.
Data I/O Corporation's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol DAIO and is quoted in many financial
publications, including the Wall Street Journal. The per share prices reported
in the table above are those reported by NASDAQ. The approximate number of
stockholders of record and the approximate number of beneficial stockholders of
record at March 2, 1998, was 927 and 4100, respectively.
Except for a special cash dividend of $4.15 per share paid on March 8, 1989, the
Company has not paid cash dividends on its common stock and does not anticipate
paying regular cash dividends in the foreseeable future. The Company's U.S. line
of credit agreement restricts the payment of cash dividends through a
requirement for minimum levels of tangible net worth.
Page 44
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the Registrant's directors is set forth under "Election of
Directors" in the Company's Proxy Statement relating to the Company's annual
meeting of shareholders to be held on May 12, 1998, and is incorporated herein
by reference. Such Proxy Statement will be filed within 120 days of the
Company's year end. Information regarding the Registrant's executive officers is
set forth in Item 1 of Part I herein under the caption "Executive Officers of
the Registrant".
Item 11. Executive Compensation
Information called for by Part III, Item 11, is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
May 12, 1998, and is incorporated herein by reference. The information appears
in the Proxy Statement under the caption "Executive Compensation." Such Proxy
Statement will be filed within 120 days of the Company's year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by Part III, Item 12, is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
May 12, 1998, and is incorporated herein by reference. The information appears
in the Proxy Statement under the caption "Voting Securities and Principal
Holders." Such Proxy Statement will be filed within 120 days of the Company's
year end.
Item 13. Certain Relationships and Related Transactions
None.
Page 45
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Executive Compensation Plans and Arrangements
The following list is a subset of the list of exhibits described below and
contains all compensatory plans, contracts or arrangements in which any
director or executive officer of the Company is a participant, unless the
method of allocation of benefits thereunder is the same for management and
non-management participants:
(1) Amended and Restated 1982 Employee Stock Purchase Plan. See Exhibit
10.16.
(2) Retirement Plan and Trust Agreement. See Exhibit 10.7, 10.9, 10.12,
10.22, 10.27, 10.28, and 10.29.
(3) 1985 Stock Option Plan. See Exhibit 10.1.
(4) 1984 FutureNet Employee Stock Option Plan. See Exhibit 10.2.
(5) Summary of Management Incentive Compensation Plan. See Exhibit 10.6,
10.10 and 10.25.
(6) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit
10.5.
(7) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.30.
(8) Form of Change in Control Agreements. See Exhibit 10.8.
(9) 1996 Director Fee Plan. See Exhibit 10.13 and 10.32.
(10) Synario Division Proceeds Sharing Plan. See Exhibit 10.14.
(11) Letter Agreement with William J. Haydamack. See Exhibit 10.15.
(12) Agreement and General Release with William J. Haydamack. See Exhibit
10.33.
(13) Separation Agreement with William C. Erxleben. See Exhibit 10.34.
(14) Consulting Agreement with William C. Erxleben. See Exhibit 10.35.
(a) List of Documents Filed as a Part of This Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
(1) Index to Financial Statements:
Report of Ernst & Young LLP, Independent Auditors 27
Report of Management 27
Consolidated Statements of Operations for each of the three years ended December 25, 1997 28
Consolidated Balance Sheets as of December 25, 1997 and December 26, 1996 29
Consolidated Statements of Cash Flows for each of the three years ended December 25, 1997 30
</TABLE>
Page 46
<PAGE>
<TABLE>
<S> <C>
Consolidated Statements of Stockholders' Equity for each of the three years ended December 25, 1997 31
Notes to Consolidated Financial Statements 32
(2) Index to Financial Statement Schedules:
II Consolidated Valuation and Qualifying Accounts 52
All other schedules not listed above have been omitted because the
required information is included in the consolidated financial
statements or the notes thereto, or is not applicable or required.
(3) Index to Exhibits:
3 Articles of Incorporation:
3.1 The Company's restated Articles of Incorporation filed November 2, 1987
(Incorporated by reference to Exhibit 3.1 of the Company's 1987 Annual Report on
Form 10-K (File No. 0-10394)). N/A
3.2 The Company's Bylaws as amended and restated as of March 12, 1998. 60
3.3 Certificate of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 1 of the Company's
Registration Statement on Form 8-A filed April 5, 1988 (File No. 0-10394)). N/A
4 Instruments Defining the Rights of Security Holders, Including Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between Data I/O Corporation and
ChaseMellon Shareholder Services, L.L.C. as Rights Agent, which includes: as
Exhibit A thereto, the Form of Right Certificate; and, as Exhibit B thereto, the
Summary of Rights to Purchase Series A Junior Participating Preferred Stock
(Incorporated by reference to the Company's Current Report on Form 8-K filed on
March 13, 1998). N/A
4.2 Rights Agreement, dated as of March 31, 1988, between Data I/O Corporation
and First Jersey National Bank, as Rights Agent, as amended by Amendment
No. 1 thereto, dated as of May 28, 1992 and Amendment No. 2 thereto, dated
as of July 16, 1997 (Incorporated by reference to the Company's current
Report on Form 8-K filed on March 13, 1998). N/A
10 Material Contracts:
10.1 1985 Stock Option Plan (Incorporated by reference to Exhibit 10.22 of the Company's
1984 Annual Report on Form 10-K (File No. 0-10394)). N/A
10.2 1984 FutureNet Employee Stock Option Plan (Incorporated by reference to Exhibit
10.23 of the Company's 1984 Annual Report on Form 10-K (File No. 0-10394)). N/A
</TABLE>
Page 47
<PAGE>
<TABLE>
<S> <C>
10.3 Asset Purchase Agreement, dated as of December 31, 1992, by and among Data I/O
Corporation, CAD/CAM Group, Inc., and certain of its shareholders, and an Amendment
thereto, dated January 19, 1993 (Incorporated by reference to Exhibit 10.21 of the
Company's 1992 Annual Report on Form 10-K (File No. 0-10394)). N/A
10.4 Software Development Agreement, dated as of January 19, 1993, by and among Data
I/O Corporation, Michael J. Mendelsohn and Peter C. Niday (Incorporated by reference
to Exhibit 10.22 of the Company's 1992 Annual Report on Form 10-K (File No. 0-10394)). N/A
10.5 Amended and Restated 1983 Stock Appreciation Rights Plan dated February 3, 1993
(Incorporated by reference to Exhibit 10.23 of the Company's 1992 Annual Report on
Form 10-K (File No. 0-10394)). N/A
10.6 Summary of 1994 Management Incentive Compensation Plan. (Incorporated by
reference to Exhibit 10.25 of the Company's 1993 Annual Report on Form 10K
(File No. O-10394)). N/A
10.7 Amended and Restated Retirement Plan and Trust Agreement. (Incorporated by
reference to Exhibit 10.26 of the Company's 1993 Annual Report on Form 10K
(File No. O-10394)). N/A
10.8 Form of Change in Control Agreements (Incorporated by reference to Exhibit 10.20
of the Company's 1994 Annual Report on Form 10K (File No. 0-10394)). N/A
10.9 First Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated
by reference to Exhibit 10.21 of the Company's 1994 Annual Report on Form
10K (File No. 0-10394)). N/A
10.10 Amended and Restated Management Incentive Compensation Plan dated January
1, 1996 (Incorporated by reference to Exhibit 10.20 of the Company's 1995
Annual Report on Form 10K (File No. 0-10394)). N/A
10.11 Amended and Restated Performance Bonus Plan dated January 1, 1996 (Incorporated
by reference to Exhibit 10.21 of the Company's 1995 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.12 Second Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by
reference to Exhibit 10.26 of the Company's 1995 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.13 Data I/O Corporation 1996 Director Fee Plan (Incorporated by reference to
Exhibit 10.27 of the Company's 1995 Annual Report on Form 10K (File No.
0-10394)). N/A
10.14 Synario Division Proceeds Sharing Plan (Confidential treatment has been
requested for certain portions of this exhibit) (Incorporated by reference
to Exhibit 10.28 of the Company's 1995 Annual Report on Form 10K (File No.
0-10394)). N/A
10.15 Letter Agreement with William J. Haydamack (Confidential treatment has
been requested for certain portions of this exhibit) (Incorporated by
reference to Exhibit 10.29 of the Company's 1995 Annual Report on Form
10K (File No. 0-10394)). N/A
</TABLE>
Page 48
<PAGE>
<TABLE>
<S> <C>
10.16 Data I/O Corporation 1982 Employee Stock Purchase Plan Amended and Restated
December 11, 1996 (Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement of Form S-8 (File No. 333-20657, filed January 29, 1997)). N/A
10.17 Business Loan Agreement dated April 24, 1996, with Seattle First National
Bank for $8.0 million (Incorporated by reference to Exhibit 10.30 of the
Company's 1996 Annual Report on Form 10K (File No. 0-10394)). N/A
10.18 OEM Agreement between Synopsys, Inc. and Synario Design Automation a Division of
Data I/O Corporation. (Portions of this exhibit have been omitted pursuant to an
application for an order granting confidential treatment. The omitted portions
have been separately filed with the Commission) (Incorporated by reference to
Exhibit 10.31 of the Company's 1996 Annual Report on Form 10K (File No.0-10394)). N/A
10.19 Purchase and Sale Agreement dated as of July 9, 1996 (Relating to the sale
of Data I/O Corporation's headquarters property in Redmond, Washington
consisting of approximately 79 acres of land and an approximately 96,000
square foot building. (Portions of this exhibit have been omitted pursuant
to an application for an order granting confidential treatment. The
omitted portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.32 of the Company's 1996 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.20 Letter dated as of December 20, 1996, First Amendment and extension of the
Closing Date under that certain Purchase and Sale Agreement dated as of
July 9, 1996. (Portions of this exhibit have been omitted pursuant to an
application for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission) (Incorporated by
reference to Exhibit 10.33 of the Company's 1996 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.21 Letter dated as of February 17, 1997, Second Amendment and extension of the
Closing Date under that certain Purchase and Sale Agreement dated as of July 9,
1996. (Portions of this exhibit have been omitted pursuant to an application for
an order granting confidential treatment. The omitted portions have been
separately filed with the Commission) (Incorporated by reference to Exhibit
10.34 of the Company's 1996 Annual Report on Form 10K (File No. 0-10394)). N/A
10.22 Third Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated
by reference to Exhibit 10.35 of the Company's 1996 Annual Report on Form
10K (File No. 0-10394)). N/A
10.23 Asset Purchase Agreement, by and between Data I/O Corporation, a Washington
corporation, Reel-Tech Inc., a Washington corporation, and General Scanning
Inc., a Massachusetts corporation, dated November 28, 1997 (Incorporated by
reference to Exhibit 2.1 of the Company's Form 8-K Report dated November 28, 1997). N/A
</TABLE>
Page 49
<PAGE>
<TABLE>
<S> <C>
10.24 Master Agreement, by and between Data I/O Corporation, a Washington corporation,
Minc, Incorporated, a Colorado corporation, and Minc Washington Corp., a
Colorado corporation, dated November 12, 1997 (Incorporated by reference to
Exhibit 2.1 of the Company's Form 8-K Report dated November 12, 1997). N/A
10.25 Amended and Restated Management Incentive Compensation Plan dated January
1, 1997. 71
10.26 Amended and Restated Performance Bonus Plan dated January 1, 1997. 75
10.27 Fourth Amendment to the Data I/O Tax Deferred Retirement Plan. 78
10.28 Fifth Amendment to the Data I/O Tax Deferred Retirement Plan. 79
10.29 Sixth Amendment to the Data I/O Tax Deferred Retirement Plan. 80
10.30 Amended and Restated 1986 Stock Option Plan dated May 13, 1997. 81
10.31 Amendment, dated May 13, 1997, to the business loan agreement dated April
24, 1996, with Seattle First National Bank. 89
10.32 Amended and Restated Data I/O Corporation 1996 Director Fee Plan. 91
10.33 Agreement and General Release with William J. Haydamack. 96
10.34 Separation Agreement with William C. Erxleben. 98
10.35 Consulting Agreement with William C. Erxleben. 103
10.36 First Amendment to the Asset Purchase Agreement dated as of August 31, 1995,
among Reel-Tech, Inc., an Indiana corporation, Norris R. Hall, Douglas R. Hall,
and Reel-Tech, Inc., a Washington corporation, a wholly owned subsidiary of Data
I/O Corporation. 107
10.37 Second Amendment to the Asset Purchase Agreement dated as of August 31, 1995,
among Reel-Tech, Inc., an Indiana corporation, Norris R. Hall, Douglas R. Hall,
and Reel-Tech, Inc., a Washington corporation, a wholly owned subsidiary of Data
I/O Corporation. 115
10.38 Third Amendment to the Asset Purchase Agreement dated as of August 31, 1995,
among Reel-Tech, Inc., an Indiana corporation, Norris R. Hall, Douglas R. Hall,
and Reel-Tech, Inc., a Washington corporation, a wholly owned subsidiary of Data
I/O Corporation. 119
10.39 Fourth Amendment to the Asset Purchase Agreement dated as of August 31, 1995,
among Reel-Tech, Inc., an Indiana corporation, Norris R. Hall, Douglas R. Hall,
and Reel-Tech, Inc., a Washington corporation, a wholly owned subsidiary of Data
I/O Corporation. 127
22 Subsidiaries of the Registrant 53
24 Consent of Ernst & Young LLP, Independent Auditors 54
</TABLE>
Page 50
<PAGE>
(b) Form 8-K:
A report on Form 8-K dated November 12, 1997 was filed relating to the
disposition of the Synario Design Automation Division.
A report on Form 8-K dated November 28, 1997 was filed relating to the
disposition of the assets of Reel-Tech, Inc.
Page 51
<PAGE>
DATA I/O CORPORATION
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged/
(Credited) Charged to
Balance at to Costs Other Balance at
Beginning and Accounts- Deductions- End of
of Period Expenses Describe Describe Period
- --------------------------------- --------- ---------- ----------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 28, 1995:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $277 $55 $12(1) $33(2) $311
Inventory reserves $1,437 $100 $116(3) $1,421
Year Ended December 26, 1996:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $311 $101 $16(1) $66(2) $362
Inventory reserves $1,421 $998 $148(3) $2,271
Year Ended December 25, 1997:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $362 $53 $7(1) $28(2) $394
Inventory reserves $2,271 $225 $398(3) $1,648
</TABLE>
(1) Collection of accounts previously written off.
(2) Uncollectable accounts written off.
(3) Obsolete inventories written off, net of recoveries.
Page 52
<PAGE>
EXHIBIT 22
DATA I/O CORPORATION
SUBSIDIARIES OF THE REGISTRANT
The following table indicates the name, jurisdiction of incorporation and basis
of ownership of each of the Company's subsidiaries:
State or Percentage
Jurisdiction of Voting
of Securities
Name of Subsidiary Organization Owned
------------------ ------------ -----
Data I/O Japan Company, Limited Japan 100%
Data I/O International, Inc. Washington 100%
Data I/O European Operations GmbH Germany 100%
Data I/O FSC International, Inc. Territory of Guam 100%
Data I/O Canada Corporation Canada 100%
Data I/O GmbH Germany 100%
Data I/O Limited United Kingdom 100%
Reel-Tech, Inc. Washington 100%
Reel-Tech Singapore Pte, Ltd. Singapore 100%
Page 53
<PAGE>
EXHIBIT 24
- --------------------------------------------------------------------------------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Data I/O Corporation
We consent to the incorporation by reference in the Registration Statements on
Form S-8 No. 333-20657 pertaining to the Company's 1982 Employee Stock Purchase
Plan and Director Fee Plan, Forms S-8 No. 33-95608 and No. 33-54422 pertaining
to the Company's 1986 Stock Option Plan, Form S-8 No. 33-66824 pertaining to the
Company's 1982 Employee Stock Purchase Plan, Form S-8 No. 33-03958 pertaining to
the Company's 1985 Stock Option Plan, and Form S-8 No. 33-02254 pertaining to
the Company's 1984 FutureNet Employee Stock Option Plan, of our report dated
February 10, 1998, with respect to the consolidated financial statements and
schedule of Data I/O Corporation included in its Annual Report (Form 10-K) for
the year ended December 25, 1997 filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Seattle, Washington
March 20, 1998
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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: March 11, 1998 By: /s/ James J. David
--------------------
James J. David
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 11, 1998, by the following persons on behalf of
the Registrant and in the capacities indicated.
NAME TITLE
By: /s/James J. David President
------------------------
James J. David
By: /s/Frances M. Conley Director
------------------------ Chairman of the Board
Frances M. Conley
By: /s/Edward D. Lazowska Director
------------------------
Edward D. Lazowska
By: /s/Keith L. Barnes Director
------------------------
Keith L. Barnes
By: /s/Joel S. Hatlen Chief Financial Officer
------------------------ Vice President of Finance
Joel S. Hatlen Secretary, Treasurer
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EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit Number Title Page Number
- -------------- ---------------------------------------------------------------------------------------------- -----------
<S> <C>
3 Articles of Incorporation:
3.1 The Company's restated Articles of Incorporation filed November 2, 1987 (Incorporated by
reference to Exhibit 3.1 of the Company's 1987 Annual Report on Form 10-K (File No. 0-10394)). N/A
3.2 The Company's Bylaws as amended and restated as of March 12, 1998. 60
3.3 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred
Stock (Incorporated by reference to Exhibit 1 of the Company's Registration Statement on Form
8-A filed April 5, 1988 (File No. 0-10394)). N/A
4 Instruments Defining the Rights of Security Holders, Including Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between Data I/O Corporation and ChaseMellon
Shareholder Services, L.L.C. as Rights Agent, which includes: as Exhibit A thereto, the Form
of Right Certificate; and, as Exhibit B thereto, the Summary of Rights to Purchase Series A
Junior Participating Preferred Stock (Incorporated by reference to the Company's Current
Report on Form 8-K filed on March 13, 1998). N/A
4.2 Rights Agreement, dated as of March 31, 1988, between Data I/O Corporation and First Jersey
National Bank, as Rights Agent, as amended by Amendment No. 1 thereto, dated as of May 28,
1992 and Amendment No. 2 thereto, dated as of July 16, 1997 (Incorporated by reference to the
Company's current Report on Form 8-K filed on March 13, 1998). N/A
10 Material Contracts:
10.1 1985 Stock Option Plan (Incorporated by reference to Exhibit 10.22 of the Company's 1984
Annual Report on Form 10-K (File No. 0-10394)). N/A
10.2 1984 FutureNet Employee Stock Option Plan (Incorporated by reference to Exhibit 10.23 of the
Company's 1984 Annual Report on Form 10-K (File No. 0-10394)). N/A
10.3 Asset Purchase Agreement, dated as of December 31, 1992, by and among Data I/O Corporation,
CAD/CAM Group, Inc., and certain of its shareholders, and an Amendment thereto, dated January
19, 1993 (Incorporated by reference to Exhibit 10.21 of the Company's 1992 Annual Report on
Form 10-K (File No. 0-10394)). N/A
10.4 Software Development Agreement, dated as of January 19, 1993, by and among Data I/O
Corporation, Michael J. Mendelsohn and Peter C. Niday (Incorporated by reference to Exhibit
10.22 of the Company's 1992 Annual Report on Form 10-K (File No. 0-10394)). N/A
10.5 Amended and Restated 1983 Stock Appreciation Rights Plan dated February 3, 1993 (Incorporated
by reference to Exhibit 10.23 of the Company's 1992 Annual Report on Form 10-K (File No.
0-10394)). N/A
</TABLE>
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<TABLE>
<S> <C>
10.6 Summary of 1994 Management Incentive Compensation Plan. (Incorporated by reference to Exhibit
10.25 of the Company's 1993 Annual Report on Form 10K (File No. O-10394)). N/A
10.7 Amended and Restated Retirement Plan and Trust Agreement. (Incorporated by
reference to Exhibit 10.26 of the Company's 1993 Annual Report on Form 10K
(File No. O-10394)). N/A
10.8 Form of Change in Control Agreements (Incorporated by reference to Exhibit 10.20 of the
Company's 1994 Annual Report on Form 10K (File No. 0-10394)). N/A
10.9 First Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by reference to
Exhibit 10.21 of the Company's 1994 Annual Report on Form 10K (File No. 0-10394)). N/A
10.10 Amended and Restated Management Incentive Compensation Plan dated January 1, 1996
(Incorporated by reference to Exhibit 10.20 of the Company's 1995 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.11 Amended and Restated Performance Bonus Plan dated January 1, 1996 (Incorporated by reference
to Exhibit 10.21 of the Company's 1995 Annual Report on Form 10K (File No. 0-10394)). N/A
10.12 Second Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by reference to
Exhibit 10.26 of the Company's 1995 Annual Report on Form 10K (File No. 0-10394)). N/A
10.13 Data I/O Corporation 1996 Director Fee Plan (Incorporated by reference to Exhibit 10.27 of the
Company's 1995 Annual Report on Form 10K (File No. 0-10394)). N/A
10.14 Synario Division Proceeds Sharing Plan (Confidential treatment has been requested for certain
portions of this exhibit) (Incorporated by reference to Exhibit 10.28 of the Company's 1995
Annual Report on Form 10K (File No. 0-10394)). N/A
10.15 Letter Agreement with William J. Haydamack (Confidential treatment has been requested for
certain portions of this exhibit) (Incorporated by reference to Exhibit 10.29 of the Company's
1995 Annual Report on Form 10K (File No. 0-10394)). N/A
10.16 Data I/O Corporation 1982 Employee Stock Purchase Plan Amended and Restated December 11, 1996
(Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement of Form S-8
(File No. 333-20657, filed January 29, 1997)). N/A
10.17 Business Loan Agreement dated April 24, 1996, with Seattle First National Bank for $8.0
million (Incorporated by reference to Exhibit 10.30 of the Company's 1996 Annual Report on
Form 10K (File No. 0-10394)). N/A
10.18 OEM Agreement between Synopsys, Inc. and Synario Design Automation a Division of Data I/O
Corporation. (Portions of this exhibit have been omitted pursuant to an application for an
order granting confidential treatment. The omitted portions have been separately filed with
the Commission) (Incorporated by reference to Exhibit 10.31 of the Company's 1996 Annual
Report on Form 10K (File No. 0-10394)). N/A
</TABLE>
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<TABLE>
<S> <C>
10.19 Purchase and Sale Agreement dated as of July 9, 1996 (Relating to the sale of Data I/O
Corporation's headquarters property in Redmond, Washington consisting of approximately 79
acres of land and an approximately 96,000 square foot building. (Portions of this exhibit have
been omitted pursuant to an application for an order granting confidential treatment. The
omitted portions have been separately filed with the Commission) (Incorporated by reference to
Exhibit 10.32 of the Company's 1996 Annual Report on Form 10K (File No. 0-10394)). N/A
10.20 Letter dated as of December 20, 1996, First Amendment and extension of the Closing Date under
that certain Purchase and Sale Agreement dated as of July 9, 1996. (Portions of this exhibit
have been omitted pursuant to an application for an order granting confidential treatment. The
omitted portions have been separately filed with the Commission) (Incorporated by reference to
Exhibit 10.33 of the Company's 1996 Annual Report on Form 10K (File No. 0-10394)). N/A
10.21 Letter dated as of February 17, 1997, Second Amendment and extension of the Closing Date under
that certain Purchase and Sale Agreement dated as of July 9, 1996. (Portions of this exhibit
have been omitted pursuant to an application for an order granting confidential treatment. The
omitted portions have been separately filed with the Commission) (Incorporated by reference to
Exhibit 10.34 of the Company's 1996 Annual Report on Form 10K (File No. 0-10394)). N/A
10.22 Third Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by reference to
Exhibit 10.35 of the Company's 1996 Annual Report on Form 10K (File No. 0-10394)). N/A
10.23 Asset Purchase Agreement, by and between Data I/O Corporation, a Washington corporation,
Reel-Tech Inc., a Washington corporation, and General Scanning Inc., a Massachusetts
corporation, dated November 28, 1997 (Incorporated by reference to Exhibit 2.1 of the
Company's Form 8-K Report dated November 28, 1997). N/A
10.24 Master Agreement, by and between Data I/O Corporation, a Washington corporation, Minc,
Incorporated, a Colorado corporation, and Minc Washington Corp., a Colorado corporation, dated
November 12, 1997 (Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K Report
dated November 12, 1997). N/A
10.25 Amended and Restated Management Incentive Compensation Plan dated January 1, 1997. 71
10.26 Amended and Restated Performance Bonus Plan dated January 1, 1997. 75
10.27 Fourth Amendment to the Data I/O Tax Deferred Retirement Plan. 78
10.28 Fifth Amendment to the Data I/O Tax Deferred Retirement Plan. 79
10.29 Sixth Amendment to the Data I/O Tax Deferred Retirement Plan. 80
</TABLE>
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<TABLE>
<S> <C>
10.30 Amended and Restated 1986 Stock Option Plan dated May 13, 1997. 81
10.31 Amendment, dated May 13, 1997, to the business loan agreement dated April 24, 1996, with
Seattle First National Bank. 89
10.32 Amended and Restated Data I/O Corporation 1996 Director Fee Plan. 91
10.33 Agreement and General Release with William J. Haydamack. 96
10.34 Separation Agreement with William C. Erxleben. 98
10.35 Consulting Agreement with William C. Erxleben. 103
10.36 First Amendment to the Asset Purchase Agreement dated as of August 31, 1995, among Reel-Tech,
Inc., an Indiana corporation, Norris R. Hall, Douglas R. Hall, and Reel-Tech, Inc., a
Washington corporation, a wholly owned subsidiary of Data I/O Corporation. 107
10.37 Second Amendment to the Asset Purchase Agreement dated as of August 31, 1995, among Reel-Tech,
Inc., an Indiana corporation, Norris R. Hall, Douglas R. Hall, and Reel-Tech, Inc., a
Washington corporation, a wholly owned subsidiary of Data I/O Corporation. 115
10.38 Third Amendment to the Asset Purchase Agreement dated as of August 31, 1995, among Reel-Tech,
Inc., an Indiana corporation, Norris R. Hall, Douglas R. Hall, and Reel-Tech, Inc., a
Washington corporation, a wholly owned subsidiary of Data I/O Corporation. 119
10.39 Fourth Amendment to the Asset Purchase Agreement dated as of August 31, 1995, among Reel-Tech,
Inc., an Indiana corporation, Norris R. Hall, Douglas R. Hall, and Reel-Tech, Inc., a
Washington corporation, a wholly owned subsidiary of Data I/O Corporation. 127
</TABLE>
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<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
DATA I/O CORPORATION
As of March 12, 1998
ARTICLE I
Offices
(1) Registered Office and Registered Agent: The registered office of the
corporation shall be located in the State of Washington at such place as may be
fixed from time to time by the Board of Directors upon filing of such notices as
may be required by law, and the registered agent shall have a business office
identical with such registered office.
(2) Other Offices: The corporation may have other offices within or outside
the State of Washington at such place or places as the Board of Directors may
from time to time determine.
ARTICLE II
Shareholders' Meetings
(1) Meeting Place: All meetings of the shareholders shall be held at the
registered office of the corporation, or at such other place as shall be
determined from time to time by the Board of Directors, and the place at which
any such meeting shall be held shall be stated in the notice of the meeting.
(2) Annual Meeting Time: The annual meeting of the shareholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting, shall be held each year during the month of
May on such date and at such time as may be determined each year by the Board of
Directors.
(3) Special Meetings: Special meetings of the shareholders for any purpose
may be called at any time by the President, Board of Directors, or the holders
of not less than one-tenth of all shares entitled to vote at the meeting in
accordance with RCW 23B.07.020.
(4) Notice:
(a) Notice of the time and place of the annual meeting of shareholders
shall be given by delivering personally or by mailing a written or printed
notice of the same, at least ten days, and not more than sixty days, prior
to the meeting to each shareholder of record entitled to vote at such
meeting.
(b) At least ten days and not more than sixty days prior to the
meeting, written or printed notice of each special meeting of shareholders,
stating the place, day and hour of such meeting, and the purpose or
purposes for which the meeting is called, shall be delivered personally, or
mailed to each shareholder of record entitled to vote at such meeting.
(c) Notice of a shareholders' meeting at which the shareholders will
be called to act on an amendment to the articles of incorporation, a plan
of merger or share exchange, a proposed sale of assets other than in the
regular course of business or the dissolution of the Corporation shall be
given not fewer than twenty days and not more than sixty days before the
meeting date.
(5) Voting Record: At least ten days and not more than seventy days before
each meeting of shareholders, a complete record of the shareholders entitled to
vote at such meeting, or any adjournment thereof, shall be made, arranged in
alphabetical order, with the address of and number of shares held by each, which
record shall be kept on file at the registered office of the corporation for a
period of ten days prior to such meeting. The record shall be kept on file at
the registered office of the Corporation for a period beginning ten days prior
to such meeting and shall be kept open at the time and place of such meeting for
the inspection of any shareholder, or any shareholder's agent or attorney.
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(6) Quorum: Except as otherwise required by law:
(a) A quorum at any annual or special meeting of shareholders shall
consist of shareholders representing, either in person or by proxy, a
majority of the votes entitled to be cast on the matter by each voting
group.
(b) The votes of a majority in interest of those present at any
properly called meeting or adjourned meeting of shareholders at which a
quorum as in this paragraph defined is present shall be sufficient to
transact business.
(7) Voting of Shares:
(a) Except as otherwise provided in these Bylaws or to the extent that
voting rights of the shares of any class or classes are limited or denied
by the Articles of Incorporation, each shareholder, on each matter
submitted to a vote at a meeting of shareholders, shall have one vote for
each share of stock registered in his name in the books of the corporation.
(b) If a quorum exists, action on a matter, other than the election of
directors, is approved by a voting group if the votes cast within the
voting group favoring the action exceed the votes cast within the voting
group opposing the action, unless the question is one which by express
provision of law, of the Articles of Incorporation or of these Bylaws a
greater number of affirmative votes is required.
(c) Unless otherwise provided in the Articles of Incorporation, in any
election of directors the candidates elected are those receiving the
largest numbers of votes cast by the shares entitled to vote in the
election, up to the number of directors to be elected by such shares.
(8) Closing of Transfer Books and Fixing Record Date: For the purpose of
determining shareholders notice of or to vote at any meeting of shareholders, or
any adjournment thereof, or entitled to receive payment of any dividend, the
Board of Directors may provide that the stock transfer books shall be closed for
a stated period not to exceed seventy days nor be less than ten days preceding
such meeting. In lieu of closing the stock transfer books, the Board of
Directors may fix in advance a record date for any such determination of
shareholders, such date to be not more than fifty days and, in case of a meeting
of shareholders, not less than ten days prior to the date on which the
particular action requiring such determination of shareholders is to be taken.
(9) Proxies: A shareholder may vote either in person or by proxy executed
in writing by the shareholder or his duly authorized attorney-in-fact or agent.
An appointment of a proxy is effective when received by the person authorized to
tabulate votes for the Corporation. No proxy shall be valid after eleven months
from the date of its execution, unless otherwise provided in the proxy.
(10) Action by Shareholders without a Meeting: Any action required or which
may be taken at a meeting of shareholders of the corporation may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the shareholders entitled to vote with respect to the
subject matter thereof, and delivered to the Corporation for inclusion in the
minutes or filing with the Corporation's records. Such consent shall have the
same force and effect as a unanimous vote of shareholders. Action taken in
accordance with this section shall be effective when all written consents are in
the possession of the Corporation unless the consent specifies a later effective
date.
(11) Waiver of Notice: A waiver of any notice required to be given any
shareholder, signed by the person or persons entitled to such notice, whether
before or after the time stated therein for the meeting shall be equivalent to
the giving of such notice provided that such waiver has been delivered to the
Corporation for inclusion in the minutes or filing with the Corporation's
records. A shareholder's attendance at a meeting waives any notice required,
unless the shareholder at the beginning of the meeting objects to holding the
meeting or transacting business at the meeting.
(12) Action of Shareholders by Communications Equipment: Shareholders may
participate in a meeting of shareholders by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other at the same time, and participation by such
means shall constitute presence in person at a meeting.
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(13) Notice of Shareholder Nominees: Nominations of persons for election to
the Board of Directors shall be made only at a meeting of shareholders and only
(i) by the Board of Directors or a committee appointed by the Board of Directors
or (ii) by any shareholder entitled to vote in the election of directors at the
meeting who complies with the notice procedures set forth in this Section 13.
Such nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the corporation. To be timely, a shareholder's notice shall be delivered to
or mailed and received at the principal executive offices of the corporation (i)
with respect to an election to be held at an annual meeting of shareholders,
ninety days prior to the date one year from the date of the immediately
preceding annual meeting of shareholders, and (ii) with respect to an election
to be held at a special meeting of shareholders for the election of directors,
the close of business on the tenth day following the date on which notice of
such meeting is first given to shareholders. For purposes of this Section 14,
any adjournment(s) or postponement(s) of the original meeting whereby the
meeting will reconvene within thirty days from the original date shall be deemed
for purposes of notice to be a continuation of the original meeting, and no
nominations by a shareholder of persons to be elected directors of the
corporation may be made at any such reconvened meeting unless pursuant to a
notice which was timely for the meeting on the date originally scheduled. Each
such notice shall set forth: (a) the name and address of the shareholder who
intends to make the nomination and of the person or persons to be nominated; (b)
a representation that the shareholder is a holder of record of stock of the
corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (d) such other information regarding each nominee proposed by
such shareholder as would be required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to the Securities Exchange Act of 1934, as amended; and (e) the consent
of each nominee to serve as a director of the corporation if so elected.
Notwithstanding the foregoing, nothing in this Section 13 shall be
interpreted or construed to require the inclusion of information about any such
nominee in any proxy statement distributed by, at the direction of, or on behalf
of the Board of Directors. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedures, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
(14) Shareholder Proposals at Annual Meeting: Business may be properly
brought before an annual meeting by a shareholder only upon the shareholder's
timely notice thereof in writing to the Secretary of the corporation. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not later than ninety days
prior to the date one year from the date of the immediately preceding annual
meeting of shareholders. For purposes of this Section 14, any adjournment(s) or
postponement(s) of the original meeting whereby the meeting will reconvene
within thirty days from the original date shall be deemed for purposes of notice
to be a continuation of the original meeting, and no business may be brought
before any reconvened meeting unless pursuant to a notice which was timely for
the meeting on the date as originally scheduled. Each such notice shall set
forth: (a) the name and address of the shareholder who intends to make the
proposal; (b) a representation that the shareholder is a holder of record of
stock of the corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to vote for the proposal; (c) any material
interest of such shareholder in such proposal; and (d) such other information
regarding such proposal as would be required to be disclosed in solicitations of
proxies pursuant to the Securities Exchange Act of 1934, as amended.
Notwithstanding the foregoing, nothing in this Section 14 shall be
interpreted or construed to require the inclusion of information about any such
proposal in any proxy statement distributed by, at the discretion of, or on
behalf of the Board of Directors. The Chairman of the meeting shall, if the
facts warrant, determine and declare to the meeting that a proposal was not made
in accordance with the foregoing procedures, and if he should so determine, he
shall so declare to the meeting, and any such business not properly brought
before the meeting shall be disregarded.
ARTICLE III
Stock
(1) Issuance of Shares: No shares of the Corporation shall be issued unless
authorized by the Board of Directors. Such authorization shall include the
number of shares to be issued, the consideration to be received and a statement
regarding the adequacy of the consideration.
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(2) Certificates: Certificates of stock shall be issued in numerical order,
and each shareholder shall be entitled to a certificate signed by the President,
or a Vice President, and the Secretary or an Assistant Secretary, and may be
sealed with the seal of the corporation or a facsimile thereof. The signatures
of such officers may be facsimiles if the certificate is manually signed on
behalf of a transfer agent, or registered by a registrar, other than the
corporation itself or an employee of the corporation. If an officer who has
signed or whose facsimile signature has been placed upon such certificate ceases
to be an officer before the certificate is issued, it may be issued by the
corporation with the same effect as if the person were an officer on the date of
issue.
At a minimum each certificate of stock shall state:
(a) the name of the Corporation;
(b) that the Corporation is organized under the laws of the State of
Washington;
(c) the name of the person to whom the certificate is issued;
(d) the number and class of shares and the designation of the series,
if any, the certificate represents; and
(e) if the Corporation is authorized to issue different classes of
shares or different series within a class, the designations, relative
rights, preferences and limitations applicable to each class and the
variations in rights, preferences and limitations determined for each
series, and the authority of the Board of Directors to determine variations
for future series, must be summarized either on the front or back of the
certificate. Alternatively, the certificate may state conspicuously on its
front or back that the Corporation will furnish the shareholder this
information without charge on request in writing.
(3) Transfers:
(a) Transfers of stock shall be made only upon the stock transfer
books of the corporation, kept at the registered office of the corporation
or at its principal place of business, or at the office of its transfer
agent or registrar, and before a new certificate is issued the old
certificate shall be surrendered for cancellation. The Board of Directors
may, by resolution, open a share register in any state of the United
States, and may employ an agent or agents to keep such register, and to
record transfers of shares therein.
(b) Shares of certificated stock shall be transferred by delivery of
the certificates therefor, accompanied either by an assignment in writing
on the back of the certificate or an assignment separate from certificate,
or by a written power of attorney to sell, assign and transfer the same,
signed by the holder of said certificate. No shares of certificated stock
shall be transferred on the records of the Corporation until the
outstanding certificates therefor have been surrendered to the Corporation
or to its transfer agent or registrar.
(4) Registered Owner: Registered shareholders shall be treated by the
corporation as the holders in fact of the stock standing in their respective
names and the corporation shall not be bound to recognize any equitable or other
claim to or interest in any share on the part of any other person, whether or
not it shall have express or other notice thereof, except as expressly provided
below or by the laws of the State of Washington. The Board of Directors may
adopt by resolution a procedure whereby a shareholder of the corporation may
certify in writing to the corporation that all or a portion of the shares
registered in the name of such shareholder are held for the account of a
specified person or persons. The resolution shall set forth:
(a) The classification of shareholder who may certify;
(b) The purpose or purposes for which the certification may be made;
(c) The form of certification and information to be contained therein;
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(d) If the certification is with respect to a record date or closing
of the stock transfer books, the date within which the certification must
be received by the corporation; and
(e) Such other provisions with respect to the procedure as are deemed
necessary or desirable.
Upon receipt by the corporation of a certification complying with the
procedure, the persons specified in the certification shall be deemed, for the
purpose or purposes set forth in the certification, to be the holders of record
of the number of shares specified in place of the shareholder making the
certification.
(5) Mutilated, Lost or Destroyed Certificates: In case of any mutilation,
loss or destruction of any certificate of stock, another may be issued in its
place on proof of such mutilation, loss or destruction. The Board of Directors
may impose conditions on such issuance and may require the giving of a
satisfactory bond or indemnity to the corporation in such sum as they might
determine or establish such other procedures as they deem necessary.
(6) Fractional Shares or Scrip: The corporation, by resolution of the Board
of Directors, may either: (a) issue fractions of a share which shall entitle the
holder to exercise voting rights, to receive dividends thereon, and to
participate in any of the assets of the corporation in the event of liquidation;
(b) arrange for the disposition of fractional interests by those entitled
thereto; (c) pay in cash the fair value of fractions of a share as of the time
when those entitled to receive such shares are determined; or (d) issue scrip in
registered or bearer form which shall entitle the holder to receive a
certificate for a full share upon the surrender of such scrip aggregating a full
share.
(7) Shares of Another Corporation: Shares owned by the corporation in
another corporation, domestic or foreign, may be voted by such officer, agent or
proxy as the Board of Directors may determine or, in the absence of such
determination, by the President of the corporation.
ARTICLE IV
Board of Directors
(1) Number and Powers: The management of all the affairs, property and
interest of the corporation shall be vested in a Board of Directors consisting
of four (4) persons, who shall be elected for a term of one year, and shall hold
office until their successors are elected and qualified. Directors need not be
shareholders or residents of the State of Washington. In addition to the powers
and authorities by these Bylaws and the Articles of Incorporation expressly
conferred upon it, the Board of Directors may exercise all such powers of the
corporation and do all such lawful acts and things as are not prohibited by
statute or by the Articles of Incorporation or by these Bylaws or as directed or
required to be exercised or done by the shareholders.
(2) Change of Number: The number of directors may at any time be increased
or decreased by amendment of these Bylaws, but no decrease shall have the effect
of shortening the term of any incumbent directors, except as provided in
Sections 5 and 6 of this Article IV.
(3) Vacancies: All vacancies in the Board of Directors, whether caused by
resignation, death or otherwise, may be filled by the affirmative vote of a
majority of the remaining directors though less than a quorum of the Board of
Directors. A director elected to fill any vacancy shall hold office for the
unexpired term of his or her predecessor and until his or her successor is
elected and qualified. Any directorship to be filled by reason of an increase in
the number of directors may be filled by the Board of Directors for a term of
office continuing only until the next election of directors by the shareholders
and until his or her successor is elected and qualified.
(4) Resignation: A director may resign at any time by delivering written
notice to the Board of Directors, the President or the Secretary. A resignation
is effective when the notice is delivered unless the notice specifies a later
effective date.
(5) Removal of Directors: At a special meeting of shareholders called
expressly for that purpose, the entire Board of Directors, or any member
thereof, may be removed by a vote of the holders of a majority of shares then
entitled to vote at an election of such directors. A director or directors may
be removed only if the number of votes cast to remove the
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director exceeds the number of votes cast not to remove the director. The notice
of such special meeting must state that the purpose, or one of the purposes, of
the meeting is removal of the director or directors, as the case may be.
(6) Regular Meetings: Regular meetings of the Board of Directors or any
committee may be held without notice at the registered office of the corporation
or at such other place or places, either within or without the State of
Washington, as the Board of Directors or such committee, as the case may be, may
from time to time designate. The annual meeting of the Board of Directors shall
be held without notice immediately after the adjournment of the annual meeting
of shareholders.
(7) Special Meetings:
(a) Special meetings of the Board of Directors may be called at any
time by the President or by any two directors, to be held at the registered
office of the corporation or at such other place or places as the Board of
Directors or the person or persons calling such meeting may from time to
time designate. Notice of all special meetings of the Board of Directors
shall be given to each director by three day's service of the same by
telegram, by letter, or personally. Such notice need not specify the
business to be transacted at, nor the purpose of, the meeting.
(b) Special meetings of any committee may be called at any time by
such person or persons and with such notice as shall be specified for such
committee by the Board of Directors, or in the absence of such
specification, in the manner and with the notice required for special
meetings of the Board of Directors.
(8) Quorum: A majority of the whole Board of Directors shall be necessary
at all meetings to constitute a quorum for the transaction of business. If a
quorum is present when a vote is taken, the affirmative vote of a majority of
directors present is the act of the Board of Directors.
(9) Waiver of Notice: Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened and does not thereafter vote for
or assent to action taken at the meeting. A waiver of notice signed by the
director or directors and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records, whether before or after the time
stated for the meeting, shall be equivalent to the giving of notice.
(10) Registering Dissent: A director who is present at a meeting of the
Board of Directors at which action on a corporate matter is taken shall be
presumed to have assented to such action unless his dissent shall be entered in
the minutes of the meeting, or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting, before the
adjournment thereof, or shall forward such dissent by registered mail to the
Secretary of the corporation within a reasonable time after the adjournment of
the meeting. Such right to dissent shall not apply to a director who voted in
favor of such action.
(11) Executive and Other Committees: The Board of Directors, by resolution
adopted by a majority of the full Board of Directors, may designate from among
its members an Executive Committee and one or more other standing or special
committees. The Executive Committee shall have and may exercise all the
authority of the Board of Directors, and other standing or special committees
may be invested with such powers, subject to such conditions, as the Board of
Directors shall see fit; provided that, notwithstanding the above, no committee
of the Board of Directors shall have the authority to: (1) Declare dividends or
distributions, except at a rate or in periodic amount determined by the Board of
Directors; (2) approve or recommend to shareholders actions or proposals
required by law to be approved by shareholders; (3) fill vacancies on the Board
of Directors or any committee thereof; (4) adopt, amend, or repeal the Bylaws;
(5) authorize or approve the reacquisition of shares unless pursuant to general
formula or method specified by the Board of Directors; (6) fix compensation of
any director for serving on the Board of Directors or on any committee thereof;
(7) approve a plan of merger, consolidation, or exchange of shares not requiring
shareholder approval; (8) reduce earned or capital surplus; or (9) appoint other
committees of the Board of Directors or the members thereof. All committees so
appointed shall keep regular minutes of their meetings and shall cause them to
be recorded in books kept for that purpose in the office of the corporation. The
designation of any such committee and the delegation of authority thereto shall
not relieve the Board of Directors, or any member thereof, of any responsibility
imposed by law.
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(12) Remuneration: No stated salary shall be paid directors, as such, for
their service, but by resolution of the Board of Directors, a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular or
special meeting of such Board; provided, that nothing herein contained shall be
construed to preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of standing or special
committees may be allowed like compensation for attending committee meetings.
(13) Loans: No loans shall be made by the corporation to the directors,
unless first approved by the holders of two-thirds of the voting shares. No
loans shall be made by the corporation secured by its own shares.
(14) Action by Directors Without a Meeting: Any action required or which
may be taken at a meeting of the directors, or of a committee thereof, may be
taken without a meeting if a consent in writing, setting forth the action so
taken or to be taken, shall be signed by all of the directors, or all of the
members of the committee, as the case may be, either before or after the action
taken, and delivered to the Corporation for inclusion in the minutes or filing
with the Corporation's records. Such consent shall have the same effect as a
unanimous vote.
(15) Action of Directors by Communications Equipment: Any action required
or which may be taken at a meeting of directors, or of a committee thereof, may
be taken by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
at the same time.
ARTICLE V
Officers
(1) Designations: The officers of the corporation shall be a Chairman of
the Board of Directors, a President, one or more Vice-Presidents (one or more of
whom may be Executive Vice-Presidents), a Secretary and a Treasurer, and such
Assistant Secretaries and Assistant Treasurers as the Board may designate, who
shall be elected for one year by the directors at their first meeting after the
annual meeting of shareholders, and who shall hold office until their successors
are elected and qualified. Any two or more offices may be held by the same
person, except the offices of President and Secretary.
(2) The Chairman of the Board of Directors: The Chairman of the Board of
Directors shall preside at all meetings of shareholders and directors, and shall
perform all such other duties as are incident to his office or are properly
required of him by the Board of Directors.
(3) The President: The President shall have general supervision of the
affairs of the corporation, and shall perform all such other duties as are
incident to his office or are properly required of him by the Board of
Directors.
(4) Vice-Presidents: During the absence or disability of the President, the
Executive Vice-Presidents, if any, and the Vice-Presidents in the order
designated by the Board of Directors, shall exercise all the functions of the
President. Each Vice-President shall have such powers and discharge such duties
as may be assigned to him from time to time by the Board of Directors.
(5) Secretary and Assistant Secretaries: The Secretary shall issue notices
for all meetings, except for notices for special meetings of the shareholders
and special meetings of the directors which are called by the requisite number
of shareholders or directors, shall keep minutes of all meetings, shall have
charge of the seal and the corporate books, and shall make such reports and
perform such other duties as are incident to his office, or are properly
required of him by the Board of Directors. The Assistant Secretary, or Assistant
Secretaries in the order designated by the Board of Directors, shall perform all
of the duties of the Secretary during the absence or disability of the
Secretary, and at other times may perform such duties as are directed by the
President or the Board of Directors.
(6) The Treasurer: The Treasurer shall have the custody of all moneys and
securities of the corporation and shall keep regular books of account. He shall
disburse the funds of the corporation in payment of the just demands against the
corporation or as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Board of Directors from
time to time as may be required of him an account of all his transactions as
Treasurer and of the financial condition of the corporation. He shall perform
such other duties incident to his office or that are properly required of him by
the Board of Directors. The Assistant Treasurer, or Assistant Treasurers in the
order designated by the
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Board of Directors, shall perform all of the duties of the Treasurer in the
absence or disability of the Treasurer, and at other times may perform such
other duties as are directed by the President or the Board of Directors.
(7) Delegation: In the case of absence or inability to act of any officer
of the corporation and of any person herein authorized to act in his place, the
Board of Directors may from time to time delegate the powers or duties of such
officer to any other officer or any director or other person whom it may in its
sole discretion select.
(8) Vacancies: Vacancies in any office arising from any cause may be filled
by the Board of Directors at any regular or special meeting of the Board.
(9) Other Officers: Directors may appoint such other officers and agents as
it shall deem necessary or expedient, who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors.
(10) Resignation: An officer may resign at any time by delivering notice to
the Corporation. Such notice shall be effective when delivered unless the notice
specifies a later effective date. Any such resignation shall not affect the
Corporation's contract rights, if any, with the officer.
(11) Loans: No loans shall be made by the corporation to any officer,
unless first approved by the holders of two-thirds of the voting shares.
(12) Term - Removal: The officers of the corporation shall hold office
until their successors are chosen and qualify. Any officer or agent elected or
appointed by the Board of Directors may be removed at any time, with or without
cause, by the affirmative vote of a majority of the whole Board of Directors,
but such removal shall be without prejudice to the contract rights, if any, of
the person so removed.
(13) Salaries and Contract Rights: The salaries, if any, of the officers
shall be fixed from time to time by the Board of Directors. The appointment of
an officer shall not of itself create contract rights.
(14) Bonds: The Board of Directors may, by resolution, require any and all
of the officers to give bonds to the corporation, with sufficient surety or
sureties, conditioned for the faithful performance of the duties of their
respective offices, and to comply with such other conditions as may from time to
time be required by the Board of Directors.
ARTICLE VI
(1) Distributions: The Board of Directors may authorize and the corporation
may make distributions to its shareholders; provided that no distribution may be
made if, after giving it effect, either:
(a) The Corporation would not be able to pay its debts as they become
due in the usual course of business; or
(b) The Corporation's total assets would be less than the sum of its
total liabilities plus the amount which would be needed, if the Corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential
rights are superior to those receiving the distribution.
The Board of Directors may authorize distributions to holders of record at
the close of business on any business day prior to the date on which the
distribution is made. If the Board of Directors does not fix a record date for
determining shareholders entitled to a distribution, the record date shall be
the date on which the Board of Directors authorizes the distribution.
(2) Measure of Effect of a Distribution: For purposes of determining
whether a distribution may be authorized by the Board of Directors and paid by
the Corporation under Article VI, Section 1 of these Bylaws, the effect of the
distribution is measured:
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(a) In the case of a distribution of indebtedness, the terms of which
provide that payment of principal and interest are made only if and to the
extent that payment of a distribution to shareholders could then be made
under this section, each payment of principal or interest is treated as a
distribution, the effect of which is measured on the date the payment is
actually made; or
(b) In the case of any other distribution:
(i) if the distribution is by purchase, redemption, or other
acquisition of the Corporation's shares, the effect of the
distribution is measured as of the earlier of the date any money or
other property is transferred or debt incurred by the Corporation, or
the date the shareholder ceases to be a shareholder with respect to
the acquired shares;
(ii) if the distribution is of an indebtedness other than
described in subsection 2(a) and (b)(i) of this section, the effect of
the distribution is measured as of the date the indebtedness is
distributed; and
(iii) in all other cases, the effect of the distribution is
measured as of the date the distribution is authorized if payment
occurs within 120 days after the date of authorization, or the date
the payment is made if it occurs more than 120 days after the date of
authorization.
(3) Depositories: The moneys of the corporation shall be deposited in the
name of the corporation in such bank or banks or trust company or trust
companies as the Board of Directors shall designate, and shall be drawn out only
by check or other order for payment of money signed by such persons and in such
manner as may be determined by resolution of the Board of Directors.
ARTICLE VII
Notices
Except as may otherwise be required by law, any notice to any shareholder
or director must be in writing and may be transmitted by: mail, private carrier
or personal delivery; telegraph or teletype; or telephone, wire or wireless
equipment which transmits a facsimile of the notice. Written notice by the
Corporation to its shareholders shall be deemed effective when mailed, if mailed
with first-class postage prepaid and correctly addressed to the shareholder's
address shown in the Corporation's current record of shareholders. Except as set
forth in the previous sentence, written notice shall be deemed effective at the
earliest of the following: (i) when received; (ii) five days after its deposit
in the United States mail, as evidenced by the postmark, if mailed with
first-class postage, prepaid and correctly addressed; or (iii) on the date shown
on the return receipt, if sent by registered or certified mail, return receipt
requested, and receipt is signed by or on behalf of the addressee.
ARTICLE VIII
Seal
The corporate seal of the corporation shall be in such form and bear such
inscription as may be adopted by resolution of the Board of Directors, or by
usage of the officers on behalf of the corporation.
ARTICLE IX
Indemnification
(1) Right to Indemnification: Each person who was or is made a party or is
threatened to be made a party to or is involved (including, without limitation,
as a witness) in any actual or threatened action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
or she is or was a director or officer of the corporation or, being or having
been such a director or officer, he or she is or was serving at the request of
the corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be
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indemnified and held harmless by the corporation to the full extent permitted by
applicable law as then in effect, against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts to be paid in settlement) actually and reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that except as provided in Section 2 of this
Article with respect to proceedings seeking to enforce rights to
indemnification, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the corporation. The right to indemnification conferred in
this Section shall be a contract right and shall include the right to be paid by
the corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that the payment of such
expenses in advance of the final disposition of a proceeding shall be made only
upon delivery to the corporation of an undertaking, by or on behalf of such
director of officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section or otherwise.
(2) Right of Claimant to Bring Suit: If a claim under Section 1 of this
Article is not paid in full by the corporation within sixty days after a written
claim has been received by the corporation, except in the case of a claim for
expenses incurred in defending a proceeding in advance of its final disposition,
in which case the applicable period shall be twenty days, the claimant may at
any time thereafter bring suit against the corporation to recover the unpaid
amount of the claim and, to the extent successful in whole or in part, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. The claimant shall be presumed to be entitled to indemnification under
this Article upon submission of a written claim (and, in an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition, where the required undertaking has been tendered to the
corporation) and thereafter the corporation shall have the burden of proof to
overcome the presumption that the claimant is not so entitled. Neither the
failure of the corporation (including its Board of Directors, independent legal
counsel or its shareholders) to have made a determination prior to the
commencement of such action that indemnification of or reimbursement or
advancement of expenses to the claimant is proper in the circumstances nor an
actual determination by the corporation (including its Board of Directors,
independent legal counsel or its shareholders) that the claimant is not entitled
to indemnification or to the reimbursement or advancement of expenses shall be a
defense to the action or create a presumption that the claimant is not so
entitled.
(3) Nonexclusivity of Rights: The right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Articles of Incorporation, Bylaws, agreement, vote of shareholders or
disinterested directors or otherwise.
(4) Insurance, Contracts and Funding: The corporation may maintain
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the corporation or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the corporation would have the power to indemnify such person against such
expense, liability or loss under the Washington Business Corporation Act. The
corporation may, without further shareholder action, enter into contracts with
any director or officer of the corporation in furtherance of the provisions of
this Article and may create a trust fund, grant a security interest or use other
means (including, without limitation, a letter of credit) to ensure the payment
of such amounts as may be necessary to effect indemnification as provided in
this Article.
(5) Indemnification of Employees and Agents of the Corporation: The
corporation may, by action of its Board of Directors from time to time, provide
indemnification and pay expenses in advance of the final disposition of a
proceeding to employees and agents of the corporation with the same scope and
effect as the provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the corporation or pursuant
to rights granted pursuant to, or provided by, the Washington Business
Corporation Act or otherwise.
ARTICLE X
Books and Records
The corporation shall keep correct and complete books and records of
account and shall keep minutes of the proceedings of its shareholders and Board
of Directors; and shall keep at its registered office or principal place of
business, or at the office of its transfer agent or registrar, a record of its
shareholders, giving the names and addresses of all shareholders in
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alphabetical order by class of shares showing the number and class of the shares
held by each. Any books, records, and minutes may be in written form or any
other form capable of being converted into written form within a reasonable
time.
ARTICLE XI
Amendments
(1) By Shareholders: These Bylaws may be altered, amended or repealed by
the affirmative vote of a majority of the voting stock issued and outstanding at
any regular or special meeting of the shareholders.
(2) By Directors: The Board of Directors shall have power to make, alter,
amend and repeal the Bylaws of this corporation. However any such Bylaws, or any
alteration, amendment or repeal of the Bylaws, may be changed or repealed by the
holders of a majority of the stock entitled to vote at any shareholders'
meeting.
(3) Emergency Bylaws: The Board of Directors may adopt emergency Bylaws,
subject to repeal or change by action of the shareholders, which shall be
operative during any emergency in the conduct of the business of the corporation
resulting from an attack on the United States or any nuclear or atomic disaster.
Most recently amended by resolution of the corporation's Board of Directors
on March 12, 1998.
/s/JOEL S. HATLEN
--------------------------
Joel S. Hatlen, Secretary
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DATA I/O CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN
Amended and Restated January 1, 1997
ARTICLE I
Purpose and Effective Date
This Management Incentive Compensation Plan (the "Plan") is intended to promote
the interests of Data I/O Corporation by stimulating the efforts of key
management staff through the opportunity to share in the success of the Company.
This amended and restated Plan is effective January 1, 1997.
ARTICLE II
Definitions
2.1 "Administrator" shall mean the Compensation Committee of the Board.
2.2 "Annual Base Pay" shall mean with respect to a Participant the
Participant's base pay earnings during the Plan Year including pay for
paid time off (PTO), holidays, and long term sick time off and excluding
pay for overtime, bonuses, relocation, and other similar additional pay.
2.3 "Board" shall mean the Board of Directors of Data I/O Corporation, a
Washington corporation.
2.4 "Company" shall mean Data I/O Corporation and all of its subsidiaries.
2.5 "Compensation Committee" shall mean the Compensation Committee of the
Board.
2.6 "Earnings Per Share" shall mean pre-tax income per the audited year end
financial statements, less any gains and losses on sales or disposals of
assets not occurring in the normal course of business, less any
investment banker fees, less taxes, at a pre-determined rate, divided by
a pre-determined annual weighted average shares outstanding. Due to the
exclusion of gains and losses on the sale or disposal of assets and
income taxes and weighted average shares outstanding being calculated at
a pre-determined rate, the earnings per share for purposes of this plan
may not equal those per the audited financial statements.
2.7 "Team member" shall mean any person employed by the Employer in any
capacity.
2.8 "Employer" shall mean the Company.
2.9 "Guideline" shall mean the percentage of Annual Base Pay which the
Participant can receive in incentive compensation if the Company
achieves its Target. The Guideline shall be approved by the
Administrator based on the following table:
Management level Guideline %
---------------- -----------
Officer 30% - 50%
Director 20% - 25%
Manager 10% - 20%
2.10 "Participant" shall mean any Team member who meets the eligibility
requirements set forth in Article III.
2.11 "Plan" shall mean the Management Incentive Compensation Plan set forth
herein.
2.12 "Plan Year" shall mean the period commencing on January 1 and ending on
the following December 31.
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ARTICLE III
Eligibility
An Team member is eligible to participate in the Plan during a Plan Year if:
(a) The Team member is not a participant in any other commission, incentive
or bonus plan for the Plan Year (being a recipient of a spot award or a
service award does not eliminate eligibility); and
(b) As of the end of the Plan Year the Team member is employed on the
payroll of the Company; and
(c) Is employed as a regular full time or part time team member (not
temporary or contract team member); and
(d) The Team member is a direct report to an elected officer of the Company
or a direct report of a direct report of an Officer of the Company; and
(e) The Team member has an annual base salary in excess of $60,000.
ARTICLE IV
Target Payout Calculation
4.1 "Target" is stated in terms of Earnings Per Share and is set annually by
the Administrator at a level which may or may not correspond to the
Company's operating plan for earnings per share for that year.
4.2 Payout at Target is equal to Guideline percent of Annual Base Pay.
Payouts between Threshold and Target and between Target and Maximum are
prorated linearly.
4.3 "Threshold" is the minimum performance level at which a payout under the
Plan will be made. Threshold is set annually by the Administrator and is
represented as a percent of the Earnings Per Share Target. Payout when
Threshold is met is set annually by the Administrator and is represented
as a percent of Guideline.
4.4 "Maximum" is the performance level at which the payout under the Plan
discontinues to increase. Maximum is set annually by the Administrator
and is represented as a percent of the Earnings Per Share Target. Payout
when Maximum is met is set annually by the Administrator and is
represented as a percent of Guideline.
ARTICLE V
Payment
5.1 Payouts shall be paid by the Company as soon as practicable after the
end of the Plan Year. The Company shall use its best efforts to make
such payments by March 15 following the end of the Plan Year.
5.2 Notwithstanding anything in the Plan to the contrary, the Company shall
withhold from all payments made under the Plan any amount which the
Company is required to withhold for any applicable state, federal, or
local taxes.
ARTICLE VI
Administration
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6.1 The Plan shall be administered by the Administrator. The Administrator
shall interpret the Plan and may from time to time make such decisions
and adopt such rules and regulations for amending or interpreting the
Plan as it deems appropriate.
6.2 The Administrator shall have complete authority to determine, in
accordance with the provisions of the Plan, the existence or
non-existence, nature and amount of the rights and interest of the Team
member and his beneficiaries under the Plan. In any action or proceeding
affecting the Plan, the Administrator shall be the only necessary party,
and no team member or former team member of the Employer or any other
person having or claiming to have an interest under the Plan shall be
entitled to any notice or process. Any judgment which may be entered in
any such action or proceeding shall be binding and conclusive on all
persons having or claiming to have any interest under the Plan.
ARTICLE VII
Indemnification
The Company shall defend, indemnify, and hold all officers and directors of the
Company, the Administrator, and all members of the Compensation Committee
harmless from and against any and all loss, liability, damage and/or deficiency
(including, without limitation, reasonable attorney's fees) arising out of the
establishment or operation of this Plan.
ARTICLE VIII
Amendment and Termination
The Administrator shall have the power, right and authority to amend,
discontinue, or terminate the Plan in its sole discretion; provided no accrued
payouts as of the end of a Plan Year may be reduced on account of any amendment
or action of the Administrator.
ARTICLE IX
Miscellaneous
9.1 Source of Funding. The rights of a Participant to benefits under the
Plan shall be solely those of an unsecured creditor of the Company and
all benefits payable under the Plan shall be paid from the general funds
of the Company.
9.2 This agreement shall not be deemed to constitute a contract of
employment between any team member and the Company nor shall any
provision restrict the right of the Company to discharge any team
member, or restrict the right of any team member to terminate his
employment with the Company.
9.3 A Participant or beneficiary shall have no right to transfer, assign,
encumber, hypothecate, pledge, put up as collateral for a loan, or
otherwise dispose of his right to receive payments under the Plan.
9.4 The provisions of the Plan shall bind and inure to the benefit of the
Company and its successors and assigns.
9.5 All expenses and costs in connection with the adoption and
administration of the Plan shall be borne by the Company.
9.6 The provisions of the Plan shall be governed by and construed in
accordance with the laws of the State of Washington. Invalidation of any
one or the provisions of the Plan for any reason shall in no way affect
the other provisions hereof, and all such other provisions shall remain
in full force and effect.
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DATA I/O CORPORATION
By /s/Joel S. Hatlen
Its Treasurer
Date: February 20, 1997
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DATA I/O CORPORATION
PERFORMANCE BONUS PLAN
Amended & Restated January 1, 1997
ARTICLE I
Purpose and Effective Date
This Performance Bonus Plan (the "Plan") is intended to promote the interests of
Data I/O Corporation by stimulating the efforts of its team members through the
opportunity to share in the success of the Company. This amended and restated
Plan is effective January 1, 1997.
ARTICLE II
Definitions
2.1 "Administrator" shall mean the Compensation Committee of the Board.
2.2 "Annual Base Pay" shall mean with respect to a Participant the
Participant's base pay earnings during the Plan Year including pay for
PTO, holidays, and long term sick and excluding pay for overtime,
bonuses, relocation, and other similar additional pay.
2.3 "Board" shall mean the Board of Directors of Data I/O Corporation, a
Washington corporation.
2.4 "Company" shall mean Data I/O Corporation and all of its subsidiaries.
2.5 "Compensation Committee" shall mean the Compensation Committee of the
Board.
2.6 "Earnings Per Share" shall mean pre-tax income per the audited year end
financial statements, less any gains and losses on sales or disposals of
assets not occurring in the normal course of business, less investment
banker fees, less taxes, at a pre-determined rate, divided by a
pre-determined annual weighted average shares outstanding. Due to the
exclusion of gains and losses on sales of assets and income taxes and
weighted average shares outstanding being calculated at a pre-determined
rate, the earnings per share for purposes of this plan may not equal
those per the audited financial statements.
2.7 "Team member" shall mean any person employed by the Employer in any
capacity.
2.8 "Employer" shall mean the Company.
2.9 "Participant" shall mean any team member who meets the eligibility
requirements set forth in Article III.
2.10 "Plan" shall mean the Performance Bonus Plan set forth herein.
2.11 "Plan Year" shall mean the period commencing on January 1 and ending on
the following December 31.
ARTICLE III
Eligibility
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A team member is eligible to participate in the Plan during a Plan Year if:
(a) The team member is not a participant in any other commission, incentive
or bonus plan for the Plan Year (being a recipient of a spot award or a
service award does not eliminate eligibility); and
(b) As of the end of the Plan Year the team member is employed on the
payroll of the Company: and
(c) Is employed as a regular full time or part time team member (not
temporary or contract team member).
ARTICLE IV
Target Payout Calculation
4.1 "Target" is stated in terms of Earnings Per Share and is set annually by
the Administrator at a level which may or may not correspond to the
Company's operating plan for earnings per share for that year.
4.2 Payout at Target is equal to two percent of Annual Base Pay. Payouts
between Threshold and Target and between Target and Maximum are prorated
linearly.
4.3 "Threshold" is set at 60% of the Earnings Per Share Target. Payout when
Threshold is met is set at one percent of Annual Base Pay.
4.4 "Maximum" is set at 200% of the Earnings Per Share Target. Payout when
Maximum is reached is set at four percent of Annual Base Pay.
ARTICLE V
Payment
5.1 Payouts shall be paid by the Company as soon as practicable after the
end of the Plan Year. The Company shall use its best efforts to make
such payments by March 15 following the end of the Plan Year.
5.2 Notwithstanding anything in the Plan to the contrary, the Company shall
withhold from all payments made under the Plan any amount which the
Company is required to withhold for any applicable state, federal, or
local taxes.
ARTICLE VI
Administration
6.1 The Plan shall be administered by the Administrator. The Administrator
shall interpret the Plan and may from time to time make such decisions
and adopt such rules and regulations for amending or interpreting the
Plan as it deems appropriate.
6.2 The Administrator shall have complete authority to determine, in
accordance with the provisions of the Plan, the existence or
non-existence, nature and amount of the rights and interest of the team
member and his beneficiaries under the Plan. In any action or proceeding
affecting the Plan, the Administrator shall be the only necessary party,
and no team member or former team member of the Employer or any other
person having or claiming to have an interest under the Plan shall be
entitled to any notice or process. Any judgment which may be entered in
any such action or proceeding shall be binding and conclusive on all
persons having or claiming to have any interest under the Plan.
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ARTICLE VII
Indemnification
The Company shall defend, indemnify, and hold all officers and directors of the
Company, the Administrator, and all members of the Compensation Committee
harmless from and against any and all loss, liability, damage and/or deficiency
(including, without limitation, reasonable attorney's fees) arising out of the
establishment or operation of this Plan.
ARTICLE VIII
Amendment and Termination
The Administrator shall have the power, right and authority to amend,
discontinue, or terminate the Plan in its sole discretion; provided no accrued
payouts as of the end of a Plan Year may be reduced on account of any amendment
or action of the Administrator.
ARTICLE IX
Miscellaneous
9.1 Source of Funding. The rights of a Participant to benefits under the
Plan shall be solely those of an unsecured creditor of the Company and
all benefits payable under the Plan shall be paid from the general funds
of the Company.
9.2 This agreement shall not be deemed to constitute a contract of
employment between any team member and the Company nor shall any
provision restrict the right of the Company to discharge any team
member, or restrict the right of any team member to terminate his
employment with the Company.
9.3 A Participant or beneficiary shall have no right to transfer, assign,
encumber, hypothecate, pledge, put up as collateral for a loan, or
otherwise dispose of his right to receive payments under the Plan.
9.4 The provisions of the Plan shall bind and inure to the benefit of the
Company and its successors and assigns.
9.5 All expenses and costs in connection with the adoption and
administration of the Plan shall be borne by the Company.
9.6 The provisions of the Plan shall be governed by and construed in
accordance with the laws of the State of Washington. Invalidation of any
one or the provisions of the Plan for any reason shall in no way affect
the other provisions hereof, and all such other provisions shall remain
in full force and effect.
DATA I/O CORPORATION
By:/s/Joel S. Hatlen
Its: Treasurer
Date: February 20, 1997
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FOURTH AMENDMENT TO THE
DATA I/O
TAX DEFERRAL RETIREMENT PLAN
The DATA I/O Tax Deferral Retirement Plan ("Plan"), as amended and restated
effective January 1, 1993 is amended as follows pursuant to Section 11.1 of the
Plan, effective January 1, 1995.
1. Section 7.1(b) Incentive Account shall be replaced in its entirety by the
following:
b) Incentive Account
Each participant shall earn a vested, nonforfeitable right to his or
her Incentive Account based on his or her years of service in
accordance with the following table:
Years of Service Percent Vested
Less than 3 0%
3 or more 100%
IN WITNESS WHEREOF, DATA I/O has caused this Fifth Amendment to be duly executed
on this 23 day of April, 1997.
FOR DATA I/O CORPORATION
__________________________ By:/s/ Alan J. Beauchamp
Witness
Its: Secretary
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FIFTH AMENDMENT TO THE
DATA I/O
TAX DEFERRAL RETIREMENT PLAN
The DATA I/O Tax Deferral Retirement Plan ("Plan"), as amended and restated
effective January 1, 1993 is amended as follows pursuant to Section 11.1 of the
Plan, effective January 1, 1995.
1. Section 7.1(b) Incentive Account shall be replaced in its entirety (to
correct an error made in the 3rd amendment) by the following:
b) Incentive Account
Each participant shall earn a vested, nonforfeitable right to his or
her Incentive Account based on his or her years of service in
accordance with the following table:
Years of Service Percent Vested
Less than 3 0%
3 or more 100%
In addition, each Participant shall have a 100% vested, nonforfeitable right to
his or her Incentive Account upon death, becoming Disabled or the attainment of
age 591/2, provided he or she is an Employee on such date.
IN WITNESS WHEREOF, DATA I/O has caused this Fifth Amendment to be duly executed
on this sixth day of November, 1997.
FOR DATA I/O CORPORATION
__________________________ By:/s/Alan J. Beauchamp
Witness
Its: Secretary
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Sixth Amendment
Data I/O Tax Deferral Retirement Plan
Pursuant to the terms of the Data I/O Tax Deferred Retirement Plan (hereinafter
referred to as "Plan" or "Plan and Trust") in connection with amendments, Data
I/O Corporation (hereinafter referred to as "Employer") does hereby adopt as of
the below described date the following amendment to the Plan.
WITNESSETH
WHEREAS, the Employer heretofore established the Plan and Trust effective
February 1, 1984, and last amended and restated effective January 1, 1993;
WHEREAS, the Employer desires to amend its Plan to provide for clarification of
the operation of certain Plan provisions in connection with the divestiture
transactions of two of the Plan Sponsor's businesses, Reel-Tech, Inc. and
Synario Design Automation Division ("Synario"), as adopted by the Plan Sponsor's
Board of Directors on August 22, 1997;
NOW, THEREFORE, the Employer and the Trustee in accordance with the provisions
of said Plan pertaining to amendments thereof, hereby amend the Plan effective
August 22, 1997 as follows:
Notwithstanding any Plan provision to the contrary and specifically
applicable to Plan Sections 4 (Contributions to the Plan) and 7 (Vesting), the
following shall apply to the Employees of Reel-Tech and Synario who are
otherwise Participants under the Plan as of the effective date of the
divestiture transaction described above and who become employees of the
applicable purchaser:
1. Each such Participant described herein shall be eligible to be credited
with Employer Matching Contributions to the extent of their salary deferral
amounts credited to the Plan and pursuant to Section 4.1(b) as if each such
Participant were employed as of the last of the Plan Year.
Such Employer Matching Contributions shall be made in accordance with the
Plan's matching contribution formula based on salary deferral amounts made to
the Plan and compensation earned from the Plan Sponsor through the day
immediately preceding the effective date of the sale transaction.
2. The Incentive Account of each such Participant described herein shall
become 100% vested.
IN WITNESS WHEREOF, this agreement has been executed this 13th day of February
1998.
EMPLOYER:
Data I/O
By: Joel S. Hatlen
Title: Secretary
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DATA I/O CORPORATION
1986 STOCK OPTION PLAN
AMENDED AND RESTATED
AS OF MAY 13, 1997
This Stock Option Plan (the "Plan") provides for the grant of options (the
"Options") to acquire shares of common stock (the "Common Stock") of Data I/O
Corporation (the "Corporation"). Stock options granted under this plan that
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") are referred to in this Plan as "Incentive Stock Options." Incentive
Stock Options and stock options that do not qualify under Section 422 of the
Code ("Non-Qualified Options") granted under this Plan are referred to as
"Options."
1. PURPOSES.
The purposes of this Plan are to retain the services of valued key
employees of the Corporation, to encourage such employees to acquire a greater
proprietary interest in the Corporation, thereby strengthening their incentive
to achieve the objectives of the shareholders and to serve as an aid and
inducement in the hiring of new key employees.
2. ADMINISTRATION.
The Plan shall be administered by the Board of Directors of the Corporation
(the "Board") or by a committee designated by the Board composed of two or more
members of the Board, each of whom is a "Non-Employee Director" (as defined
below), which committee (the "Committee") may be an executive, compensation or
other committee, including a separate committee especially created for this
purpose. The term "Non-Employee Director" shall be defined by reference to the
rules and regulations promulgated under Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Act"). The Board shall consider whether a director
is an "outside director" as defined in the regulations promulgated under Section
162(m) of the Code when appointing any such Committee and shall appoint solely
two or more "outside directors" if the Board intends for compensation
attributable to Options to be "qualified performance-based compensation" as
defined in the regulations promulgated under Section 162(m) of the Code. Any
such Committee shall have the powers and authority vested in the Board hereunder
(including the power and authority to interpret any provision of the Plan or of
any Option). The members of any such Committee shall serve at the pleasure of
the Board. A majority of the members of the Committee shall constitute a quorum,
and all actions of the Committee shall be taken by a majority of the members
present. Any action may be taken by a written instrument signed by all of the
members of the Committee and any action so taken shall be fully as effective as
if it had been taken at a meeting. The Board, or any committee thereof appointed
to administer the Plan, is referred to herein as the "Plan Administrator."
Subject to the provisions of the Plan, and with a view to effecting its
purpose, the Plan Administrator shall have sole authority, in its absolute
discretion, to (a) construe and interpret the Plan; (b) define the terms used
herein; (c) prescribe, amend, and rescind rules and regulations relating to the
Plan; (d) determine the individuals to whom Options to purchase shares of Common
Stock shall be granted under the Plan and whether the Options are Incentive
Stock Options or Non-Qualified Options; (e) determine the time or times at which
Options shall be granted under the Plan; (f) determine the number of shares of
Common Stock subject to each Option, the Option price, the duration of each
Option granted under the Plan and the times at which each Option shall become
exercisable; (g) determine all of the other terms and conditions of Options
granted under the Plan; and (h) make all other determinations necessary or
advisable for the administration of the Plan and do everything necessary or
appropriate to administer the Plan. All decisions, determinations, and
interpretations made by the Committee shall be binding and conclusive on all
participants in the Plan and on their legal representatives, heirs, and
beneficiaries.
The Board or the Committee may delegate to one or more executive officers
of the Corporation the authority to grant Options under this Plan to employees
of the Corporation who, at the time of grant, are neither subject to Section
16(b) of the Exchange Act with respect to the Common Stock nor a " covered
employee" within the meaning of Section 162(m)(3) of the Code ("Non-Insiders"),
and in connection therewith the authority to determine: (a) whether the Option
in an Incentive Stock Option or a Non-Qualified Stock Option; (b) the number of
shares of Common Stock subject to such Option; (c) the duration of the Option;
(d) the vesting schedule for determining the times at which such Option shall
become exercisable; and (e) all other terms and conditions of such Options. The
exercise price for any Option granted by action of an executive officer
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pursuant to such delegation of authority shall not be less than the fair market
value per share of the Common Stock on the Date of Grant as determined in
accordance with procedures established by the Plan Administrator. Unless
expressly approved in advance by the Board or the Committee, such delegation of
authority shall not include the authority to accelerate the vesting, extend the
period for exercise or otherwise alter the terms of outstanding Options. The
term "Plan Administrator" when used in any provision of this Plan other than
Sections 2, 5(f), 5(m), 5(n) and 11 shall be deemed to refer to the Board or the
Committee, as the case may be, and such senior executive officer, insofar as
such provision may be applied to Non-Insiders and Options granted to
Non-Insiders.
3. ELIGIBILITY.
Options may be granted to any individual who, at the time the Option is
granted, is an employee of the Corporation or any "related corporation" (as
defined below) and may be granted in substitution for outstanding options of
another corporation in connection with the merger, consolidation, acquisition of
property or stock, or other reorganization between such other corporation and
the Corporation or any subsidiary thereof. Options may also be granted in
exchange for outstanding Options. No person shall be granted Options to purchase
more than 250,000 shares of Common Stock (subject to adjustment as set forth in
Section 5(m) hereof) in any calendar year. Any person to whom an Option is
granted under this Plan is referred to herein as an "Optionee."
As used in this Plan, the term "related corporation," when referring to a
subsidiary corporation, shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation if, at the
time of the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock of one of the
other corporations in such chain. When referring to a parent corporation, the
term "related corporation" shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the Corporation
if, at the time of granting of the Option, each of the corporations other than
the Corporation owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock of one of the other corporations
in such chain.
4. STOCK.
The Plan Administrator is authorized to grant Options to acquire one
million one hundred thirty thousand (1,130,000) shares of the authorized but
unissued, or reacquired, Common Stock. The number of shares with respect to
which Options may be granted hereunder is subject to adjustment as set forth in
Section 5(m) hereof. In the event that any Option granted pursuant to this Plan
expires or is terminated for any reason, those shares of Common Stock allocable
to the unexercised portion of such terminated Option may again be subject to an
Option granted to the same or to a different Optionee under this Plan.
5. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted pursuant to this Plan shall be evidenced by a written
agreement approved by the Plan Administrator (the "Agreement"). Agreements may
contain such additional provisions, not inconsistent herewith, as the Plan
Administrator in its discretion, may deem advisable. All Options shall also
comply with the following requirements:
(a) Number of Shares.
Each Agreement shall state the number of shares of Common Stock to which it
pertains and whether the Option is intended to be an Incentive Stock Option or a
Non-Qualified Stock Option. In the absence of action to the contrary by the Plan
Administrator in connection with the grant of an Option, all Options shall be
Non-Qualified Options. The aggregate fair market value (determined at the Date
of Grant, as defined below) of the stock with respect to which Incentive Stock
Options are exercisable for the first time by the Optionee during any calendar
year (granted under this Plan and all other incentive stock option plans of the
Corporation, a related corporation or a predecessor corporation) shall not
exceed $100,000, or such other limit as may be prescribed by the Code as it may
be amended from time to time. Any Option which exceeds the annual limit shall
not be void, but rather shall be a Non-Qualified Option.
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(b) Date of Grant.
Each Agreement shall state the date which the Plan Administrator has deemed
to be the effective date of the Option for purposes of this Plan (the "Date of
Grant").
(c) Option Price.
Each Agreement shall state the price per share of Common Stock at which it
is exercisable. Common Stock issued under this Plan may be issued for any lawful
consideration as determined by the Plan Administrator; provided, that the per
share exercise price for any Incentive Stock Option shall not be less than the
fair market value per share of the Common Stock on the Date of Grant as
determined by the Plan Administrator in good faith and provided, further, that
with respect to Incentive Stock Options granted to greater-than-10% shareholders
of the Corporation (as determined with reference to Section 424(d) of the Code),
the exercise price per share shall not be less than 110% of the fair market
value per share of the Common Stock at the Date of Grant.
(d) Duration of Options.
At the time of the grant of the Option, the Plan Administrator shall
designate, subject to paragraph 5(g) below, the expiration date of the Option,
which shall not be later than ten years from the Date of Grant in the case of
Incentive Stock Options; provided, that the expiration date of any Incentive
Stock Option granted to a greater-than-10% shareholder of the Corporation (as
determined with reference to Section 424(d) of the Code) shall not be later than
five years from the Date of Grant. In the absence of action to the contrary by
the Plan Administrator in connection with the grant of a particular Option, and
except as otherwise required by the preceding sentence, all Options granted
hereunder shall expire six years from the Date of Grant.
(e) Vesting Schedule.
In order to ensure that the Corporation will receive the benefits
contemplated in exchange for the Options granted pursuant hereto, no Option
shall be exercisable until it has vested. Subject to paragraph 5(f) below, the
vesting schedule or other events for vesting for each Option, such as
performance goals, shall be specified by the Plan Administrator at the time of
the grant of the Option and shall be set forth or referenced in the Agreement.
If no vesting schedule is specified by the Plan Administrator at the time of the
grant of an Option hereunder, the following schedule shall apply:
Years of Service
Following Date of Percent
Grant Vested
----------------- ------
1 25
2 50
3 75
4 100
(f) Acceleration of Vesting.
The vesting of one or more outstanding Options may be accelerated by the
Plan Administrator at such times and in such amounts as it shall determine in
its sole discretion. The vesting of Options shall also be accelerated under the
circumstances described in Section 5(n) below.
(g) Term of Option.
Each Option shall terminate, to the extent not previously exercised, upon
the occurrence of the first of the following events: (i) the expiration of the
duration of the Option, as designated by the Plan Administrator in accordance
with Section 5(d) above; (ii) the expiration of 90 days from the date of the
Optionee's termination of employment with the Corporation for any reason
whatsoever other than death or disability unless, in the case of a Non-Qualified
Option, the
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exercise period is extended by the Plan Administrator until a date not later
than the expiration date of the Option; or (iii) the expiration of one year from
(A) the date of death of the Optionee or (B) cessation of employment by reason
of "disability" unless, in the case of a Non-Qualified Option, the exercise
period is extended by the Plan Administrator until a date not later than the
expiration date of the Option. For purposes of the Plan, "disability" shall mean
any physical, mental or other health condition which substantially impairs the
employee's ability to perform her or his assigned duties for 60 days or more in
any 120 day period or that can be expected to result in death. The Plan
Administrator shall determine whether an Optionee has incurred a disability on
the basis of medical evidence acceptable to the Plan Administrator. Upon making
a determination of disability, the Plan Administrator shall, for purposes of the
Plan, determine the date of an Optionee's termination of employment. Unvested
Options shall terminate immediately upon the termination of employment of the
Optionee by the Corporation for any reason whatsoever, including death or
disability.
(h) Exercise of Options.
Options shall be exercisable, either all or in part, at any time after
vesting. If less than all of the shares included in the vested portion of any
Option are purchased, the remainder may be purchased at any subsequent time
prior to the expiration of the Option term. No portion of any Option of less
than one hundred (100) shares (as adjusted pursuant to Section 5(m) hereof) may
be exercised, provided that if the vested portion of any Option is less than one
hundred (100) shares, it may be exercised with respect to all Shares for which
it is vested. Only whole shares may be issued pursuant to an Option, and to the
extent that an Option covers a fraction of a share, it is unexercisable. Options
or portions thereof may be exercised by giving written notice to the
Corporation, which notice shall specify the number of shares to be purchased,
and be accompanied by payment in the amount of the aggregate Option exercise
price for the Common Stock so purchased, which payment shall be in the form
specified in Section 5(i) hereof. The Corporation shall not be obligated to
issue, transfer, or deliver a certificate of Common Stock to any Optionee, or to
his personal representative, until the aggregate Option price has been paid for
all shares for which the Option shall have been exercised and adequate provision
has been made by the Optionee for satisfaction of any tax withholding
obligations associated with such exercise. During the lifetime of an Optionee,
Options are exercisable only by the Optionee.
(i) Payment upon Exercise of Option.
Upon exercise of any Option the aggregate Option exercise price shall be
paid to the Corporation in cash or by certified or cashier's check. In addition,
an Optionee may pay for all or any portion of the aggregate Option exercise
price for any shares of Common Stock purchased upon the exercise of any Option
by delivering to the Corporation shares of Common Stock previously held by such
Optionee or by complying with any other payment mechanism which the Plan
Administrator may approve from time to time. The shares of Common Stock received
or withheld by the Corporation as payment for shares of Common Stock purchased
upon the exercise of Options shall have a fair market value at the date of
exercise (as determined by the Plan Administrator) equal to the aggregate Option
exercise price (or portion thereof) to be paid by exchange or withholding of
shares of Common Stock.
(j) Rights as a Shareholder.
An Optionee shall have no rights as a shareholder with respect to any
shares covered by the Option until the Optionee becomes a record holder of such
shares, irrespective of whether he has given notice of exercise. Subject to the
provisions of Section 5(m) hereof, no rights shall accrue to an Optionee and no
adjustments shall be made on account of dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
declared on, or created in, the Common Stock for which the record date is prior
to the date the Optionee becomes a record holder of the shares of Common Stock
covered by the Option, irrespective of whether the Optionee has given notice of
exercise.
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(k) Transfer of Option.
Options granted under this Plan and the rights and privileges conferred
hereby may not be transferred, assigned, pledged, or hypothecated in any manner
(whether by operation of law or otherwise) other than by will or by the
applicable laws of descent and distribution or, in the case of Non-Qualified
Options (but not Incentive Stock Options), pursuant to a qualified domestic
relations order, and shall not be subject to execution, attachment or similar
process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise
dispose of any Option under this Plan or of any right or privilege conferred
hereby, contrary to the provisions hereof, or upon the sale, levy or any
attachment or similar process upon the rights and privileges conferred hereby,
such Option shall thereupon terminate and become null and void.
(1) Securities Regulation and Tax Withholding.
(1) Shares shall not be issued with respect to an Option unless
the exercise of such Option and the issuance and delivery of such
shares pursuant thereto shall comply with all relevant provisions of
law, including, without limitation, any applicable state securities
laws, the Securities Act of 1933, as amended, the Securities Exchange
Act of 1934, as amended, the rules and regulations promulgated
thereunder and the requirements of any stock exchange upon which such
shares may then be listed and shall be further subject to the approval
of counsel for the Corporation with respect to such compliance,
including the availability of an exemption from registration for the
issuance and sale of any shares upon exercise of any Option. Inability
of the Corporation to obtain from any regulatory body having
jurisdiction the authority deemed by the Corporation to be necessary
for the lawful issuance and sale of any shares hereunder, or the
unavailability of an exemption from registration for the issuance and
sale of any shares hereunder, shall relieve the Corporation of any
liability in respect of the non-issuance or sale of such shares as to
which such requisite authority shall not have been obtained.
As a condition to the exercise of an Option, the Corporation may
require the Optionee to represent and warrant in writing at the time
of such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute
such shares. At the Option of the Corporation, a stop-transfer order
against any shares of stock may be placed on the official stock books
and records of the Corporation, and a legend indicating that the stock
may not be pledged, sold or otherwise transferred unless an opinion of
counsel is provided stating that such transfer is not in violation of
any applicable law or regulation, may be stamped on stock certificates
in order to assure exemption from registration. The Plan Administrator
may also require such other actions or agreements by the Optionees as
may from time-to-time be necessary to comply with federal and state
securities laws. THE CORPORATION SHALL BE UNDER NO OBLIGATION TO
UNDERTAKE REGISTRATION OF THE OPTIONS OR SHARES OF STOCK ISSUABLE UPON
EXERCISE THEREOF.
(2) As a condition to the exercise of any Option granted
hereunder, the Optionee shall make such arrangements as the Plan
Administrator may require for the satisfaction of any federal, state
or local withholding tax obligations that may arise in connection with
such exercise.
(3) Issue, transfer or delivery of certificates of Common Stock
pursuant to the exercise of Options may be delayed, at the discretion
of the Plan Administrator until the Plan Administrator is satisfied
that the applicable requirements of the federal and state securities
laws and the withholding provisions of the Code have been met.
(m) Stock Dividend, Reorganization or Liquidation.
The aggregate number and class of shares for which Options may be granted
under this Plan, the number and class of shares covered by each outstanding
Option and the exercise price per share thereof (but not the total price) shall
all be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock of the Corporation resulting from a split-up or
consolidation of shares or any like capital adjustment, or the payment of any
stock dividend, and to the extent that such actions shall include an increase or
decrease in the number of shares of Common Stock subject to outstanding Options,
the number of shares available under Section 4 of this Plan shall automatically
be increased or decreased, as the case may be, proportionately, without further
action on the part of the Plan Administrator, the Corporation or the
Corporation's shareholders.
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In the event of any adjustment in the number of shares covered by any
Option, any fractional shares resulting from such adjustment shall be
disregarded and each such Option shall cover only the number of full shares
resulting from such adjustment.
The foregoing adjustments in the shares subject to Options shall be made by
the Plan Administrator or by any successor administrator of the Plan, or by the
applicable terms of any assumption or substitution document, and any adjustments
so made shall be final, binding and conclusive.
Except as provided in this Section 5(m) or Section 5(n) below, no Optionee
shall have rights by reason of any subdivision or consolidation of shares of any
class including shares of Common Stock, or the payment of any Common Stock
dividend on shares of Common Stock or any other increase or decrease in the
number of shares of Common Stock, or by reason of any liquidation, dissolution,
corporate combination or division; and any issuance by the Corporation of shares
of any class including shares of Common Stock, or securities convertible into
shares of any class including shares of Common Stock, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to any Option.
The grant of an Option shall not affect in any way the right or power of
the Corporation to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
(n) Change in Control.
(1) For the purpose of this Section 5(n): (i) "Person" shall include
any individual, firm, corporation, partnership or other entity; (ii)
"Affiliate" and "Associate" shall have the meanings assigned to them in
Rule 12b-2 under the Exchange Act of 1934 as amended (the "Exchange Act");
and (iii) "Beneficial Owner" shall have the meaning assigned to it in Rule
16a-1 under the Exchange Act.
(2) Any and all Options that have been outstanding under the Plan for
at least six (6) months at the time of occurrence of any of the events
described in Paragraphs (A), (B) and (C) below (an "Eligible Option") shall
become exercisable in full for the periods indicated (each such exercise
period referred to as an "Acceleration Window") in connection with the
following events:
(A) For a period of 45 days beginning on the day on which any
Person, together with all Affiliates and Associates of such Person
shall become the Beneficial Owner, directly or indirectly, of 25% or
more of the combined voting power of the then outstanding securities
of the Company ordinarily (and apart from rights accruing under
special circumstances) having the right to vote in the election of
directors (calculated as provided in Rule 13d-3(d) under the Exchange
Act in the case of rights to acquire the Company's securities), but
shall not include the Corporation, any subsidiary of the Corporation,
any employee benefit plan of the Corporation or of any subsidiary of
the Corporation, or any Person or entity organized, appointed or
established by the Corporation for or pursuant to the terms of any
such employee benefit plan;
(B) Beginning on the date that a tender or exchange offer for
Common Stock by any Person (other than the Corporation, any subsidiary
of the Corporation, any employee benefit plan of the Corporation or of
any subsidiary of the Corporation, or any Person or entity organized,
appointed or established by the Corporation for or pursuant to the
terms of any such employee benefit plan) is first published or sent or
given within the meaning of Rule 14d-2 under the Exchange Act and
continuing so long as such offer remains open (including any
extensions or renewals of such offer), unless by the terms of such
offer the offeror, upon consummation thereof, would be the Beneficial
Owner of less than 30% of the shares of Common Stock then outstanding;
or
(C) Immediately prior to consummation of (i) any merger,
consolidation, reorganization or other transaction pursuant to which
the persons who hold the outstanding shares of Common Stock
immediately prior to the transaction have immediately following the
transaction less than forty percent (40%) of the combined voting power
of the outstanding securities of the surviving entity ordinarily (and
apart from rights accruing under special circumstances) having the
right to vote in the election of directors; or (ii) any sale, lease,
exchange or other transfer not in the ordinary course of business (in
one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company (the
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foregoing transactions being referred to as "Approved Transactions").
The Company shall provide to each Optionee notice of the pendency of
any Approved Transaction at least twenty (20) days prior to the
expected date of consummation thereof. Each Optionee shall thereupon
be entitled to exercise his or her Options in full or in part at any
time prior to consummation of the Approved Transaction. Any such
exercise as to any portion of his or her Options that will only become
vested immediately prior to the consummation of the Approved
Transaction in accordance with this acceleration provision shall be
contingent on such consummation. Any such exercise as to any other
portion of the Option will not be contingent on such consummation
unless so elected by the Optionee in a notice delivered to the Company
simultaneously with the exercise.
PROVIDED, HOWEVER, that the Plan Administrator may determine (by the
affirmative vote of a majority of all of the members thereof, excluding for
such purposes the votes of directors who are directors, officers,
Affiliates or Associates of, or have a material financial interest in, any
Person (other than the Corporation) who is a party to the event specified
in Paragraphs (A), (B) or (C) above which otherwise would trigger
acceleration of vesting) that acceleration shall not occur in connection
with any one or any combination of the foregoing events.
(3) The exercisability of any Eligible Option which remains
outstanding following expiration of an Acceleration Window shall be
governed by the vesting schedule and other terms of the Agreement
representing such Option.
(4) If the shareholders of the Corporation receive shares of capital
stock of another Person ("Exchange Stock") in exchange for or in place of
shares of Common Stock in any transaction involving any merger,
consolidation, reorganization or other transaction providing for the
conversion or exchange of all or substantially all outstanding shares of
Common Stock into Exchange Stock, then at the closing of such transaction
all Options granted hereunder which have not been exercised as of the
effective date of such exchange transaction shall be converted into options
to purchase shares of Exchange Stock ("Exchange Stock Options") whereupon
all rights to acquire shares of Common Stock pursuant to Options shall end.
The number of shares of Exchange Stock issuable upon exercise of an
Exchange Stock Option and the exercise price therefor shall be determined
by the Plan Administrator by adjusting the number of shares of Common stock
issuable upon exercise of the Option converted into such Exchange Stock
Option, and the exercise price therefor, in the same proportion as used for
determining the shares of Exchange Stock received by holders of Common
Stock in connection with a transaction described in this Section 5(n)(3).
Unless altered by the Plan Administrator or otherwise provided above, the
vesting schedule set forth in the Option Agreement shall continue to apply
to the Exchange Stock Options.
6. EFFECTIVE DATE; TERM.
This Plan shall be effective as of December 16, 1986 and Incentive Stock
Options may be granted by the Plan Administrator from time to time thereafter
until December 14, 2006; provided, however, that termination of the Plan shall
not terminate any Option granted prior thereto. Non-Qualified Stock Options may
be granted hereunder until this Plan is terminated by the Board in its sole
discretion.
7. NO OBLIGATIONS TO EXERCISE OPTION.
The granting of an Option shall impose no obligation upon the Optionees to
exercise such Option.
8. NO RIGHT TO OPTIONS OR EMPLOYMENT.
Whether or not any Options are to be granted hereunder shall be exclusively
within the discretion of the Committee, and nothing contained herein shall be
construed as giving any Optionee any right to participate hereunder. Granting of
an Option hereunder shall in no way constitute any form of agreement or
understanding binding on the Corporation, express or implied, that the
Corporation will employ or contract with an Optionee for any length of time.
9. APPLICATION OF FUNDS.
The proceeds received by the Corporation from the sale of Common Stock,
pursuant to Options granted hereunder, will be used for general corporate
purposes, unless otherwise directed by the Board.
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10. INDEMNIFICATION OF PLAN ADMINISTRATOR.
In addition to all other rights of indemnification they may have as members
of the Board or of any Committee, the Plan Administrators shall be indemnified
by the Corporation for all reasonable expenses and liabilities of any type or
nature, including attorneys' fees, incurred in connection with any action, suit
or proceeding to which they or any of them are a party by reason of, or in
connection with, the Plan or any Option granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Corporation), except to the extent
that such expenses relate to matters for which it is adjudged that such Plan
Administrator member is liable for willful misconduct; provided that within
fifteen (15) days after the institution of any such action, suit or proceeding,
the Plan Administrator involved therein shall, in writing, notify the
Corporation of such action, suit or proceeding, so that the Corporation may have
the opportunity to make appropriate arrangements to prosecute or defend the
same.
11. AMENDMENT OF THE PLAN.
The Plan Administrator may, at any time, modify or amend this Plan and
Options granted hereunder, except that no amendment with respect to an
outstanding Option shall be made over the objection of the Optionee thereof; and
provided, further, that any amendment for which shareholder approval is required
by Securities and Exchange Commission Rule 16b-3, as amended from time to time,
or any successor rule or regulatory requirements (the "Rule"), in order for the
Plan to be eligible or continue to qualify for the benefits of the Rule, shall
be subject to approval of the shareholders of the Corporation in accordance with
the Rule.
Effective as of December 16, 1986.
Amended and restated as of May 13, 1997.
DATA I/O CORPORATION
By: /s/ Alan J. Beauchamp
----------------------------------
Alan J. Beauchamp, Vice President -
Finance
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AMENDMENT TO BUSINESS LOAN AGREEMENT
This Agreement is made between Bank of America National Trust and Savings
Association, doing business as Seafirst Bank, successor by merger to Bank of
America NW, N.A. ("Bank") and Data I/O Corporation, a Washington Corporation
("Borrower"). Bank and Borrower are parties to a Business Loan Agreement dated
May 14, 1996 and wish to make certain revisions to their loan arrangements as
set forth in that Agreement. Upon execution hereof, that Agreement shall be
amended as follows effective immediately:
Part A:
Availability Period:
Availability period is hereby extended to May 31, 1998.
Interest Rate:
The prime rate referred to under option #1 shall now be referred to as the
reference rate.
The applicable margin for the interest rate under option #2 shall be
amended as follows:
<TABLE>
Tangible Net Worth Debt/Worth Ratio Spread Over LIBOR
------------------ ---------------- -----------------
<S> <C> <C>
Greater than or equal to Less than or equal to 1.20:1 1.10%
$19,000,000
Less than $19,000,000 but Greater than 1.20:1 but less 1.55%
greater than the amount than the ratio required in Part
required in Part B, Section B, Section 4.3 of this
4.3 of this Agreement. Agreement.
</TABLE>
Part B, Section 4.3 is hereby amended in its entirety as follows:
Maintain a tangible net worth of at least $12,000,000 and not permit
Borrower's total indebtedness which is not subordinated in a manner
satisfactory to Bank to exceed 1.80 times Borrower's tangible net worth. By
the end of Borrower's fiscal year ending December 31, 1997, Borrower shall
not permit total indebtedness which is not subordinated in a manner
satisfactory to Bank to exceed 1.60 times Borrower's tangible net worth.
"Tangible net worth" means the excess of total assets over total
liabilities, excluding, however, from the determination of total assets (a)
all assets which should be classified as intangible assets such as
goodwill, patents, trademarks, copyrights, franchises, and deferred charges
(including unamortized debt discount and research and development costs)
but including as tangible assets all of Borrower's existing and future
"investment in product line assets", (b) treasury stock, (c) cash held in a
sinking or other similar fund for the purpose of redemption or other
retirement of capital stock, (d) to the extent not already deducted from
total assets, reserves for depreciation, depletion, obsolescence or
amortization of properties and other reserves or appropriations of retained
earnings which have been or should be established in connection with the
business conducted by the relevant corporation, and (e) any revaluation or
other write-up in book value of assets subsequent to the fiscal year of
such corporation last ended at the date of this Agreement;
Part B, Section 4.15 is hereby added:
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Maintain liquidity, defined as the sum of cash plus investments in
marketable securities, in an amount at least equal to $3,000,000.
Except as specifically set forth herein, all provisions of the Agreement remain
in full force and effect.
This Amendment to Business Loan Agreement is executed by the parties on this
13th day of May, 1997.
SEAFIRST BANK
Western Wholesale Banking Division
By : /s/ Steven E. Melby
Steven E. Melby
Vice President
DATA I/O CORPORATION
By: /s/ Willian C. Erxleben
William C. Erxleben
President & Chief Executive Officer
By: /s/ Alan J. Beauchamp
Alan J. Beauchamp
Vice President & Chief Financial Officer
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DATA I/O CORPORATION
1996 DIRECTOR FEE PLAN
This 1996 Director Fee Plan (the "Plan") provides for the payment of
certain fees to directors of Data I/O Corporation, a Washington corporation (the
"Company") who are not employees of the Company by delivery of shares of the
Company's common stock (the "Common Stock").
ELIGIBILITY.
Persons eligible to receive Common Stock under this Plan shall be all
directors of the Company who are not otherwise employed by the Company or any
Related Corporation, as defined below (each, a "Director", collectively, the
"Directors").
As used in this Plan, the term "Related Corporation," when referring to a
subsidiary corporation, shall mean any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time of
the granting of the Common Stock, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock of one of the
other corporations in such chain. When referring to a parent corporation, the
term "Related Corporation" shall mean any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company if, at the time of
granting of the Common Stock, each of the corporations other than the Company
owns stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock of one of the other corporations in such chain.
STOCK.
Subject to approval of this Plan by the shareholders of the Company as
described in Section 7 hereof, so long as this Plan is in effect, each person
serving as a member of the Board of Directors of the Company shall be entitled
to receive shares of Common Stock in consideration of his or her service on the
Board, payable annually in arrears. The number of shares of Common Stock payable
hereunder each calendar year shall be determined pursuant to the following
formula, rounded down to the nearest whole number:
(A/365) x ($20,000/Share Price)
A = the number of days of service as a director during the calendar year
The Share Price shall mean the price per share of Common Stock determined
as provided in this paragraph. If the Common Stock of the Company is publicly
traded on the first trading day of the calendar year, the Share Price shall be
the average of the high and low sale prices per share of Common Stock on such
date or, in case no reported sales take place on such date, the average of the
last reported bid and asked prices, in either case on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or if not listed or admitted to trading on any national securities exchange, on
the National Association of Securities Dealers Automated Quotation System. If
the Common Stock is not traded in such manner that the quotations referred to
above are available as of such date, the Share Price shall be deemed to be the
greater of (i) the book value per share as set forth on the most recent
quarterly financial statement of the Company available on such date, or (ii) the
fair market value per share at such date as determined in good faith by the
Board of Directors. Notwithstanding the foregoing, with respect to shares of
Common Stock payable to a Director for service as a Director during the calendar
year in which such person was first elected to the Board of Directors, the Share
Price shall be determined in the manner described above as of the day on which
such Director is elected to the Board of Directors, or if the Common Stock is
publicly traded and such day is not a trading day, the first trading day
thereafter.
Certificates for shares deliverable under this Plan shall be earned as of
January 1 of the year following the year of service regardless of whether the
Director remains a Director on such date and shall be delivered to each Director
by not later than February 15 of such following year.
In the event a Director resigns or is no longer able to serve as a Director
due to death or permanent disability, then such Director shall be paid the
amount of shares due to him or her under this Section 2 by a date not later than
forty-five
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(45) days from the earlier of the date their notice of resignation is received
by the Board or the date the Board is made aware of the Director's death or
permanent disability.
Reservation of Common Stock
Subject to adjustment as set forth in Section 6 hereof, a total of 200,000
shares of authorized but unissued or reacquired Common Stock are hereby reserved
for grant under this Plan.
Rights as a Shareholder.
A Director shall have no rights as a shareholder with respect to any shares
to be delivered under this plan until such Director becomes a record holder of
such shares. Subject to the provisions of Sections 6 below, no rights shall
accrue to a Director and no adjustments shall be made on account of dividends
(ordinary or extraordinary, whether in cash, securities or other property) or
distributions or other rights declared on, or created in, the Common Stock for
which the record date is prior to the date the Director becomes a record holder
of the shares of Common Stock.
Securities Regulation and Tax Withholding.
No shares of Common Stock shall be delivered hereunder unless the issuance
and delivery of such shares shall comply with all relevant provisions of law,
including, without limitation, any applicable state securities laws, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations thereunder and the requirements of any stock
exchange or consolidated reporting system upon which such shares may then be
listed or quoted. The inability of the Company to obtain from any regulatory
body the authority deemed by the Company to be necessary for the lawful issuance
of any shares under this Plan, or the unavailability of an exemption from
registration for the issuance of any shares under this Plan shall relieve the
Company of any liability with respect to the non-issuance of such shares;
provided, however, if the Company refrains from issuing shares hereunder, the
Director shall receive cash in lieu of shares at a rate of $20,000 per year, pro
rated for actual days of service during the year.
As a condition to participation in this Plan, each Director shall make such
arrangements as the Company may require for the satisfaction of any federal,
state, local or foreign withholding tax obligations that may arise in connection
with delivery of shares under this Plan.
The issuance, transfer or delivery of certificates of Common Stock granted
under this Plan may be delayed, at the option of the Company, until the Company
is satisfied that the applicable requirements of the federal and state
securities laws and the withholding provisions of the Internal Revenue Code have
been met.
Stock Dividend, Reorganization of Liquidation.
If the Company should declare with respect to the Common Stock a
stock-split or a dividend payable in shares of Common Stock, or a reverse-stock
split or other combination of the Common Stock, or a reclassification of the
Common Stock (each, an "Event"), then (1) the class and number of shares yet to
be delivered to any Director subsequent to the record date for the Event, and
(2) the class and number of shares reserved for grant under Section 3 of this
Plan, shall be appropriately adjusted to account for the change in the number
and class of capital stock of the Company outstanding as a result of the Event,
without further action on the part of the Company, its Board of Directors or its
shareholders.
If the shareholders of the Company receive debt or equity securities of
another Person ("Exchange Securities") or cash in exchange for or in place of
shares of Common Stock in any transaction involving any merger, consolidation,
reorganization or other transaction providing for the conversion or exchange of
all or substantially all outstanding shares of Common Stock into Exchange
Securities or cash, then payment to Directors of the retainer fee provided for
by this Plan, pro rated through the date of closing of such transaction, shall
be accelerated to such closing date and shall be paid in the form of Exchange
Securities or cash, as the case may be. In such case, the amount of Exchange
Securities or cash to be delivered in lieu of Common Stock shall be determined
by adjusting the number of shares of Common Stock otherwise deliverable
hereunder in the same proportion as used for determining the shares of
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Exchange Securities or cash the holders of the Common Stock received in such
merger, consolidation, reorganization or other transaction. Notwithstanding the
foregoing, if payment in the form of Exchange Securities would cause a Director
to have engaged in a violation of Section 16 of the Securities Exchange Act of
1934 (taking into consideration any other transactions in the securities of the
Company or Exchange Securities by the Director), then each such Director shall
receive cash in lieu of Common Stock or Exchange Securities at a rate of $20,000
per year, pro rated for actual days of service during the year prior to the
closing of such transaction.
Except as provided in this Section 6, no Director shall have any rights by
reason of any subdivision, combination or reclassification of shares of any
class of the Company's capital stock, including shares of Common Stock, or the
payment of any dividend payable on shares of Common Stock or any other change in
the number or class of shares of the Company's outstanding capital stock, or by
reason of any merger, consolidation, dissolution or liquidation of the Company,
or by reason of any sale of all or substantially all of the assets of the
Company other than in the usual and regular course of business, or by reason of
any issuance of any shares of capital stock of the Company, including shares of
Common Stock or securities convertible into or exchangeable or exercisable for
shares of Common Stock, and no adjustment by reason thereof shall be made with
respect to the number of shares to be granted to Directors as described in
Section 2 hereof.
EFFECTIVE DATE; TERM.
The effective date of this Plan shall be January 1, 1996; provided that no
shares of Common Stock shall be issued hereunder until the Company's
shareholders have approved this Plan by the affirmative vote of a majority of
the voting securities shares represented in person or by proxy at a duly
convened meeting of the shareholders of the Company at which a quorum is
present. If shareholder approval is not obtained by June 30, 1996, then this
Plan shall be deemed abandoned. Otherwise, this Plan shall continue until
terminated by action of the Board of Directors.
INDEMNIFICATION OF BOARD.
In addition to all other rights or indemnification they may have as
directors of the Company or as members of the Board, members of the Board shall
be indemnified by the Company for all reasonable expenses and liabilities of any
type and nature, including reasonable attorneys' fees, incurred in connection
with any action, suit or proceeding to which they or any of them are a party by
reason of, or in connection with, the Plan or any grant of Common Stock
hereunder, and against all amounts paid by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by the
Company), except to the extent that such expenses relate to matters for which it
is adjudged that such Board members are liable for willful misconduct; provided,
that within fifteen (15) days after the institution of any such action, suit or
proceeding, member(s) of the Board shall, in writing, notify the Company of such
action, suit or proceeding, so that the Company may have the opportunity to make
appropriate arrangements to prosecute or defend the same.
AMENDMENT OF PLAN.
The Board of Directors may, at any time, modify, amend or terminate this
Plan, including, without limitation, such modifications or amendments as are
necessary to maintain compliance with applicable statutes, rules or regulations;
provided, that (i) any amendment for which shareholder approval is required by
Securities and Exchange Commission Rule 16b-3, as amended from time to time, or
any successor rule or regulatory requirements (the "Rule"), in order for the
Plan to be eligible or continue to qualify for the benefits of the Rule, shall
be subject to approval of the shareholders of the Company in accordance with the
Rule; and (ii) this Plan shall not be amended in any material respect more than
once every six (6) months, other than to comport with changes in the Rule, the
Internal Revenue Code of 1986, as amended, the Employee Retirement Security Act
of 1974, as amended, or the rules thereunder.
Approved by the Board of Directors of the Company.
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AGREEMENT AND GENERAL RELEASE
This Agreement and General Release ("Agreement") is made between Data I/O
Corporation ("Data I/O") and Bill Haydamack and is presented to Mr. Haydamack on
November 10, 1997.
Data I/O and Mr. Haydamack agree as follows:
1. Termination of Employment. Mr. Haydamack's regular, full-time employment
with Data I/O will terminate on November 14, 1997.
2. Payments. In consideration of signing this Agreement, Mr. Haydamack will
receive the severance and other payments as described in this Agreement. Data
I/O shall pay Mr. Haydamack his current salary according to the normal payroll
process through the date of termination, less any lawful withholding. Mr.
Haydamack will also receive severance in the amount of $143,000.00, less any
lawful withholding, to be paid in a lump sum not later than December 1, 1997.
3. Confidentiality and Return of Data I/O Property. Mr. Haydamack agrees to
keep the existence and terms of this Agreement confidential; provided Mr.
Haydamack may share its provisions with his or her spouse, attorney, and tax
advisor. Mr. Haydamack agrees not to use or disclose any non-public financial,
technical, marketing, operating, or other proprietary information of Data I/O or
its affiliates (collectively the "Company"), and agrees to return all tangible
items and copies containing such information to Data I/O on or before December
31, 1998.
4. Entire Agreement; Severability. This Agreement and the letter attachment
(Exhibit A) hereto dated November 10, 1997, contains the entire understanding
between Data I/O and Mr. Haydamack regarding the subject matter of this
Agreement, and it supersedes all prior negotiations and agreements, whether oral
or written. The provisions of this Agreement are severable. If any provision is
found to be invalid or unenforceable, the balance of this Agreement shall remain
in full force and effect.
5. Non-Admission of Liability. This Agreement shall not be construed in any
way as an admission by either party of any wrongdoing or liability.
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GENERAL RELEASE
Mr. Haydamack hereby releases and forever discharges Data I/O, its present
and former officers, directors, agents, attorneys, parents, subsidiaries,
divisions and affiliates, from any and all claims, demands, actions, suits,
causes of action, debts, accounts or controversies of any nature whatsoever,
known or unknown, which Mr. Haydamack has, or may have, against Data I/O or its
present or former officers, directors, agents, attorneys, parents, subsidiaries,
divisions and affiliates, up to the date of execution of this Agreement.
This Agreement specifically includes any and all claims arising out of, or
in any way related to, Mr. Haydamack's employment with Data I/O, or the
termination of Mr. Haydamack's employment with Data I/O, or any employment
actions taken by Data I/O during the course of Mr. Haydamack's employment.
Further, this Agreement specifically includes any and all claims based on, or
related to, Title VII of the Civil Rights Act of 1964, the Age Discrimination in
Employment Act, any local, state or federal equal employment opportunity laws,
wrongful discharge claims, defamation claims, breach of contract claims, and
negligence and/or tort claims.
WAIVER AND RELEASE OF AGE DISCRIMINATION CLAIMS
This Agreement provides for a waiver and release of any rights or claims
that Mr. Haydamack may have against Data I/O or its agents, prior to the date it
is signed, under the Age Discrimination in Employment Act.
Mr. Haydamack understands that he or she is receiving benefits under this
Agreement in addition to anything he or she is already entitled.
Mr. Haydamack is advised to consult with an attorney prior to signing this
Agreement.
Mr. Haydamack understands that he or she has a period of 21 days within
which to consider signing this Agreement.
Mr. Haydamack understands that he or she has a period of 7 days after
signing this Agreement within which to revoke it, and that it shall not become
effective or enforceable until that revocation period has expired.
Dated: November 11, 1997 /s/ William J. Haydamack
Bill Haydamack
Dated: November 11, 1997 Data I/O Corporation
By William C. Erxleben
Title President and Chief
Executive Officer
ATTACHMENT A
TO: Bill Haydamack
FROM: Bill Erxleben
DATE: November 10, 1997
Dear Bill:
This letter details our agreement regarding severance upon your voluntary
termination of employment at Data I/O.
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1. Your last day of employment is November 14, 1997.
2. You will receive one year's base pay of $135,000, or as pro-rated pursuant
to the attached schedule. (Schedule 1)
3. Data I/O will transfer to you your laptop computer in exchange for up to 20
hours of consulting beginning November 14, but ending not later than
December 31, 1998.
4. In exchange for being available to Data I/O as a consultant for up to an
additional 40 hours through December 31, 1998, Data I/O will vest all
10,000 of your remaining unvested options. You may exercise these options
anytime after November 14 until you are notified in writing that your
consultancy has ended whereupon you will have ninety days to exercise or
December 31, 1998, whichever first occurs.
5. You will receive a 401(k) match for 1997 prorated to November 14.
6. If consulting services are required from you beyond 60 hours between
November 14, 1997 and December 31, 1998 you will be paid $150.00 per hour.
Any separate consultancy to MINC shall not be charged to Data I/O.
7. You may keep your office files for the period of the consultancy but
thereafter you must destroy these files or return them to Data I/O.
It's been a pleasure to work with you. I wish you great success.
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Separation Agreement
This Separation Agreement ("Agreement") is entered into by William C.
Erxleben ("Employee") and Data I/O Corporation, a Washington corporation
("Employer"). Employee and Employer wish to enter into an agreement pertaining
to the termination of Employee's employment in order to effect an orderly
transition. Nothing in this Agreement is intended or should be construed as an
admission of wrongdoing or liability by any party.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises contained below, it is agreed as follows:
1. TERMINATION DATE. The last day of Employee's employment with Employer will be
January 31, 1998 ("Termination Date"), provided that Employer may sooner
terminate the employment relationship if Employee fails to comply with any of
Employee's obligations hereunder, and further provided that Employee is hereby
relieved of his obligations to perform services as an employee or officer of
Employer and, effective immediately, shall not: perform services on behalf of
Employer, except as specifically requested by the President or CEO; make
representations on behalf of Employer; or bind Employer to any obligations.
Employee shall execute and submit to Employer as a condition precedent to this
Agreement a written resignation in substantially the form of Exhibit A ("Written
Resignation"). Employee claims and shall claim no further right to employment by
Employer beyond the Termination Date.
2. USUAL PAYMENTS AND BENEFITS. Employee shall be paid his usual and customary
benefits and compensation due him until January 6, 1998, plus unused accrued
vacation as of the Termination Date. Employer shall provide Employee with the
following compensation and benefits following termination:
(A) Employee may exercise whatever rights Employee may have to
continuation of medical benefits under the Company's medical plan
under COBRA;
(B) Employee's account under Employer's 401(k) plan upon termination shall
be handled in accordance with the terms and conditions of that plan,
and the Employer match for Employee will be provided for 1997 in
accordance with existing policies of Employer;
(C) Out of pocket expenses previously incurred by Employee on Employer
business shall be reimbursed in accordance with Employer policies
regarding the reimbursement of business expenses, provided that
Employee provides a request for such expenses together with related
receipts or other suitable documentation on or before January 31,
1998; and
(D) Management Incentive Compensation for 1997 shall be paid in accordance
with the MICP Plan of Employer, with the amount of payout to be
determined by the Board of Directors in its discretion after
completion of the 1997 audit on the same basis as the payout to all
other participants. Employee shall be permitted to review and
challenge the calculation of such payout, subject to the understanding
that such material is provided to Employee subject to the
confidentiality provisions of this Agreement.
(E.) Employee's contributions to Employer's Stock Purchase Plan shall be
applied to the purchase of shares of Employer's Common Stock at
January 31, 1998, the end of the current plan period, in accordance
with Employer's Employee Stock Purchase Plan.
Except as stated herein, any and all other payments and benefits offered by
Employer to Employee cease on the Termination Date.
3. ADDITIONAL CONSIDERATION. In addition to the compensation identified in
Paragraph 2 herein, and in consideration for Employee's covenants and release
herein, Employer will provide Employee with the following payments, benefits,
and other consideration:
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A. Employer shall enter into a consulting agreement with Employee in the
form of Exhibit B to this Agreement ("the Consulting Agreement").
Employer shall execute and deliver to Employee the fully executed
Consulting Agreement within three days after the expiration of the
revocation period in Paragraph 8, provided that Employee has executed
and delivered this Agreement and the Consulting Agreement to Employer
in accordance with the terms and conditions herein and has not revoked
or rescinded this Agreement. The effective date of the Consulting
Agreement shall be the later of: 1) the eighth day after Employee has
delivered to Employer this fully executed Agreement and other
documents referenced herein as conditions to this Agreement, provided
that this Agreement has not been revoked or rescinded; or 2) February
1, 1998.
B. At the date hereof Employee holds options to purchase shares of
Employer's Common Stock granted pursuant to Employer's 1986 Stock
Option Plan, as amended (the "86 Plan") in the amounts and with the
other essential terms set forth on Exhibit C hereto and in the Plan
(the "Options"). Conditioned on Employee's continued compliance with
the terms of this Agreement and the Consulting Agreement, the Options
shall remain exercisable and shall continue to vest throughout the
term of Employee's service as a consultant to Employer pursuant to the
Consulting Agreement (the "Term of the Consulting Agreement"). Any
Options which were granted as Incentive Stock Options for purposes of
Section 422 of the Internal Revenue Code of 1986, as amended, shall
become non-qualified options as of the 91st day after the date on
which Employee is no longer an employee of Employer. Each of the
Options shall terminate on the earlier of (i) its original expiration
date, (ii) the effective date of termination of the Consulting
Agreement for cause, or (iii) 90 days after termination of the
Consulting Agreement for any other reason. Vesting of the Options
shall in any event cease on the last day of the Term of the Consulting
Agreement. In the event of a change of control of Employer as
described in Section 5 (n) of the 86 Plan during the term of the
Consulting Agreement, the vesting of outstanding stock Options shall
be accelerated in accordance with Section 5(n) of the 86 Plan, but
only to the extent that such options would be vested as of June 30,
1999 had the term of the Consulting Agreement continued through June
30, 1999. Any stock appreciation rights granted in tandem with the
Options are hereby terminated. Except as otherwise expressly stated
herein, all other terms and conditions of the Options shall remain in
full force and effect.
C. Employer shall pay the dues for continuing Harbor Club (Bellevue)
membership for the months of January, February, and March of 1998.
D. Should Employee elect to exercise Employee's rights under COBRA, to
the extent that such rights exist, Employer shall pay the premiums for
COBRA coverage for Employee and dependents through December 31, 1998,
unless Employee is entitled to medical benefits under another
employer's plan.
E. Employer shall make a payment to Employee in the amount of $ 19,333.34
("Initial Payment") on the eighth day after Employee executes and
delivers to Employer this Agreement, provided this Agreement is not
rescinded or revoked. The Initial Payment shall be Payment 1 payable
under and as described in the Consulting Agreement.
It is agreed and acknowledged that Employer is not obligated to make the
payments and provide the benefits and other consideration described in this
Paragraph 3, that Employer does so only as consideration for the covenants and
release herein and that such payments and consideration constitute adequate
consideration for the covenants and release set forth in this Agreement.
Employer's obligation to provide the consideration set forth in this Paragraph
3, including execution and delivery to Employee of the Consulting Agreement and
performance of the Consulting Agreement, are conditioned upon all of the
following: 1) Employee's execution of this Agreement and delivery of this
Agreement to Employer in accordance with the terms and conditions herein; 2)
Employee not revoking or rescinding this Agreement; 3) Employee complying with
his obligations under this Agreement and the Consulting Agreement; 4) Employee's
execution of the Consulting Agreement and Written Resignation and delivery to
Employer of the Consulting Agreement and Written Resignation prior to the
expiration of this offer; and 5) Employee executing and delivering a waiver and
release in substantially the form of Exhibit D ("Second Release") within five
(5) days after the Termination Date but no earlier than the
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Termination Date, and not rescinding or revoking the Second Release. If Employer
has provided to Employee any of the consideration set forth in this Paragraph 3,
and Employee subsequently rescinds or revokes this Agreement or fails to meet
other conditions precedent to this Agreement, Employer shall be entitled to the
repayment of all such consideration. Other than those benefits and payments
specified in this Agreement, Employer shall have no obligation to provide and
shall provide no further payments or benefits of any kind to Employee.
4. COMPANY PROPERTY. Employee represents and warrants that Employee has turned
over to Employer all files, memoranda, records, keys, credit cards, manuals, and
other documents, including electronically recorded documents and data, and
physical property which Employee received from Employer or its employees or
which Employee generated in the course of Employee's employment with Employer.
If Employee still has any such property or materials, Employee shall turn all
such property and materials, including copies thereof, over to Employer within
three days after the effective date of this Agreement.
5. RELEASE OF CLAIMS. On behalf of himself, his marital community, and his
heirs, executors, administrators and assigns, Employee expressly waives against
Employer and its present and former affiliates, successors, subsidiaries,
related entities and their present and former officers, directors, stockholders,
managers, employees, agents, representatives, and attorneys (all of which are
collectively referred to as "Released Parties") any and all claims which
occurred or which could be alleged to have occurred on the date of or prior to
the execution of this Release. Employee releases Released Parties, individually
and in their representative capacities, from any claims or disputes, whether
presently known or unknown, that occurred or could be alleged to have occurred
on the date of or prior to the execution of this Release. It is understood that
this waiver and release includes, but is not limited to, any and all claims for
wages, employment benefits, and damages of any kind whatsoever arising out of
any: contracts, express or implied including the Executive Agreement for Data
I/O Corporation between Employer and Employee dated March 20, 1995 ("Change of
Control Agreement"); any covenant of good faith and fair dealing; estoppel or
misrepresentation; discrimination, including age, sex or disability
discrimination; harassment; unjust enrichment; wrongful termination or any legal
restriction on Employer's right to terminate the employment of Employee; any
federal, state, local or other governmental statute or ordinance, including,
without limitation, Title VII of the Civil Rights Act of 1964 and the Age
Discrimination in Employment Act; or any other legal limitation on the
employment relationship. Employee acknowledges that Released Parties are in no
way liable for any claims described in this paragraph and Employee agrees not to
take any position inconsistent with this acknowledgment. Excluded from this
release are claims Employee may have with regard to vested benefits under ERISA,
workers' compensation claims, claims arising under this Agreement or the
Consulting Agreement, claims for indemnification in accordance with Employer's
Articles of Incorporation and By-Laws, and any other claim which may not be
released in accordance with law. Employee represents that Employee has not filed
any complaints, charges or lawsuits against any of the Released Parties with any
governmental agency or court.
6. RESTRICTIVE COVENANTS.
A. Employee shall not use or disclose, either directly or indirectly, any
non-public strategic, financial, technical, marketing, sales, operating, or
other proprietary information of Employer or its affiliates. Employee agrees to
keep the terms of this Agreement and the Consulting Agreement (including but not
limited to the fact and amount of consideration under this Agreement and the
Consulting Agreement) completely confidential, and will not disclose any
information concerning this Agreement or its terms to anyone other than
Employee's spouse, legal counsel and/or financial advisors, who will be informed
of and bound by this confidentiality clause. Employee's obligations under this
Paragraph 6 (A) are unlimited in time and geographical scope. This provision is
not intended to restrict Employee from making disclosures as may be required by
law or legal process.
B. Employee agrees that he will not, during the period from the effective
date of this Agreement until June 30, 1999 ("the Restricted Period"), directly
or indirectly be employed by, own, manage, operate, join, control or participate
in the ownership, management, operation or control of or be connected with, in
any manner, any person or entity engaged in any business or activities that are,
or are preparing to be, in competition with Employer with respect to any product
or service sold or actively engaged in by Employer in the IC Programmer Products
Market, as defined below, in any geographical area where Employer, during the
Restricted Period, is engaged in activities, including sales, pertaining to the
IC Programmer Products Market or is preparing to engage in such activities. "IC
Programmer Products Market" means the design, development, manufacture, sale or
distribution of any device or system used to program or handle programmable
integrated circuits. Employee shall be deemed to be connected with such business
if such business is carried on by a partnership, corporation or association of
which he or she is an employee, officer, director, shareholder, partner, member,
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consultant or agent; provided, however, that nothing herein shall prevent the
purchase or ownership by Employee of shares which constitute less than five
percent (5%) of the outstanding equity securities of a publicly-held
corporation.
C. During the Restricted Period, Employee shall not, in addition, directly
or indirectly, solicit, influence, or entice any employee or consultant of
Employer to cease his or her relationship with Employer or solicit, entice or in
any way divert any customer or supplier of Employer to do business with Employee
or any entity described herein.
D. Employee acknowledges that the covenants in this Paragraph 6 are
reasonable and that compliance with such covenants will not prevent Employee
from pursuing his livelihood. Employee agrees that Employer would be irreparably
harmed by a breach of this Paragraph 6. In the event of breach of this
provision, Employer shall be entitled to any and all remedies permitted by law
and equity, including, without limitation, injunctive relief, disgorgement of
funds obtained as a result of the breach of this provision and reasonable
attorneys' fees.
7. COMMUNICATIONS. Employee shall not make any statements or take any actions to
disparage or undermine the reputation of any Released Party. Employee shall
refer all persons requesting references to the President of Employer, who shall
provide information consistent with the content of the press release dated
January 6, 1997 regarding Employee's termination.
8. REVIEW AND REVOCATION PERIOD. Employer hereby advises Employee to obtain
counsel to assist in assessing this offer. This offer shall remain open for
twenty-one (21) days from the date upon which it is presented to Employee, after
which it shall expire. Further, Employee affirms Employee's understanding that
Employee has a period of seven (7) days from the date upon which Employee
executes and delivers this Agreement to Employer to revoke Employee's acceptance
of this Agreement. If Employee decides to rescind this Agreement, Employee is
required to deliver to the undersigned representative of Employer within seven
(7) days from execution and delivery of this Agreement a notice revoking
Employee's acceptance of this Agreement.
9. SEVERABILITY. The provisions of this Agreement are severable, and if any part
of it is found to be unlawful or unenforceable, the other provisions of this
Agreement shall remain fully valid and enforceable to the maximum extent
consistent with applicable law.
10. KNOWING AND VOLUNTARY AGREEMENT. Employee is hereby advised to consult an
attorney of Employee's choice and has either done so or has knowingly waived the
right to do so. Employee has carefully read this agreement; knows the contents
thereof; has had an opportunity to discuss it and its effects with Employee's
attorney; understands that he is giving up all claims, damages or disputes as
set forth in Paragraph 5 of this Agreement, including claims, damages and
disputes under the Age Discrimination in Employment Act; has been afforded ample
and adequate opportunity to review and analyze this entire Agreement;
understands its contents and its final and binding effect; and has signed it as
Employee's free and voluntary act. Employee represents and warrants that
Employee is the sole and exclusive owner of all respective claims, demands and
causes of action, and that no other party has any right, title or interest
whatsoever in any of the matters referred to herein, and there has been no
assignment, transfer, conveyance or other disposition by Employee of any matters
referred to herein.
11. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding between
Employee and Employer and supersedes any prior Agreements or understandings,
express or implied, pertaining to the terms of Employee's employment with
Employer and the termination of the employment relationship except for the
Consulting Agreement which is incorporated herein by reference and the
agreements representing the Options except as expressly modified herein. This
Agreement expressly supersedes and terminates the Change of Control Agreement.
Employee acknowledges that in executing this Agreement, Employee does not rely
upon any representation or statement by any representative of Employer or any of
the Released Parties concerning the subject matter of this Agreement, except as
expressly set forth in the text of the Agreement. This Agreement may be amended
only by a writing signed by Employee and the President or CEO of Employer.
12. OTHER. This Agreement will be governed by the laws of the State of
Washington, excluding its choice of law provisions. The parties hereby consent
to the exclusive jurisdiction and venue of the state or federal courts in King
County, Washington for all matters and actions arising under this Agreement. The
prevailing party shall be entitled to reasonable costs and attorney's fees
incurred in connection with such litigation.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
dates below written.
Employer Employee
DATA I/O CORPORATION
By //S//Milton F. Zeutschel /s/William C. Erxleben
Its President and CEO William C. Erxleben
Date January 14, 1998 Date January 14, 1998
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<PAGE>
Consulting Agreement
This Consulting Agreement is between William C. Erxleben ("Consultant") and
Data I/O Corporation, a Washington corporation ("the Company") in accordance
with a Separation Agreement between Consultant and the Company ("the Separation
Agreement.")
Consultant and the Company hereby agree as follows:
1. Services. Consultant shall perform consulting services for the Company to
assist the Company with regard to areas of Consultant's expertise as reasonably
requested from time to time by the President or CEO of the Company. Consultant
shall not be required to provide more than 20 hours of assistance per month and
the Company shall not require Consultant to perform services during times which
would restrict Consultant from pursuing other employment or consulting positions
which are not inconsistent with the Restrictive Covenants herein. Consultant
shall provide his own office facilities and equipment.
2. Term of Agreement. This Consulting Agreement shall become effective upon the
later of 1) the eighth day after Employee has delivered to the Company the fully
executed Separation Agreement in accordance with the terms and conditions
therein, provided that the Separation Agreement has not been rescinded or
revoked and further provided that by such date Consultant has executed and
delivered and all other documents referenced in the Separation Agreement as
conditions precedent to the Separation Agreement; or 2) February 1, 1998. This
Consulting Agreement shall terminate on June 30, 1999, unless terminated sooner
in accordance with the terms and conditions herein.
3. Compensation. The Company shall pay Consultant consulting fees as described
in Schedule 1 to this Consulting Agreement until the expiration or termination
of this Consulting Agreement. Consultant shall pay all taxes required in
connection with this Consulting Agreement and shall indemnify the Company and
hold the Company harmless against any and all costs, including taxes, penalties
and attorneys' fees, arising from the non-payment of taxes under this Consulting
Agreement. Consultant shall pay all expenses related to this agreement unless
otherwise authorized in writing in advance by the President or CEO of the
Company. Nothing in this Consulting Agreement or the relationship created
hereunder entitles Consultant to any fringe benefits.
4. No Agency. The relationship hereunder is one of independent contractor, and
neither the Company nor Consultant intends to create any partnership, joint
venture, employment or agency. Consultant shall not hold himself out as an agent
of the Company and shall not make any representations on behalf of the Company
or enter into any obligations on behalf of the Company.
5. Termination. The Company may terminate this Consulting Agreement and cease
making payments hereunder upon the occurrence of any of the following:
(A) Consultant breaches his obligations under Sections 6 or 7 of the
Consulting Agreement or Sections 4 or 6 of the Separation Agreement between
the Company and Consultant, in which case this Consulting Agreement shall
automatically terminate without notice; or
(B) Consultant fails to comply with provisions of the Consulting
Agreement or the Separation Agreement other than those identified in
Paragraph 5 (A), provided that Consultant is given a thirty-day period to
cure the non-performance upon written notice and fails to satisfactorily
cure such non-compliance within the thirty-day cure period.
Nothing in this Paragraph 5 limits in any way any other rights or remedies
the Company may have in the event of the breach by Consultant of any obligation
he may have to the Company.
6. Restrictive Covenants.
A. Consultant shall not use or disclose, either directly or indirectly, any
non-public strategic, financial, technical, marketing, sales, operating, or
other proprietary information of the Company or its affiliates. Consultant
agrees to keep the terms of the Consulting Agreement (including but not limited
to the fact and amount of consideration under this Agreement
Page 102
<PAGE>
and the Consulting Agreement) completely confidential, and will not disclose any
information concerning this Consulting Agreement or its terms to anyone other
than Consultant's spouse, legal counsel and/or financial advisors, who will be
informed of and bound by this confidentiality clause. Consultant's obligations
under this Paragraph 6 (A) are unlimited in time and scope and shall survive the
termination or expiration of this Consulting Agreement. This provision is not
intended to restrict Consultant from making disclosures as may be required by
law or legal process.
B. Consultant agrees that he will not, directly or indirectly, during the
period from the effective date of this Consulting Agreement until June 30, 1999
("the Restricted Period"), directly or indirectly be employed by, own, manage,
operate, join, control or participate in the ownership, management, operation or
control of or be connected with, in any manner, any person or entity engaged in
any business or activities that are, or are preparing to be, in competition with
the Company with respect to any product or service sold or actively engaged in
by the Company in the IC Programmer Products Market, as defined below, in any
geographical area where the Company, during the Restricted Period, is engaged in
activities, including sales, pertaining to the IC Programmer Products Market or
is preparing to engage in such activities. "IC Programmer Products Market" means
the design, development, manufacture, sale or distribution of any device or
system used to program or handle programmable integrated circuits. Consultant
shall be deemed to be connected with such business if such business is carried
on by a partnership, corporation or association of which he is an employee,
officer, director, shareholder, partner, member, consultant or agent; provided,
however, that nothing herein shall prevent the purchase or ownership by
Consultant of shares which constitute less than five percent (5%) of the
outstanding equity securities of a publicly-held corporation.
C. During the Restricted Period, Consultant shall not, in addition,
directly or indirectly, solicit, influence, or entice any employee or consultant
of the Company to cease his or her relationship with the Company or solicit,
entice or in any way divert any customer or supplier of the Company to do
business with the Company or any entity described herein.
D. Consultant acknowledges that the covenants in this Paragraph 6 are
reasonable and that compliance with such covenants will not prevent Consultant
from pursuing his livelihood. Consultant agrees that the Company would be
irreparably harmed by a breach of this Paragraph 6. In the event of breach of
this provision, the Company shall be entitled to any and all remedies permitted
by law and equity, including, without limitation, injunctive relief,
disgorgement of funds obtained as a result of the breach of this provision and
reasonable attorneys' fees.
7. Intellectual Property. All rights in all intellectual properties, including
without limitation works, programs, ideas, manuals reports or inventions which
Consultant develops in whole or in part, either alone or jointly with others
("Inventions") in connection with this Consulting Agreement shall be the sole
property of the Company and its assigns, and the Company and its assigns shall,
in any such case, be the sole owner of all patents, copyrights and other rights
in connection therewith. Consultant hereby assigns to the Company any rights
Consultant may have or acquire in such Inventions. Consultant further agrees as
to all such Inventions to assist the Company in every proper way to obtain and
from time to time to enforce patents, copyrights or other rights on said
Inventions and improvements in any and all countries and to that end Consultant
will execute all documents for use in applying for and obtaining such patents
and copyrights thereon and enforcing the same, as the Company may desire,
together with any assignments thereof to the Company or persons designated by
it. Consultant's obligation to assist the Company in obtaining and enforcing
patents, copyrights or other rights for such Inventions and improvements in any
and all countries shall continue beyond the termination of this Consulting
Agreement.
8. Notices. Notices and other communications called for or required by this
Consulting Agreement shall be in writing and shall be addressed to the parties
at their respective addresses stated below or to such other address as party may
subsequently specify by written notice and shall be deemed to have been received
(i) upon delivery in person, (ii) five days after mailing it by U.S. certified
or registered mail, return receipt requested and postage prepaid, or (iii) two
days after depositing it with a commercial overnight carrier which provides
written verification of delivery:
To the Company: Data I/O Corporation
10525 Willows Road, N.E.
Redmond, Washington 98052
Attention: President
To Consultant: William C. Erxleben
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<PAGE>
9. Governing Law. This Consulting Agreement shall be governed by the law of the
State of Washington, excluding its choice of law provisions. The parties agree
that the exclusive jurisdiction and venue of any lawsuit between them shall be
in the state or federal courts sitting in King County, Washington. The
prevailing party shall be entitled to reasonable attorneys' fees and costs
incurred in connection with such litigation.
10. Other. Except for the Separation Agreement between Consultant and the
Company and other agreements incorporated by reference therein, this Consulting
Agreement constitutes the exclusive agreement of the parties with respect to the
subject matter hereof and supersedes all prior agreements or understandings of
the parties. This Consulting Agreement may be modified only by a writing signed
by Consultant and the President or CEO of the Company.
The Company Consultant
DATA I/O CORPORATION
By /s/Milton F. Zeutschel /s/William C. Erxleben
Its President and CEO William C. Erxleben
-------------------
Social Security Number
Date January 14, 1998 Date January 14, 1998
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<PAGE>
Data I/O Corporation
Bill Erxleben Consulting Payment Structure
1/13/1998
Total Payments under Consulting Proposal $250,000.00
Amount scheduled for 1999 (before tax related adjustment) 18,000.00
Amount scheduled for 1998 232,000.00
Payment 1 8th day after execution of Sep.Agmt 19,333.34
Payment 2 15-Feb 9,666.67
Payment 3 28-Feb 9,666.67
Payment 4 15-Mar 9,666.67
Payment 5 31-Mar 9,666.67
Payment 6 15-Apr 9,666.67
Payment 7 30-Apr 9,666.67
Payment 8 15-May 9,666.67
Payment 9 31-May 9,666.67
Payment 10 15-Jun 9,666.67
Payment 11 30-Jun 9,666.67
Payment 12 15-Jul 9,666.67
Payment 13 31-Jul 9,666.67
Payment 14 15-Aug 9,666.67
Payment 15 31-Aug 9,666.67
Payment 16 15-Sep 9,666.67
Payment 17 30-Sep 9,666.67
Payment 18 15-Oct 9,666.67
Payment 19 31-Oct 9,666.67
Payment 20 15-Nov 9,666.67
Payment 21 30-Nov 9,666.67
Payment 22 15-Dec 9,666.67
Payment 23 31-Dec 9,666.67
-----------
Total for 1998 232,000.08
Payment 1 15-Jan 1624.26
Payment 2 31-Jan 1624.26
Payment 3 15-Feb 1624.26
Payment 4 28-Feb 1624.26
Payment 5 15-Mar 1624.26
Payment 6 31-Mar 1624.26
Payment 7 15-Apr 1624.26
Payment 8 30-Apr 1624.26
Payment 9 15-May 1624.26
Payment 10 31-May 1624.26
Payment 11 15-Jun 1624.26
Payment 12 30-Jun 1624.26
-----------
Total for 1999 19,491.12
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<PAGE>
FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT BETWEEN
REEL-TECH, INC., A WASHINGTON CORPORATION, AND
REEL TECH, INC., AN INDIANA CORPORATION
Effective May 6, 1997, the following is an amendment (the "First Amendment") to
the Asset Purchase Agreement by and among Reel-Tech, Inc., a Washington
corporation ("Purchaser"), Reel Tech, Inc., an Indiana corporation ("Seller"),
and Norris R. Hall and Douglas R. Hall ("Shareholders") dated August 31, 1995.
All terms used in this First Amendment shall have the same meaning as those in
the Agreement. The Agreement shall be amended as follows:
1. The parties acknowledge Reel Tech, Inc., an Indiana corporation, has
changed its name to Hall, Inc.
2. Section 2 of Exhibit 3.6A, Employment Agreement between Reel-Tech, Inc. and
Douglas R. Hall, and Section 2 of Exhibit 3.6B, Employment Agreement
between Reel-Tech, Inc. and Norris R. Hall, shall be amended as follows:
"August 31, 1998" in the fourth line shall be changed to "December 31,
1998".
3. Section 3.2 of Exhibit 3.6A, Employment Agreement between Reel-Tech, Inc.
and Douglas R. Hall, and Section 3.2 of Exhibit 3.6B, Employment Agreement
between Reel-Tech, Inc. and Norris R. Hall, shall be amended as follows:
After the end of the third sentence, the remainder of Section 3.2 shall be
deleted and superseded by the following:
In addition, subject to the conditions set forth herein, Data I/O shall
grant to Employee additional nonqualified stock options to purchase up to
3,750 shares of the Common Stock of Data I/O (the "TR4000 Options")
pursuant to and in accordance with the Plan, to be granted on the date
development of the TR4000 tape and reel system (the"TR4000") is
successfully completed (the "TR4000 Date"). The criteria for determining
the TR4000 Date are: (a) The TR4000 must meet the specifications detailed
in the Customer Requirements Document ("CRD") for the TR4000 (b) The TR4000
must be a fully documented product (including all drawings and
manufacturing assembly instructions) for manufacturing to be able to
reproduce on a volume basis and (c) Reel-Tech, Inc. must manufacture a
reproducible product as evidenced by the shipment, installation and written
acceptance of the beta unit and/or first production unit by October 15,
1997. Such grant shall be in the form of Stock Option Agreement attached
hereto as Exhibit B-1. The exercise price for the TR4000 Options shall be
the fair market value of the Common Stock on the TR4000 Date as determined
by the Plan administrator. Notwithstanding the foregoing, Data I/O shall
have no obligation to grant, and Employee shall have no right to be
granted, the TR4000 Options if the TR4000 Date occurs after October 15,
1997.
In addition, subject to the conditions set forth herein, Data I/O shall
grant to Employee additional nonqualified stock options to purchase up to
11,250 shares of the Common Stock of Data I/O (the "Coyote Options")
pursuant to and in accordance with the Plan, to be granted on the date
development of the Coyote programming system is successfully completed (the
"Coyote Date"). The criteria for determining the Coyote Date shall be
mutually agreed on by the parties by May 9, 1997. Such grant shall be in
the form of Stock Option Agreement to be
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<PAGE>
attached hereto as Exhibit B-2. The exercise price for the Coyote Options
shall be the fair market value of the Common Stock on the Coyote Date as
determined by the Plan administrator.
3. Exhibit B, Stock Option Agreement, of Exhibit 3.6A, Employment Agreement
between Reel-Tech, Inc. and Douglas R. Hall, shall be deleted in its
entirety and superseded by the attached Exhibit B-1, and Exhibit B-2 to be
attached by May 9, 1997:
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<PAGE>
EXHIBIT B-1
DATA I/O CORPORATION
1986 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is entered into as of the __ day of ______,
199__ ("Date of Grant"), by and between Data I/O Corporation, a Washington
corporation (the "Company"), and Douglas R. Hall (the "Optionee").
1. Grant of Option. Subject to the terms and conditions hereof and the
Company's 1986 Stock Option Plan (the "Plan"), the Company hereby grants to the
Optionee the right and option (the "Option") to purchase up to three thousand
seven hundred fifty (3,750) shares (the "Shares") of the common stock, $.01 par
value, of the Company, at a price per share of $________ (the "Exercise Price").
This Option is intended not to qualify as an Incentive Stock Option for purposes
of Section 422 of the Internal Revenue Code of 1986, as amended. In the case of
any stock split, stock dividend or like change in the nature of shares granted
by this Agreement, the number of shares and option price shall be
proportionately adjusted as set forth in Section 5(m) of the Plan. The Option
shall vest and become exercisable according to the following schedule provided
that the Optionee is continuously employed by the Company through the dates set
forth therein:
Portion of Total
Option Which Will Become
Date Exercisable
---- -----------
October 15, 1997 33.33%
October 15, 1998 66.66%
October 15, 1999 100%
The vesting of the Option is subject to acceleration in accordance with the
provisions of Section 5(f) of the Plan.
2. Termination of Option. The Option shall terminate, to the extent not
previously exercised, six (6) years from the Date of Grant or earlier in
accordance with Section 5 of the Plan. The unvested portion of the Option shall
terminate immediately upon the Optionee's termination of employment for any
reason whatsoever.
3. Non-transferable. This Option may not be transferred, assigned, pledged
or hypothecated in any manner (whether by operation of law or otherwise) other
than by will or by the applicable laws of descent and distribution, and shall
not be subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of this Option or of
any right or privilege conferred hereby, contrary to the provisions hereof, or
upon the sale or levy
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or any attachment or similar process upon the rights and privileges conferred
hereby, this Option shall thereupon terminate and become null and void.
4. Exercise. Subject to Sections 1 and 2 hereof and the Plan, this Option
may be exercised in whole or in part by means of a written notice of exercise
signed and delivered by the Optionee (or, in the case of exercise after death of
the Optionee by the executor, administrator, heir or legatee of the Optionee, as
the case may be) to the Company at the address set forth herein for notices to
the Company. Such notice (a) shall state the number of Shares to be purchased
and the date of exercise, and (b) shall be accompanied by payment of the full
exercise price in cash, by certified or cashier's check or by delivery of such
other consideration as the administrator of the Plan may approve.
5. Withholding. Prior to delivery of any Shares purchased upon exercise of
this Option, the Company shall determine the amount of any United States federal
and state income tax, if any, which is required to be withheld under applicable
law and shall, as a condition of exercise of this Option and delivery of
certificates representing the Shares purchased upon exercise of the Option,
collect from Optionee the amount of any such tax to the extent not previously
withheld.
6. Rights of the Optionee. Neither this Option, the execution of this
Agreement nor the exercise of any portion of this Option shall confer upon
Optionee any right to, or guarantee of, continued employment by the Company, or
in any way limit the right of the Company to terminate employment of Optionee at
any time, subject to the terms of any employment agreements between the Company
and Optionee.
7. Professional Advice. The acceptance and exercise of the Option and the
sale of Option Stock may have consequences under federal and state tax and
securities laws which may vary depending upon the individual circumstances of
the Optionee. Accordingly, the Optionee acknowledges that he has been advised to
consult his personal legal and tax advisor in connection with this Agreement and
his dealings with respect to the Option or the Option Stock.
8. Agreement Subject to Plan. This Option and this Agreement evidencing and
confirming the same are subject to the terms and conditions set forth in the
Plan and in any amendments to the Plan existing now or in the future, which
terms and conditions are incorporated herein by reference. A copy will be made
available upon request. Should any conflict exist between the provisions of the
Plan and those of this Agreement, those of this Agreement shall govern and
control. This Agreement and the Plan set forth the entire and exclusive
understanding between the Company and Optionee with respect to the Option and
shall be deemed to integrate, replace and supersede all previous communications,
representations or agreements between the parties with respect to the subject
matter hereof, whether written or oral.
9. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington without regard to its
conflicts of laws principles to the contrary, and shall bind and inure to the
benefit of the heirs, executors, personal representatives, successors and
assigns of the parties hereto.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
Page 109
<PAGE>
DATA I/O CORPORATION OPTIONEE: Douglas R. Hall
By _______________________ ________________________
Printed Name ____________________ Printed Name _____________________
Title _________________
4. Exhibit B, Stock Option Agreement, of Exhibit 3.6B, Employment Agreement
between Reel-Tech, Inc. and Norris R. Hall, shall be deleted in its
entirety and superseded by the attached Exhibit B-1, and Exhibit B-2 to be
attached by May 9, 1997:
Page 110
<PAGE>
EXHIBIT B-1
DATA I/O CORPORATION
1986 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is entered into as of the __ day of _______,
199__ ("Date of Grant"), by and between Data I/O Corporation, a Washington
corporation (the "Company"), and Norris R. Hall (the "Optionee").
1. Grant of Option. Subject to the terms and conditions hereof and the
Company's 1986 Stock Option Plan (the "Plan"), the Company hereby grants to the
Optionee the right and option (the "Option") to purchase up to three thousand
seven hundred fifty (3,750) shares (the "Shares") of the common stock, $.01 par
value, of the Company, at a price per share of $________ (the "Exercise Price").
This Option is intended not to qualify as an Incentive Stock Option for purposes
of Section 422 of the Internal Revenue Code of 1986, as amended. In the case of
any stock split, stock dividend or like change in the nature of shares granted
by this Agreement, the number of shares and option price shall be
proportionately adjusted as set forth in Section 5(m) of the Plan. The Option
shall vest and become exercisable according to the following schedule provided
that the Optionee is continuously employed by the Company through the dates set
forth therein:
Portion of Total
Option Which Will Become
Date Exercisable
---- -----------
October 15, 1997 33.33%
October 15, 1998 66.66%
October 15, 1999 100%
The vesting of the Option is subject to acceleration in accordance with the
provisions of Section 5(f) of the Plan.
2. Termination of Option. The Option shall terminate, to the extent not
previously exercised, six (6) years from the Date of Grant or earlier in
accordance with Section 5 of the Plan. The unvested portion of the Option shall
terminate immediately upon the Optionee's termination of employment for any
reason whatsoever.
3. Non-transferable. This Option may not be transferred, assigned, pledged
or hypothecated in any manner (whether by operation of law or otherwise) other
than by will or by the applicable laws of descent and distribution, and shall
not be subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of this Option or of
any right or privilege conferred hereby, contrary to the provisions hereof, or
upon the sale or levy or any attachment or similar process upon the rights and
privileges conferred hereby, this Option shall thereupon terminate and become
null and void.
Page 111
<PAGE>
4. Exercise. Subject to Sections 1 and 2 hereof and the Plan, this Option
may be exercised in whole or in part by means of a written notice of exercise
signed and delivered by the Optionee (or, in the case of exercise after death of
the Optionee by the executor, administrator, heir or legatee of the Optionee, as
the case may be) to the Company at the address set forth herein for notices to
the Company. Such notice (a) shall state the number of Shares to be purchased
and the date of exercise, and (b) shall be accompanied by payment of the full
exercise price in cash, by certified or cashier's check or by delivery of such
other consideration as the administrator of the Plan may approve.
5. Withholding. Prior to delivery of any Shares purchased upon exercise of
this Option, the Company shall determine the amount of any United States federal
and state income tax, if any, which is required to be withheld under applicable
law and shall, as a condition of exercise of this Option and delivery of
certificates representing the Shares purchased upon exercise of the Option,
collect from Optionee the amount of any such tax to the extent not previously
withheld.
6. Rights of the Optionee. Neither this Option, the execution of this
Agreement nor the exercise of any portion of this Option shall confer upon
Optionee any right to, or guarantee of, continued employment by the Company, or
in any way limit the right of the Company to terminate employment of Optionee at
any time, subject to the terms of any employment agreements between the Company
and Optionee.
7. Professional Advice. The acceptance and exercise of the Option and the
sale of Option Stock may have consequences under federal and state tax and
securities laws which may vary depending upon the individual circumstances of
the Optionee. Accordingly, the Optionee acknowledges that he has been advised to
consult his personal legal and tax advisor in connection with this Agreement and
his dealings with respect to the Option or the Option Stock.
8. Agreement Subject to Plan. This Option and this Agreement evidencing and
confirming the same are subject to the terms and conditions set forth in the
Plan and in any amendments to the Plan existing now or in the future, which
terms and conditions are incorporated herein by reference. A copy will be made
available upon request. Should any conflict exist between the provisions of the
Plan and those of this Agreement, those of this Agreement shall govern and
control. This Agreement and the Plan set forth the entire and exclusive
understanding between the Company and Optionee with respect to the Option and
shall be deemed to integrate, replace and supersede all previous communications,
representations or agreements between the parties with respect to the subject
matter hereof, whether written or oral.
9. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington without regard to its
conflicts of laws principles to the contrary, and shall bind and inure to the
benefit of the heirs, executors, personal representatives, successors and
assigns of the parties hereto.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
DATA I/O CORPORATION OPTIONEE: Norris R. Hall
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<PAGE>
By _______________________ ________________________
Printed Name ____________________ Printed Name _____________________
Title _________________
In the event of a conflict between the terms of the First Amendment and the
Agreement, the First Amendment shall control. All other terms and conditions of
the Agreement shall remain in full force and effect.
Executed by authorized representatives of the parties as of the date first
listed above.
PURCHASER: SELLER:
REEL-TECH, INC., A WASHINGTON HALL, INC. (FORMERLY REEL TECH,
CORPORATION INC., AN INDIANA CORPORATION)
/s/William C. Erxleben /s/Douglas R. Hall
Signature Signature
William C. Erxleben Douglas R. Hall
Chairperson of the Board President
May 6, 1997 May 6, 1997
Date Date
SHAREHOLDERS:
/s/Douglas R. Hall
Douglas R. Hall
May 6, 1997
Date
/s/Norris R. Hall
Norris R. Hall
May 6, 1997
Date
Page 113
<PAGE>
SECOND AMENDMENT TO ASSET PURCHASE AGREEMENT BETWEEN
REEL-TECH, INC., A WASHINGTON CORPORATION, AND
REEL TECH, INC., AN INDIANA CORPORATION
Effective May 6, 1997, 1997, the following is the second amendment (the "Second
Amendment") to the Asset Purchase Agreement by and among Reel-Tech, Inc., a
Washington corporation ("Purchaser"), Reel Tech, Inc., an Indiana corporation
("Seller"), and Norris R. Hall and Douglas R. Hall ("Shareholders") dated August
31, 1995. All terms used in this Second Amendment shall have the same meaning as
those in the Agreement. The Agreement shall be amended as follows:
1. Section 2.4 Calculation and Payment of Earn-Out shall be deleted in its
entirety and superseded by the following:
2.4 Calculation and Payment of Earn-Out.
2.4.1 Subject to the requirements of Section 2.4 hereof, Purchaser
shall make additional cash payments of an aggregate amount not to exceed
$2,000,000 should the continuing operations of the SCE Business acquired
hereby attain the revenue and pre-tax income as a percentage of revenue or
pre-tax income targets, as applicable, set forth below. The period for
attainment of these targets (the "Earn-Out Period") will be the period
beginning with the first day following the Effective Date and ending on
December 31, 1998, but excluding the period between August 23, 1996, and
December 26, 1996. No earn-out will accrue after the end of the Earn-Out
Period. The revenue and pre-tax income targets and related Earn-Out
Payments are as follows:
Earn-Out Payments(1)(2)
<TABLE>
<CAPTION>
Earn-Out Earn-Out Earn-Out
Payment 1 Payment 2 Payment 3
<S> <C> <C> <C>
Earn-Out Payment amounts:
Achievement of minimum targets(1) $666,000 $667,000 $667,000
Achievement of bonus targets(1) $832,750 $833,750 $333,500
Minimum Targets(1):
Revenues(2) $4,500,000 $5,500,000 $6,500,000
and
Pre-tax income as a % of revenues or pre-tax income,(3) 10% $550,000 $650,000
as applicable
Bonus Targets(1):
Revenues(2) $4,500,000 $5,500,000 $6,500,000
and
Pre-tax income as a % of revenues(3) 17% 17% 17%
</TABLE>
Requirements:
(1) For any Earn-Out Payments, both the revenue target and pre-tax income as a
% of revenue or pre-tax income target, as applicable, must be met in an
Annual Earn-Out Period, as defined below. Any Earn-Out Payment may be
earned during any of the three Annual Earn-Out Periods during the Earn-Out
Period and more than one Earn-Out Payment may be earned in any Annual
Earn-Out Period, provided that Earn-Out Payment 3 may only be earned in the
Annual Earn-Out Period beginning on December 26, 1997 and ending on
December 31, 1998, each Earn-Out Payment may be earned only once and under
no circumstances will the aggregate amount of Earn-Out Payments exceed
$2,000,000.
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<PAGE>
(2) For purposes of calculating Earn-Out Payments, revenue shall mean revenues
generated by the SCE Business from the sale of semi-conductor equipment or
the provision of related services plus the transfer price of the
ProMaster(R) 9500 at the price therefor under the OEM/Purchase Agreement
dated October 7, 1994, between Data I/O and Seller (the "9500 Transfer
Price") and the transfer price of Data I/O's Coyote product, plus actual
revenues from the sale of any other products as mutually agreed in writing,
in each case net of discounts, returns, credits and allowances. Revenues
shall not include sales to third party customers of any of Data I/O's
ProMaster(R) line of products, including without limitation, Data I/O's
Coyote product, or of similar products which include programming
capabilities. Acceptance of orders will be governed by Purchaser-approved
operating plans and profit criteria. All exceptions will require approval
by the Chief Executive Officer, Treasurer or Chief Financial Officer of
Purchaser.
(3) Pre-tax income shall mean the aggregate net income (including losses which
shall be taken into account negatively) for the Annual Earn-Out Period in
question before any deductions for federal, state or local taxes measured
by income. The costs to be used in calculating pre-tax income will be
determined substantially as follows:
(a) All direct costs, except for costs associated with producing Data
I/O's ProMaster(R) 9500 or Coyote product, associated with the
Indianapolis operations or otherwise associated with the SCE Business
or any product for which revenue is included in this earn-out
calculation, per note 2 above, will be charged against earnings.
Amortization of the purchase price of this transaction shall be
excluded.
(b) Interest expense will be charged against earnings at a rate equal to
the prevailing prime rate as published by the Wall Street Journal in
effect on the first day of each Purchaser fiscal quarter to the extent
that the operations of the SCE Business consume cash beyond the amount
of cash included in the Purchased Assets or generated by the SCE
Business after the Effective Date. For purposes of this calculation
all sums paid as Purchase Price will be excluded. Such use of cash
will be calculated on a daily basis. A "line of credit" shall be
established by Purchaser for the SCE Business. Such "line of credit"
will provide the SCE Business with working capital as approved by
Purchaser and may be paid down to reduce the balance based on cash
generated by the SCE Business.
(c) The costs of producing Data I/O's ProMaster(R) 9500 will be included
in the calculation of the Earn-Out Payment at sixty-five percent (65%)
of the 9500 Transfer Price and the costs of developing and/or
manufacturing Data I/O's Coyote product will be included in the
calculation of the Earn-Out Payment at a formula to be mutually agreed
upon by May 9, 1997.
(d) New product development will be funded at 8% of revenues of the SCE
Business unless otherwise mutually agreed by Purchaser and the
Shareholders. The actual direct costs to the SCE Business of any NRE
funded by customers of the SCE Business for development of new
products will be considered product development expenditures for
purposes of calculating such 8%.
(e) Data I/O corporate senior staff time and costs will not be charged to
the Indianapolis operation; provided, however, other corporate
personnel time and costs will be charged to the SCE Business on a
pro-rata basis at Direct, Unburdened Cost, plus a 5% administrative
fee, if such personnel devote more than one-half of their time in any
Fiscal Month to direct support of the SCE Business. "Direct,
Unburdened Cost" shall include all salaries, benefits and taxes for
personnel and other direct costs associated with the support of the
SCE Business.
(f) The following also shall be excluded from the calculation of pre-tax
income:
(i) Revenue derived from non-operating sources, such as interest
income and income or loss from non-business related investments;
(ii) Gain from the sale of capital assets or other non-recurring
events; and
(iii) The results of any operations acquired by the SCE Business or
Purchaser after the Effective Date.
Page 115
<PAGE>
2.4.2 All Earn-Out Payments are contingent on or subject to the
following:
(a) The parties agree that the target date for ISO 9001 certification of
the Indianapolis, Indiana facility is January 31, 1997. No Earn-Out
Payment shall be made unless and until the SCE Business obtains ISO
9001 certification. If ISO 9001 certification is not obtained by the
end of the Earn-Out Period, no Earn-Out Payments shall accrue or be
made.
(b) Earn-Out Payments 2 and 3 are contingent on completion by the SCE
Business of engineering and manufacturing documentation for all
products being sold by the SCE business and for Data I/O's Coyote
product which satisfys the standards set forth in Schedule 2.4.2. The
parties agree that the target date for completion of such
documentation is January 31, 1997 for all products except Coyote
products and that the target date for Coyote products shall be agreed
upon by May 9, 1997; provided, however, that if such documentation has
not been completed by the end of the Earn-Out Period, Earn-Out
Payments 2 and 3 shall not accrue or be paid.
(c) Payment of Earn-Out Payments is also contingent on both of the
Shareholders continued employment (unless such employment is
terminated as a result of death or disability) by Purchaser pursuant
to their Employment Agreements with Purchaser.
2.4.3 The measurement of the achievement of the revenue and pre-tax
income as a percentage of revenue or pre-tax income targets, as applicable,
will be done based on three twelve (12) Fiscal Month periods, the first of
which will begin on September 1, 1995, and end on August 22, 1996; the
second of which will begin on December 27, 1996 and end on December 25,
1997; and the third of which will begin on December 26, 1997, and end on
December 31, 1998. Each such period is referred to as an "Annual Earn-Out
Period". The period between August 23, 1996, and December 26, 1996, shall
be excluded from the Earn-Out Period. The calculation of the actual results
will be completed by Purchaser within sixty (60) days following the last
day of each Annual Earn-Out Period. All calculations of performance of the
SCE Business against the foregoing targets shall be determined by Purchaser
in good faith based on the foregoing and in accordance with generally
accepted accounting principles applied in a manner consistent with the
accounting policies, practices and assumptions employed by Purchaser in
preparing its own financial statements.
2.4.4 Earn-Out Payments shall be made to the Seller within thirty (30)
days of completion of the measurement of actual results as noted in Section
2.4.3 or within thirty (30) days of the completion of the requirements as
specified in Section 2.4.2, whichever is later.
In the event of a conflict between the terms of the Second Amendment and the
Agreement, the Second Amendment shall control. All other terms and conditions of
the Agreement shall remain in full force and effect.
Executed by authorized representatives of the parties as of the date first
listed above.
Page 116
<PAGE>
PURCHASER: SELLER:
REEL-TECH, INC., A WASHINGTON HALL, INC. (FORMERLY REEL TECH,
CORPORATION INC., AN INDIANA CORPORATION)
/s/William C. Erxleben /s/Douglas R. Hall
Signature Signature
William C. Erxleben Douglas R. Hall
Chairperson of the Board President
May 6, 1997 May 6, 1997
Date Date
SHAREHOLDERS:
/s/Douglas R. Hall
Douglas R. Hall
May 6, 1997
Date
/s/Norris R. Hall
Norris R. Hall
May 6, 1997
Date
Page 117
<PAGE>
THIRD AMENDMENT TO ASSET PURCHASE AGREEMENT BETWEEN
REEL-TECH, INC., A WASHINGTON CORPORATION, AND
REEL TECH, INC., AN INDIANA CORPORATION
Effective July 2, 1997, the following is an amendment (the "Third Amendment") to
the Asset Purchase Agreement by and among Reel-Tech, Inc., a Washington
corporation ("Purchaser"), Reel Tech, Inc., an Indiana corporation ("Seller"),
and Norris R. Hall and Douglas R. Hall ("Shareholders") dated August 31, 1995.
All terms used in this Third Amendment shall have the same meaning as those in
the Agreement. The Agreement shall be amended as follows:
1. Footnote 2 of Section 2.4.1 shall be deleted in its entirety and superseded
by the following:
(2) For purposes of calculating Earn-Out Payments, revenue shall mean
revenues generated by the SCE Business from the sale of semi-conductor
equipment or the provision of related services plus the transfer price
of the ProMaster(R) 9500 at the price therefor under the OEM/Purchase
Agreement dated October 7, 1994, between Data I/O and Seller (the
"9500 Transfer Price") and the transfer price of Data I/O's Coyote
Product, if the SCE Business is producing the Coyote product, plus
actual revenues from the sale of any other products as mutually agreed
in writing, in each case net of discounts, returns, credits and
allowances. If the Coyote product is not being produced by the SCE
Business on December 31, 1998, but is being produced at such time by
Data I/O, Seller will receive a revenue credit for the Annual Earnout
Period beginning on December 26, 1997, and ending on December 31,
1998, equal to $415,000. Such credit shall be reduced by seventy-five
percent (75%) of the gross margin of thirty percent (30%) previously
paid to Seller as part of the Coyote transfer price for prior units
produced by the SCE Business and sold to Data I/O. Revenues shall not
include sales to third party customers of any of Data I/O's
ProMaster(R) line of products or of similar products which include
programming capabilities. Acceptance of orders will be governed by
Purchaser-approved operating plans and profit criteria. All exceptions
will require approval by the Chief Executive Officer, Treasurer or
Chief Financial Officer of Purchaser.
2. Footnote 3 (c) of Section 2.4.1 shall be deleted in its entirety and
superseded by the following:
(c) The costs of producing Data I/O's ProMaster(R)9500 will be included in
the calculation of the Earn-Out Payment at sixty-five percent (65%) of
the 9500 Transfer Price. The costs of producing Data I/O's Coyote
product, if Data I/O's Coyote product is produced by the SCE Business,
will be included in the calculation of the Earn-Out Payment at seventy
percent (70%) of the Coyote product transfer price.
3. Section 3.2 of Exhibit 3.6A, Employment Agreement between Reel-Tech, Inc.
and Douglas R. Hall, and Section 3.2 of Exhibit 3.6B, Employment Agreement
between Reel-Tech, Inc. and Norris R. Hall, shall be amended as follows:
The following language in the last paragraph of Section 3.2 regarding the
Coyote Options, shall be deleted in its entirety:
"In addition, subject to the conditions set forth herein, Data I/O shall
grant to Employee additional nonqualified stock options to purchase up to
11,250 shares of the Common Stock of Data I/O (the "Coyote Options")
pursuant to and in accordance with the Plan, to be granted on the date
development of the Coyote programming system is successfully completed (the
"Coyote Date"). The criteria for determining the Coyote Date shall be
mutually agreed on by the parties by May 9, 1997. Such grant shall be in
the form of Stock Option Agreement to be attached
Page 118
<PAGE>
hereto as Exhibit B-2. The exercise price for the Coyote Options shall be
the fair market value of the Common Stock on the Coyote Date as determined
by the Plan administrator";
and replaced with the following language:
"In addition, subject to the conditions set forth herein, Data I/O shall
grant to Employee additional nonqualified stock options to purchase up to
11,250 shares of the Common Stock of Data I/O (the "Coyote Options")
pursuant to and in accordance with the Plan, to be granted on the date
development of the Coyote programming system (the "Coyote") is successfully
completed (the "Coyote Date"). The criteria for determining the Coyote Date
are: (a) The Coyote must meet the specifications detailed in the Customer
Requirements Document ("CRD") for the Coyote as of March 26, 1997, Rev. 0.4
(b) The Coyote must be a fully documented product (including all drawings
and manufacturing assembly instructions) for manufacturing to be able to
reproduce on a volume basis and (c) Reel-Tech, Inc. must manufacture a
reproducible product as evidenced by the shipment, installation and written
acceptance of the beta unit and/or first production unit and the completion
of Quality Gate 6, Product Launch, as listed in the ProMaster Coyote
Schedule dated May 2, 1997, ("Product Launch") by December 5, 1997;
provided, however, all design modifications necessary for full production
and Product Launch of the Coyote must be completed by December 5, 1997.
Such grant shall be in the form of Stock Option Agreement attached hereto
as Exhibit B-2. The exercise price for the Coyote Options shall be the fair
market value of the Common Stock on the Coyote Date as determined by the
Plan administrator. Notwithstanding the foregoing, Data I/O shall have no
obligation to grant, and Employee shall have no right to be granted, the
Coyote Options if the Coyote Date occurs after December 5, 1997; provided,
however, if Data I/O has not delivered to Reel-Tech, Inc. the DataSite
product for integration with the Coyote by July 18, 1997, the laser and
shuttle for the Coyote by August 1, 1997, the Tasklink Handler interface
for the Coyote by August 8, 1997, and the beta Tasklink Windows(R)
interface for the Coyote by September 17, 1997, , and the Coyote Date shall
be extended one (1) day for each day of delay in delivery of such items."
4. The attached Exhibit B-2, Stock Option Agreement, shall be attached after
Exhibit B-1 to Exhibit 3.6A, Employment Agreement between Reel-Tech, Inc.
and Douglas R. Hall:
Page 119
<PAGE>
EXHIBIT B-2
DATA I/O CORPORATION
1986 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is entered into as of the __ day of __________,
199__ ("Date of Grant"), by and between Data I/O Corporation, a Washington
corporation (the "Company"), and Douglas R. Hall (the "Optionee").
1. Grant of Option. Subject to the terms and conditions hereof and the
Company's 1986 Stock Option Plan (the "Plan"), the Company hereby grants to the
Optionee the right and option (the "Option") to purchase up to eleven thousand
two hundred fifty (11,250) shares (the "Shares") of the common stock, $.01 par
value, of the Company, at a price per share of $________ (the "Exercise Price").
This Option is intended not to qualify as an Incentive Stock Option for purposes
of Section 422 of the Internal Revenue Code of 1986, as amended. In the case of
any stock split, stock dividend or like change in the nature of shares granted
by this Agreement, the number of shares and option price shall be
proportionately adjusted as set forth in Section 5(m) of the Plan. The Option
shall vest and become exercisable according to the following schedule provided
that the Optionee is continuously employed by the Company through the dates set
forth therein:
Portion of Total
Option Which Will Become
Date Exercisable
---- -----------
December 5, 1997 33.33%
December 5, 1998 66.66%
December 5, 1999 100%
The vesting of the Option is subject to acceleration in accordance with the
provisions of Section 5(f) of the Plan.
2. Termination of Option. The Option shall terminate, to the extent not
previously exercised, six (6) years from the Date of Grant or earlier in
accordance with Section 5 of the Plan. The unvested portion of the Option shall
terminate immediately upon the Optionee's termination of employment for any
reason whatsoever.
3. Non-transferable. This Option may not be transferred, assigned, pledged
or hypothecated in any manner (whether by operation of law or otherwise) other
than by will or by the applicable laws of descent and distribution, and shall
not be subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of this Option or of
any right or privilege conferred hereby, contrary to the provisions hereof, or
upon the sale or levy
Page 120
<PAGE>
or any attachment or similar process upon the rights and privileges conferred
hereby, this Option shall thereupon terminate and become null and void.
4. Exercise. Subject to Sections 1 and 2 hereof and the Plan, this Option
may be exercised in whole or in part by means of a written notice of exercise
signed and delivered by the Optionee (or, in the case of exercise after death of
the Optionee by the executor, administrator, heir or legatee of the Optionee, as
the case may be) to the Company at the address set forth herein for notices to
the Company. Such notice (a) shall state the number of Shares to be purchased
and the date of exercise, and (b) shall be accompanied by payment of the full
exercise price in cash, by certified or cashier's check or by delivery of such
other consideration as the administrator of the Plan may approve.
5. Withholding. Prior to delivery of any Shares purchased upon exercise of
this Option, the Company shall determine the amount of any United States federal
and state income tax, if any, which is required to be withheld under applicable
law and shall, as a condition of exercise of this Option and delivery of
certificates representing the Shares purchased upon exercise of the Option,
collect from Optionee the amount of any such tax to the extent not previously
withheld.
6. Rights of the Optionee. Neither this Option, the execution of this
Agreement nor the exercise of any portion of this Option shall confer upon
Optionee any right to, or guarantee of, continued employment by the Company, or
in any way limit the right of the Company to terminate employment of Optionee at
any time, subject to the terms of any employment agreements between the Company
and Optionee.
7. Professional Advice. The acceptance and exercise of the Option and the
sale of Option Stock may have consequences under federal and state tax and
securities laws which may vary depending upon the individual circumstances of
the Optionee. Accordingly, the Optionee acknowledges that he has been advised to
consult his personal legal and tax advisor in connection with this Agreement and
his dealings with respect to the Option or the Option Stock.
8. Agreement Subject to Plan. This Option and this Agreement evidencing and
confirming the same are subject to the terms and conditions set forth in the
Plan and in any amendments to the Plan existing now or in the future, which
terms and conditions are incorporated herein by reference. A copy will be made
available upon request. Should any conflict exist between the provisions of the
Plan and those of this Agreement, those of this Agreement shall govern and
control. This Agreement and the Plan set forth the entire and exclusive
understanding between the Company and Optionee with respect to the Option and
shall be deemed to integrate, replace and supersede all previous communications,
representations or agreements between the parties with respect to the subject
matter hereof, whether written or oral.
9. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington without regard to its
conflicts of laws principles to the contrary, and shall bind and inure to the
benefit of the heirs, executors, personal representatives, successors and
assigns of the parties hereto.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
Page 121
<PAGE>
DATA I/O CORPORATION OPTIONEE: Douglas R. Hall
By _________________________ ____________________________
Printed Name _______________ Printed Name ________________
Title ______________________
4. The attached Exhibit B-2, Stock Option Agreement, shall be attached after
Exhibit B-1 to Exhibit 3.6B, Employment Agreement between Reel-Tech, Inc.
and Norris R. Hall:
Page 122
<PAGE>
EXHIBIT B-2
DATA I/O CORPORATION
1986 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is entered into as of the __ day of __________,
199__ ("Date of Grant"), by and between Data I/O Corporation, a Washington
corporation (the "Company"), and Norris R. Hall (the "Optionee").
1. Grant of Option. Subject to the terms and conditions hereof and the
Company's 1986 Stock Option Plan (the "Plan"), the Company hereby grants to the
Optionee the right and option (the "Option") to purchase up to eleven thousand
two hundred fifty (11,250) shares (the "Shares") of the common stock, $.01 par
value, of the Company, at a price per share of $________ (the "Exercise Price").
This Option is intended not to qualify as an Incentive Stock Option for purposes
of Section 422 of the Internal Revenue Code of 1986, as amended. In the case of
any stock split, stock dividend or like change in the nature of shares granted
by this Agreement, the number of shares and option price shall be
proportionately adjusted as set forth in Section 5(m) of the Plan. The Option
shall vest and become exercisable according to the following schedule provided
that the Optionee is continuously employed by the Company through the dates set
forth therein:
Portion of Total
Option Which Will Become
Date Exercisable
---- ------------------------
December 5, 1997 33.33%
December 5, 1998 66.66%
December 5, 1999 100%
The vesting of the Option is subject to acceleration in accordance with the
provisions of Section 5(f) of the Plan.
2. Termination of Option. The Option shall terminate, to the extent not
previously exercised, six (6) years from the Date of Grant or earlier in
accordance with Section 5 of the Plan. The unvested portion of the Option shall
terminate immediately upon the Optionee's termination of employment for any
reason whatsoever.
3. Non-transferable. This Option may not be transferred, assigned, pledged
or hypothecated in any manner (whether by operation of law or otherwise) other
than by will or by the applicable laws of descent and distribution, and shall
not be subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of this Option or of
any right or privilege conferred hereby, contrary to the provisions hereof, or
upon the sale or levy or any attachment or similar process upon the rights and
privileges conferred hereby, this Option shall thereupon terminate and become
null and void.
Page 123
<PAGE>
4. Exercise. Subject to Sections 1 and 2 hereof and the Plan, this Option
may be exercised in whole or in part by means of a written notice of exercise
signed and delivered by the Optionee (or, in the case of exercise after death of
the Optionee by the executor, administrator, heir or legatee of the Optionee, as
the case may be) to the Company at the address set forth herein for notices to
the Company. Such notice (a) shall state the number of Shares to be purchased
and the date of exercise, and (b) shall be accompanied by payment of the full
exercise price in cash, by certified or cashier's check or by delivery of such
other consideration as the administrator of the Plan may approve.
5. Withholding. Prior to delivery of any Shares purchased upon exercise of
this Option, the Company shall determine the amount of any United States federal
and state income tax, if any, which is required to be withheld under applicable
law and shall, as a condition of exercise of this Option and delivery of
certificates representing the Shares purchased upon exercise of the Option,
collect from Optionee the amount of any such tax to the extent not previously
withheld.
6. Rights of the Optionee. Neither this Option, the execution of this
Agreement nor the exercise of any portion of this Option shall confer upon
Optionee any right to, or guarantee of, continued employment by the Company, or
in any way limit the right of the Company to terminate employment of Optionee at
any time, subject to the terms of any employment agreements between the Company
and Optionee.
7. Professional Advice. The acceptance and exercise of the Option and the
sale of Option Stock may have consequences under federal and state tax and
securities laws which may vary depending upon the individual circumstances of
the Optionee. Accordingly, the Optionee acknowledges that he has been advised to
consult his personal legal and tax advisor in connection with this Agreement and
his dealings with respect to the Option or the Option Stock.
8. Agreement Subject to Plan. This Option and this Agreement evidencing and
confirming the same are subject to the terms and conditions set forth in the
Plan and in any amendments to the Plan existing now or in the future, which
terms and conditions are incorporated herein by reference. A copy will be made
available upon request. Should any conflict exist between the provisions of the
Plan and those of this Agreement, those of this Agreement shall govern and
control. This Agreement and the Plan set forth the entire and exclusive
understanding between the Company and Optionee with respect to the Option and
shall be deemed to integrate, replace and supersede all previous communications,
representations or agreements between the parties with respect to the subject
matter hereof, whether written or oral.
Page 124
<PAGE>
9. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington without regard to its
conflicts of laws principles to the contrary, and shall bind and inure to the
benefit of the heirs, executors, personal representatives, successors and
assigns of the parties hereto.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
DATA I/O CORPORATION OPTIONEE: Norris R. Hall
By ______________________ _________________________
Printed Name ____________ Printed Name _______________
Title ___________________
In the event of a conflict between the terms of the Third Amendment and the
Agreement, the Third Amendment shall control. All other terms and conditions of
the Agreement shall remain in full force and effect.
Executed by authorized representatives of the parties as of the date first
listed above.
PURCHASER: SELLER:
REEL-TECH, INC., A WASHINGTON HALL, INC. (FORMERLY REEL TECH,
CORPORATION INC., AN INDIANA CORPORATION)
/s/William C. Erxleben /s/Douglas R. Hall
Signature Signature
William C. Erxleben Douglas R. Hall
Chairperson of the Board President
July 2, 1997 July 2, 1997
Date Date
SHAREHOLDERS:
/s/Douglas R. Hall
Douglas R. Hall
July 2, 1997
Date
/s/Norris R. Hall
Norris R. Hall
July 2, 1997
Date
Page 125
<PAGE>
FOURTH AMENDMENT TO ASSET PURCHASE AGREEMENT
AMONG REEL-TECH, INC., A WASHINGTON CORPORATION,
HALL, INC. (FORMERLY REEL TECH, INC., AN INDIANA CORPORATION) AN INDIANA
CORPORATION, DOUGLAS R. HALL, AND NORRIS R. HALL
Effective November 25, 1997, the following is an amendment (the "Fourth
Amendment") to the Asset Purchase Agreement (the "Agreement"), by and among
Reel-Tech, Inc., a Washington corporation ("Purchaser"), Hall, Inc. (formerly
Reel-Tech, Inc., an Indiana Corporation), an Indiana corporation ("Seller") and
Norris R. Hall and Douglas R. Hall ("Shareholders") dated August 31, 1995 as
amended. All terms used in this Fourth Amendment and not defined herein shall
have the same meaning as those in the Agreement. The Agreement shall be amended
as follows:
1. Section 2.4 Calculation and Payment of Earn-Out shall be amended to
add a new Section 2.4.5 as follows:
2.4.5 Notwithstanding anything to the contrary in Section 2.4,
Purchaser shall make the additional cash payments to Seller for
Earn-Out Payments 2 and 3 of an aggregate amount not to exceed
$1,334,000 which shall be paid as follows:
(a) Earn-Out Payments 2 and 3 in the amount of $667,000 each shall be
paid by Purchaser on or before December 31, 1998; provided, however,
that Seller may be paid such Earn-Out Payments earlier as follows:
(i) Earn-Out Payment 2 shall be paid by Purchaser within five (5)
days after Purchaser's written acceptance of the Coyote base unit
handler, which acceptance shall be in accordance with the Coyote
Base Unit Handler Acceptance Criteria attached hereto and marked
"Exhibit A". The parties acknowledge that the Coyote base unit
handler acceptance is presently scheduled to be completed by
January 9, 1998 (the "Coyote Base Completion Date").
(ii) Earn-Out Payment 3 shall be paid within five (5) days after
Purchaser's written acceptance of all Coyote add-ons (tube
input-output modules and tape input-output modules) in accordance
with mutually agreed upon acceptance criteria and in accordance
with the ProMaster Coyote Transition Plan. Such criteria shall be
defined and agreed to by December 15, 1997. The parties
acknowledge that the Coyote add-ons acceptance is presently
scheduled to be completed by March 31, 1998 (the "Coyote Add-Ons
Completion Date").
(iii) The Coyote Base Completion Date and the Coyote Add-Ons
Completion Date will each be extended one day for each day that
Purchaser's deliverables from Data I/O (defined in the ProMaster
Coyote Transition Plan) are delayed.
(iv) Both, or either, of the Coyote Base Completion Date and the
Coyote Add-Ons Completion Date, may be extended in accordance
with paragraph (iii) immediately above, after which extension
there shall be a thirty (30) day grace period after which period
the following shall occur:
a. If the Coyote Base Completion Date or the Coyote Add-Ons
Completion Date (or both), as the case may be, occurs on or
after the 31st day of delay but on or before the 60th day of
delay, then only 50% of the applicable Earn-Out Payment
shall be accelerated and paid by Purchaser within five (5)
days after Purchaser's written acceptance of the Coyote base
unit handler or Coyote add-ons, as the case may be, and the
remaining 50% of the applicable Earn-Out Payment shall be
paid by Purchaser on December 31, 1998.
b. If the Coyote Base Completion Date or the Coyote Add-Ons
Completion Date (or both), as the case may be, occurs on or
after the 61st day of delay, there shall be no acceleration
of the applicable Earn-Out Payment and the applicable
Earn-Out Payment shall be paid by Purchaser on December 31,
1998.
Page 126
<PAGE>
(b) In the event Data I/O is acquired by a third-party, the remaining
payments for Earn-Out Payments 2 and 3 due Seller, in the total amount
of $1,334,000, shall be made at the time of such acquisition closing
into an escrow with a mutually acceptable escrow agent, to be invested
as mutually agreed and with interest to be paid to Purchaser until the
conditions of the Agreement are met."
2. The parties acknowledge that Data I/O will be assigning the obligation
to pay Earn-Out Payment 1 to General Scanning Inc. under the Asset
Purchase Agreement (the "Asset Purchase Agreement") among General
Scanning Inc. and Purchaser and Data I/O Corporation.
3. This Fourth Amendment is conditioned upon the closing of the Asset
Purchase Agreement by December 15, 1997.
4. In the event of a conflict between the terms of this Fourth Amendment
and the Agreement, this Fourth Amendment shall control. Except as
amended herein, all other terms and conditions of the Agreement shall
remain in full force and effect.
Executed as of the date first above listed.
Purchaser:
Reel-Tech, Inc., a Washington corporation
By: /s/William C. Erxleben
William C. Erxleben,
Chairperson of the Board
Seller:
Hall, Inc. (formerly Reel-Tech, Inc., an Indiana corporation),
an Indiana Corporation
By: /s/Douglas R. Hall
Douglas R. Hall
President
Shareholders:
/s/ Douglas R. Hall /s/Norris R. Hall
Douglas R. Hall Norris R. Hall
Page 127
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
RESTATED FOR FAS 128 FOR THE YEARS 1996 AND 1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-25-1997 DEC-26-1996 DEC-28-1995
<PERIOD-START> DEC-27-1996 DEC-29-1995 DEC-30-1994
<PERIOD-END> DEC-25-1997 DEC-26-1996 DEC-28-1995
<CASH> 8,113 4,048 4,496
<SECURITIES> 24,855 0 0
<RECEIVABLES> 6,072 7,530 11,421
<ALLOWANCES> 394 362 311
<INVENTORY> 8,158 7,540 7,802
<CURRENT-ASSETS> 52,704 24,337 28,019
<PP&E> 21,576 28,822 29,974
<DEPRECIATION> 18,187 19,956 20,022
<TOTAL-ASSETS> 57,736 39,319 44,776
<CURRENT-LIABILITIES> 19,478 14,283 16,014
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 16,412 15,247 17,528
<OTHER-SE> 18,202 7,312 8,401
<TOTAL-LIABILITY-AND-EQUITY> 57,736 39,319 44,776
<SALES> 46,284 48,860 57,496
<TOTAL-REVENUES> 46,284 48,860 57,496
<CGS> 22,748 25,934 27,386
<TOTAL-COSTS> 21,650 22,620 22,252
<OTHER-EXPENSES> (2,976) (197) (398)
<LOSS-PROVISION> 81 119 48
<INTEREST-EXPENSE> 219 256 273
<INCOME-PRETAX> 4,562 128 7,935
<INCOME-TAX> 176 121 892
<INCOME-CONTINUING> 4,386 7 7,043
<DISCONTINUED> (7,114) 1,108 2,282
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 11,500 (1,101) 4,761
<EPS-PRIMARY> 1.66 (0.16) 0.64
<EPS-DILUTED> 1.62 (0.16) 0.60
</TABLE>
