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 30, 1999 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 (425) 881-6444
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (No Par)
Series A Junior Participating Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held
by non-affiliates of the registrant as of March 10, 2000
$35,914,062
7,365,063 shares of no par value Common Stock outstanding as of March 10, 2000
Documents incorporated by reference
Portions of the registrant's Proxy Statement relating to its May 19, 2000
Annual Meeting of Stockholders are incorporated into Part III of
this Annual Report on Form 10-K.
Page 1 of 83
Exhibit Index on Page 46
<PAGE>
DATA I/O CORPORATION
FORM 10-K
For the Fiscal Year Ended December 30, 1999
INDEX
Part I Page
----
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Stockholders 14
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 15
Item 6. Selected Five-Year Financial Data 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk 24
Item 8. Financial Statements and Supplementary Data 24
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 44
Part III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and Related Transactions 44
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 45
Signatures 54
Exhibit Index 55
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PART I
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward Looking
Statements."
General
Data I/O(R) Corporation ("Data I/O" or the "Company") is engaged in the design,
manufacture, and sale of programming systems that are used by designers and
manufacturers of electronic products. The Company's programming system products
are used to program integrated circuits ("ICs" or "devices" or "semiconductors")
with the specific unique data for the product within which the ICs will be used,
and are an important tool for the electronics industry which is experiencing
growing use of programmable ICs. Data I/O markets and distributes its
programming systems worldwide, and is a global leader in this market. The
Company was incorporated in the state of Washington in 1969.
Business Restructuring Progress
1999 was a pivotal year for Data I/O. The accomplishments of 1999 have
significantly added to the foundation needed for a turnaround of the Company.
The Company initiated a significant restructuring plan during 1998, which
continued to be implemented during 1999. The implementation of this
restructuring plan has resulted in a lower corporate cost structure, more
focused and strategically oriented research and development spending, and the
elimination of certain aging, lower-margin products during 1999. Also during
1999, the Company focused considerable effort toward integrating SMS Holding
GmbH, Wangen, Germany ("SMS"), and the SMS products, which were acquired in
November 1998, into its operations and its product lines.
The Company believes that progress made in these areas has positioned the
Company for a successful turnaround. However, the Company cannot predict when
the Company will return to profitability, and there is no assurance that the
turnaround efforts will be successful.
Industry Background
Data I/O Corporation operates in a niche of the electronics equipment industry
that provides programming systems used to code specific data and design
information into programmable ICs. These systems are purchased by companies that
design and manufacture electronic products that utilize programmable ICs. These
companies, who are Data I/O's primary customers, design and manufacture a broad
range of electronic products for both consumer and industrial use.
Programmable ICs represent an approximately $11 billion segment of the
semiconductor industry, and have grown more rapidly than the semiconductor
industry as a whole in recent years. Programmable ICs offer advantages to the
electronic product designer to bring products to market more quickly and
inexpensively than using fixed-function ICs, and can offer the advantage of
simpler product upgrades. Programmable ICs also offer attractive functionality
to the user of the electronic product, such as storing personal information or
customizing product functionality. As a result, use of programmable ICs is
growing rapidly in both high-volume consumer electronic products and more
complex electronic systems.
Due to this growth, there are currently over 70 vendors of programmable ICs, and
thousands of different programmable ICs on the market, designed with a variety
of different technologies developed by the different vendors. The technology
trends driving the programmable IC market result in a broad range of
requirements for programming information into these devices. These technology
trends include high-density flash memory, complex and high pin-count
programmable logic, small chip-scale packages, low-voltage operation, in-system
programming protocols, and multiple semiconductor technologies requiring
different programming methods. These technology advances require advanced
programming equipment to support them.
Automated programming systems are increasingly used to handle the miniaturized
and fine-pitch programmable IC packages in high-volume manufacturing and
programming. This automated handling equipment is critical for minimizing damage
to the delicate leads of the ICs and for increasing handling and programming
capacity. The integration of programming and handling functions into one product
for the high-volume customer has been a significant development for the Company
over the past few years as it tries to provide a complete programming solution
for both high-volume manufacturing environments and high-volume programming
center customers.
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Products
In order to accommodate the expanding variety of programmable ICs being
manufactured today, the Company's programming systems must have the capability
to program many different types of ICs. ICs vary in terms of technology,
features and functions, package type, pin arrangement, and number of pins. The
Company works closely with major manufacturers of programmable ICs to develop
its products in accordance with these requirements. Many of these IC
manufacturers endorse Data I/O's programming systems as equipment they recommend
for end-user applications, as well as for use in their own environments. With
their broad range of capabilities, some of Data I/O's systems can program more
than 8,000 programmable ICs, which accounts for the vast majority of the types
of programmable ICs currently available. Just as breadth of device support is a
critical product feature, high performance is also a critical product feature,
particularly to high-volume manufacturers using programmable ICs within their
products. The Company has developed products to address the needs of these high
volume customers as well.
Data I/O's line of programming systems includes a broad range of products,
systems, modules, and accessories, which the Company groups into two general
categories: non-automated programming systems and automated programming systems.
Automated programming systems are broken down further into two categories:
off-line and in-line. In addition, the Company provides device support and
service on all of its products.
Tasklink is the Company's software platform that provides a common user
interface and enhances the quality of the customers' programming process. The
Company has recently expanded its industry standard Tasklink software to include
support for the Sprint family of programmers as described below.
Non-Automated Programming Systems
The Company's line of non-automated programming systems provides solutions for
both engineering and low- to medium-volume manufacturing customers.
Non-automated programming systems require a user to physically handle the ICs
being programmed. These types of programmers are also sometimes referred to as
"manual" or "desktop" programmers. The Company has three families of
non-automated programmers: the Sprint, the UniSystem and the ChipWriter
families.
Engineering customers typically use single-site programming systems during the
prototype phase of a new design, and may purchase inexpensive systems for
limited device needs or more expensive systems to support more complex devices
or a large variety of device types. Single-site programming systems can perform
programming on only one programmable IC at a time.
The Company offers a range of single-site programming systems. The Sprint family
single-site models include the Plus 48 programmer and the Optima programmer. The
Optima programmer offers a broader range of device package support than the Plus
48 by utilizing interchangeable TOPs and upgradeable pin drivers. The Company
also offers two higher-end single-site models in its UniSystem family: the 3980
Programming System and the UniSite Universal Programming System. Both the 3980
and the Unisystem utilize the Company's proprietary socketing technology which
permits the user to program the majority of IC package types. Pricing for the
Company's non-automated programming systems range from just under $1,000 for the
Plus 48 to approximately $23,000 for a fully loaded UniSite Universal
Programming System.
Low- to medium-volume manufacturing customers often use multiple site (or gang
or parallel) non-automated programming systems for increased programming
capacity. These "multi-site" systems can program multiple devices
simultaneously. The Company's Sprint family multi-site models include the Dual
(two sites), the Quad (four sites) and the Octal (eight sites) programming
systems, which sell from approximately $5,000 to $16,000. Each of these
programmers are also sold with the Company's new Flashtop option which enables
customers to increase their Flash memory programming capacity by a factor of
four.
With the recent inclusion of the Sprint line of programmers, the Company's
Tasklink software now supports the Company's proprietary non-automated
programming systems.
Under a worldwide distribution agreement with a third party supplier, the
Company sells a line of low-priced programmers under the brand name ChipWriter.
The ChipWriter and ChipWriter Portable single-site programming systems and the
ChipWriter Gang multi-site programming systems offer very cost-effective
programming solutions.
Automated Programming Systems
The Company offers a range of automated programming systems that provide
electronic equipment manufacturers with an automated pick and place method for
handling, programming, testing and marking programmable ICs. Automated
programmers are most frequently used by medium- to high-volume manufacturers and
IC programming centers to automate the programming process, to reduce labor
costs, to increase programming capacity, to eliminate potential damage to
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devices due to human handling, and to more accurately handle more complex and
delicate IC package types. The automated programming system feeds the
programmable IC out of its protective media (trays, tubes, or tape and reel),
places the IC into the socket of the programmer, completes programming, applies
a label or laser mark, rejects the ICs that could not be programmed correctly,
and loads correctly programmed ICs back into protective media (trays, tubes or
tape & reel). The IC is then ready to be assembled onto a printed circuit board
using other automated production equipment. The Company offers automated
programming system products within its ProMaster product line and with its PP100
product. Prices range from approximately $50,000 for the ProMaster 2500 up to
approximately $500,000 for the PP100 with options.
The Company's PP100 automated programming system offers a range of programmer
and device media options and requires limited floor space. The system can be
configured with 4 to 12 programmer sites utilizing the same programmer
technology as the Sprint family of programmers to support a wide range of
programmable ICs including fine pitch logic devices. The PP100 utilizes precise
pick-and-place technology, has optional marking capabilities, and can handle ICs
in trays, tubes, or tape and reel media. System pricing starts at under
$200,000. The PP100 has been installed in the facilities of consumer, medical
and automotive electronics manufacturers, and is also supporting contract
manufacturers and IC programming centers.
In the first quarter of 2000, the Company introduced a new automated programming
system which employs a unique concept for in-line programming using an on-line
implementation. The ProLINE RoadRunner targets high-volume production
applications using high density Flash memory devices, such as cellular
telephones.
The Company also provides a complete line of labels for use with its automated
programming systems. These labels are custom manufactured by the Company for the
PP100 and its ProMaster products.
Device Support and Service Support
The Company offers device support updates, which contain algorithms to program
new ICs as they are introduced by the semiconductor manufacturers. These updates
may also include enhancements to existing algorithms and may add new features
and functionality to the programmers. The device support updates are essential
to the Company's customers to keep the programmers current so that new devices
can be programmed. Customers may purchase update contracts that entitle them to
receive periodic updates throughout the year.
The Company also offers out-of-warranty service and repair of its products.
Service contracts are offered for repair, preventative maintenance and
calibration of the systems. This additional support enables the Company's
customers to keep their programming products at current support levels.
Customers
The Company sells its products to thousands of customers worldwide in a broad
range of industries including telecommunications, consumer electronics,
computers, test and measurement, medical, transportation, military, aerospace,
electronic contract manufacturing, and semiconductors. These customers either
design and/or manufacture electronic products that incorporate programmable ICs
or provide IC programming services.
The Company believes that its most significant current market opportunity is
with users of Flash memory programmable ICs. Flash memory has become the
programmable technology of choice for many applications. As the technology
improves, Flash memory will become more dense, yielding higher capacity and
lower cost per bit of information stored. The more dense Flash memory ICs
become, the more important programming becomes to users of those ICs because it
can become a bottleneck in the electronic product production line. The Company
is focusing on solutions for its customers to address those manufacturing
bottlenecks. The Company believes that the most significant users of Flash
memory are the manufacturers of products for wireless communications, personal
computers, automotive electronics and consumer products such as set-top boxes
for cable television, but particularly cellular telephones.
The Company estimates that during 1999, it sold products to over 2,500 customers
throughout the world, none of whom accounted for more than 10% of the Company's
net sales. None of the Company's independent distributors or representatives
accounted for more than 5% of the Company's net sales.
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Geographic Markets and Distribution
The Company markets and sells its products through a combination of direct
sales, internal telesales, and indirect sales representatives and distributors.
The Company continually evaluates its sales channels against its evolving
markets and customers.
U.S. Sales
The Company markets its products throughout the U.S. using a variety of sales
channels including its own field sales management personnel, independent sales
representatives, and a direct telesales organization. The Company's U.S.
independent sales representatives obtain orders on an agency basis, with
shipments made directly to the customer by the Company. The Company recognizes
sales at the time of shipment, or at customer acceptance, if an acceptance
clause is specified in the sales terms.
Foreign Sales
Foreign sales represented between 52% and 58% of net sales of programming
systems in each of 1999, 1998 and 1997 (see Note 16 of "Notes to Consolidated
Financial Statements"). Foreign sales are made through the Company's wholly
owned subsidiaries in Germany and Canada, as well as through independent
distributors and sales representatives located in 35 other countries. Sales made
through foreign subsidiaries are denominated in local currency and recognized
when the subsidiary ships to the end-user. The Company's independent foreign
distributors purchase Data I/O products in U.S. Dollars for resale; the sale is
recognized at the time of shipment to the distributor. Distributors are allowed
to return a portion of their Data I/O product inventory for credit on future
purchases, subject to limitations. As with U.S. sales representatives, sales
made by international sales representatives are on an agency basis with
shipments made directly to the customer by the Company. These sales are
denominated in U.S. Dollars and are recognized at the time of shipment.
Total foreign sales are determined by the geographic area into which the
products are sold and delivered, and include not only sales by foreign
subsidiaries but also export sales from the U.S. to the Company's foreign
distributors and representatives' customers. Foreign sales do not include
transfers between the Company and its foreign subsidiaries. Export sales are
subject to U.S. Department of Commerce regulations. The Company has not,
however, experienced any difficulties to date as a result of these requirements.
Fluctuating exchange rates and other factors beyond the Company's control, such
as international monetary stability, tariff and trade policies, and U.S. and
foreign tax and economic policies, affect the level and profitability of foreign
sales. The Company is unable to predict the effect of such factors on its
business. The Company does hedge against certain currency exposures in order to
minimize their impact.
In February 1999, Data I/O sold its Japan sales and service subsidiary to
Synchro-Work Corporation, one of its sub-distributors in Japan. In connection
with this sale, the Company and Synchro-Work also entered into a new
distribution agreement under which Synchro-Work will continue to sell the
Company's products and assume and fulfill all warranty, device support update
contract, service contract and phone support obligations in Japan.
Competition
The competitors in the market for programming systems are highly fragmented,
consisting of a large number of companies in many regions of the world. The
Company believes that it has the leading market share for programming systems,
with approximately 20% of the total worldwide revenue. Although independent
market information is not available, this estimate is based on internal analysis
by the Company, supplemented with external research. Competitive factors include
product features, programmable IC support, brand awareness and preference,
price, ease of use, fit with customer's manufacturing process, quality,
reliability, throughput, distribution channels, availability, post-sales
support, and service. The Company's competitiveness depends on offering the most
effective combination of these factors.
Many of the competitors in non-automated programming systems are small companies
that distribute their products in limited geographical regions, and compete
primarily on price, local support, and response to specific customer
programmable IC needs. Programmable IC companies who offer programming systems
for their own devices through their distribution channels hold a small portion
of the market. Data I/O competes in the non-automated programming systems area
primarily on the breadth of its product line and programmable IC support, the
strength of its worldwide distribution channels, brand awareness and preference,
post-sales support, and service.
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There are fewer competitors in the automated programming systems category. This
category includes several companies that offer integrated systems, and other
companies that offer automated handling systems that require integration with a
programming system by the customer. The Company's largest competitor for
automated programming systems is BP Microsystems. The primary factors on which
the competitors with integrated systems compete are cost per programmed IC,
capacity, programmable IC support, post-sales support, reliability and service.
Certain customers are using their in-circuit test equipment to also program ICs
after they have been assembled onto printed circuit boards. The Company believes
that the trends in high density Flash memory devices coupled with decreasing
production cycle times make in-circuit test equipment unattractive in many
high-volume applications, and therefore has introduced the ProLINE RoadRunner
in-line programming system. The high performance of the ProLINE RoadRunner
eliminates the programming bottlenecks caused by the ever increasing densities
of Flash memory devices.
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>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Programming Semiconductor Synario Design Automation
Systems Division Equipment Division(1) Division (2) Total Sales
---------------------- ----------------------- ------------------------- ---------------
Percent Percent Percent Percent Percent Percent Percent
Year Amount Growth of Total Amount Growth of Total Amount Growth of Total Amount Growth
- ----- ------ ------ -------- ------ ------ -------- ------ ------ ---------- ------ ------
1999 $34,113 (3.5%) 100% $ - na 0.0% $ - na 0.0% $34,113 (3.5%)
1998 $35,338 (23.6%) 100% na 0.0% - na 0.0% $35,338 (42.2%)
1997 $46,284 (5.3%) 75.8% $7,640 104% 12.5% $7,172 (8.3%) 11.7% $61,096 1.1%
- ------
</TABLE>
(1)The Semiconductor Equipment Division was sold in November 1997 and has been
accounted for in the financial statements as discontinued operations.
(2)The Company disposed of its Synario Design Automation Division in November
1997. The Synario Design Automation Division has been accounted for in the
financial statements as discontinued operations.
Manufacturing, Raw Materials, and Backlog
During 1999, Data I/O conducted manufacturing operations at its principal
facility in Redmond, Washington, where it manufactures automated and
non-automated programming systems. In its manufacturing processes, the Company
uses a combination of standard components, proprietary custom ICs and fabricated
parts manufactured to Data I/O specifications. Most components used are
available from a number of different suppliers and subcontractors but certain
items, such as some handler and programmer subassemblies, custom ICs, hybrid
circuits and connectors, are purchased from single sources. The Company believes
that additional sources can be developed for present single-source components
without significant difficulties in obtaining supplies. There can, however, be
no assurance that single-source components will continue to be readily
available.
The Company had plans to outsource its Redmond manufacturing operations as part
of the Company's restructuring which was initiated in the second half of 1998.
Market conditions, availability of suppliers, as well as other factors caused
the Company to revise its outsourcing plans resulting in less of the
manufacturing operations being outsourced than was originally planned with
respect to the Company's existing products which have relatively high-mix and
low-volume (see Note 2 of "Notes to Consolidated Financial Statements"). To best
support its long-term direction, the Company continues to evaluate its
manufacturing capabilities against future requirements for new products and
technologies and the related investment required to enhance or upgrade
capabilities versus its options for outsourcing.
Manufacturing of the Sprint non-automated programming systems, which were
integrated into the Data I/O product line during 1999 after the acquisition of
SMS in November 1998, is currently provided by an outside supplier located in
Germany. Most orders are scheduled for delivery within one to 60 days after
receipt of order. The Company's backlog of pending orders was approximately
$1.7 million, $4.2 million and $5.7 million as of December 30, 1999,
December 31, 1998 and December 25, 1997, respectively.
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In accordance with industry practices, generally all orders are subject to
cancellation prior to shipment without penalty except for contracts calling for
custom configuration. To date, such cancellations have not had a material effect
on the Company's sales volume. To meet customers' fast delivery requirements,
Data I/O manufactures certain of its products based upon a combination of
backlog and anticipated orders. The size of backlog at any particular date is
not necessarily a meaningful indicator of the trend of the Company's business.
Research and Development
Because Data I/O's future growth is, to a large extent, dependent upon the
timely development and introduction of new products and its support of the
latest programmable ICs, the Company is committed to a substantial research and
development program. Research and development activities include design of new
products and continual enhancement and support of existing products. The Company
is currently 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 is also focusing on increasing
its capacity and responsiveness for new device support requests from customers
and programmable IC manufacturers by revising and enhancing its internal
processes and tools.
During 1999, 1998 and 1997 the Company made expenditures for research and
development of $8,403,000, $9,109,000 and $7,807,000, respectively, representing
24.6%, 25.8% and 16.9% of net sales, respectively.
At the time of the acquisition of SMS in 1998 the Company recognized a charge
for in-process research and development of $2.0 million. This research and
development was primarily focused on a new generation programming technology.
During 1999 this research and development work continued although at a reduced
pace as a significant portion of engineering resources were dedicated toward
support and enhancement of existing products, including those automated and
non-automated programming system products acquired with SMS. The Company
continues to evaluate the results of this research and development work and will
continue development of those elements which are deemed to be commercially
viable.
Patents, Copyrights, Trademarks, and Licenses
Intellectual property rights applicable to various Data I/O products include
patents, copyrights, trade secrets and trademarks. 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. However, for certain strategic technology the
Company uses patent protection as an additional means of protecting its
intellectual property.
The Company attempts to protect its rights in proprietary software products by
retaining the title to and copyright of the software and documentation, by
including appropriate contractual restrictions on use and disclosure in its
licenses, and by requiring its employees to execute non-disclosure agreements.
The Company's software products are typically shipped in sealed packages on
which notices are prominently displayed informing the end-user that, by breaking
the seal of the packaging, the end-user agrees to be bound by the license
agreement contained in the package. The license agreement includes limitations
on the end-user's authorized use of the product, as well as restrictions on
disclosure and transferability. The legal and practical enforceability and
extent of liability for violations of license agreements that purport to become
effective upon opening of a sealed package are unclear. The Company is not aware
of any situation where a license agreement restricting an end-user's authorized
use of a licensed product resulted in enforcement action.
Because of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, there is a possibility that portions of the
Company's products might infringe upon existing patents or copyrights, and the
Company may, therefore, be required to obtain licenses or discontinue the use of
the infringing technology. The Company believes that any exposure it may have
regarding possible infringement claims is a reasonable business risk similar to
that being assumed by other companies in the electronic equipment and software
industries. However, any claim of infringement, with or without merit, could be
costly and a diversion of management's attention, and an adverse determination
could adversely affect the Company's reputation, preclude it from offering
certain products, and subject it to substantial liability.
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Employees
As of December 30, 1999, the Company had 199 total employees, of which 37 were
located outside the U.S. The Company also utilizes independent contractors for
specialty work, primarily in research and development, and utilizes temporary
workers to adjust capacity to fluctuating demand. 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.
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Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of the
Company as of March 10, 2000:
Name Age Position
Frederick R. Hume 57 President and Chief Executive
Officer
Helmut Adamski 39 Vice President Semiconductor
Industry Relationships and
General Manager Device Support
Mark L. Edelsward 43 Vice President
Worldwide Sales
Joel S. Hatlen 41 Vice President
Finance
Chief Financial Officer
Secretary and Treasurer
Jim Rounds 51 Vice President and General
Manager Programming Systems
Frederick R. Hume joined the Company as President and Chief Executive Officer in
February 1999. He was appointed to the Board of Directors of the Company in
January 1999. From 1988 until his retirement in 1998, Mr. Hume was Vice
President and General Manager of Keithley Instruments in Cleveland, Ohio. From
1972 to 1988, he held various management positions at Fluke Corporation,
including Group Vice President for Manufacturing and Research and Development.
Helmut Adamski joined the Company in November 1998 as Vice President of
Marketing when the Company acquired SMS Holding GmbH. In October 1999, Mr.
Adamski was named Vice President Semiconductor Industry Relationships and
General Manager Device Support. From 1994 until the acquisition, Mr. Adamski
served as the Chief Executive Officer of SMS Holding GmbH. From 1991 to 1993, he
was the Vice President of Operations for Schnieder & Koch, a German manufacturer
of networking products. Prior to 1991, he served in various management roles for
Digital Equipment Corporation.
Mark L. Edelsward joined Data I/O Canada as Distribution Manager in 1987. He has
held a variety of sales-related positions with the Company, including European,
Pacific Region and USA Sales Management roles. In January 1998, he was promoted
to Vice President of Worldwide Sales. From 1978 until joining the Company, Mr.
Edelsward was employed by Allan Crawford Associates, a Canadian distributor of
test and measurement and scientific instrumentation.
Joel S. Hatlen joined the Company in September 1991 as a Senior Tax Accountant
and became Tax Manager in December 1992. He was promoted to Corporate Controller
in December 1993. In February 1997, he was named Chief Accounting Officer and
Corporate Controller. In January 1998, he was promoted to Vice President of
Finance and Chief Financial Officer, Secretary and Treasurer. From September
1981 until joining the Company, Mr. Hatlen was employed by Ernst & Young LLP,
where his most recent position was Senior Manager.
Jim Rounds joined the Company in September 1998 as Vice President of
Engineering. In October 1999 Mr. Rounds was named Vice President and General
Manager of Programming Systems. Prior to joining the Company, Mr. Rounds spent
23 years at Hewlett-Packard Corporation, where he last served as Research and
Development Manager for one of the company's new business initiatives from 1995
to 1998. Prior to that, he served as Research and Development Manager for
Hewlett-Packard's Lake Stevens Division from 1993 to 1995, which supported many
product lines and introduced many new products.
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Cautionary Factors That May Affect Future Results
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. The reader can identify these statements by the fact
that they do not relate strictly to historical or current facts. In particular,
these include statements relating to future action, prospective products, new
technologies, future performance or results of current and anticipated products,
sales efforts, expenses, outsourcing of functions, Year 2000 remediation
activities, the outcome of contingencies, and financial results.
Any or all of our forward-looking statements in this report or in any other
public statement made may turn out to be wrong. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors -- for example, product competition and our product
development -- will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may
materially vary.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. The reader
is advised, however, to consult any future disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC and press releases. Also,
note that we provide the following cautionary discussion of risks, uncertainties
and possible inaccurate assumptions relevant to our business. These are factors
that we think could cause our actual results to differ materially from expected
and historical results. Other factors besides those listed here could also
adversely affect the Company. This discussion is permitted by the Private
Securities Litigation Reform Act of 1995.
Development, Introduction and Shipment of New Products
The Company currently is developing new engineering and automated programming
systems. Significant technological, supplier, manufacturing or other problems
may delay the development, introduction or production of these products.
For example, we may encounter these problems:
o technical problems in the development of a new programming system
platform or the robotics for new automated handing systems
o inability to hire qualified personnel
o delays or failures to perform by third parties involved in our
development projects
Our sales in the past three years have been significantly adversely affected by
delays in developing and releasing new products. Some customers waited for our
new products, while many others purchased products from our competitors. Delays
in the completion and shipment of new products, or failure of customers to
accept new products, may result in a decline in sales in 2000.
Variability in Quarterly Operating Results
Our operating results tend to vary from quarter to quarter. Our revenue in each
quarter is substantially dependent upon orders received within that quarter.
Conversely, our expenditures are based on investment plans and estimates of
future revenues. We may, therefore, be unable to quickly reduce our spending if
our revenues decline in a given quarter. As a result, operating results for that
quarter will suffer. Our results of operations for any one quarter are not
necessarily indicative of results for any future periods.
Other factors which may cause our quarterly operating results to fluctuate
include:
o increased competition
o timing of new product announcements
o product releases and pricing changes by us or our competitors
o market acceptance or delays in the introduction of new products
o production constraints
o the timing of significant orders
o customers' budgets
o foreign currency exchange rates
Page 11
<PAGE>
Due to all of the foregoing factors, it is possible that in some future
quarters, our operating results will be below expectations of analysts and
investors.
Rapid Technological Change
Product technology in our industry evolves rapidly, making timely product
innovation essential to success in the marketplace. The introduction of products
with improved technologies or features may render our existing products obsolete
and unmarketable. Technological advances that may negatively impact our business
include:
o new IC package types requiring hardware and software changes in order to
be programmed by our products
o electronics equipment manufacturing practices, such as widespread use of
in-circuit programming
o customer software platform preferences different from those on which our
products operate
o more rigid industry standards, which would decrease the value-added
element of our products and support services
If we cannot develop products in a timely manner in response to industry
changes, or if our products do not perform well, our business and financial
condition will be adversely affected. Also, our new products may contain defects
or errors which give rise to product liability claims against us or cause them
to fail to gain market acceptance.
Economic and Market Conditions
Our business is impacted by capital spending plans and other economic cycles
that affect the users and manufacturers of ICs. These industries are highly
cyclical and are characterized by rapid technological change, short product life
cycles, fluctuations in manufacturing capacity and pricing and gross margin
pressures. Our operations may in the future reflect substantial fluctuations
from period-to-period as a consequence of such industry patterns, general
economic conditions affecting the timing of orders from major customers, and
other factors affecting capital spending. These factors could have a material
adverse effect on our business and financial condition.
Competition
Technological advances have reduced the barriers of entry into the programming
systems markets. We expect competition to increase from both established and
emerging companies. Certain competitors have recently increased their market
share in our business. We believe this is due in part to our product development
delays. If we fail to compete successfully against current and future sources of
competition, our profitability and financial performance will be adversely
impacted.
Dependence on IC Manufacturers
We work closely with most semiconductor manufacturers to ensure that our
programming systems comply with their requirements. In addition, many
semiconductor manufacturers recommend our programming system for use by users of
their programmable devices. These working relationships enable us to keep our
programming systems product line up-to-date and provide end-users with broad and
current programmable IC support. Our business may be adversely affected if our
relationships with semiconductor manufactures deteriorate.
Dependence on Suppliers
Certain parts used in our products are currently available from either a single
supplier or from a limited number of suppliers. If we cannot development
alternative sources of these components, or if we experience a deterioration in
our relationship with these suppliers, there may be delays or reductions in
product introductions or shipments, which may materially adversely affect our
operating results.
Because we rely on a small number of suppliers for certain parts, we are subject
to possible price increases by these suppliers. Also, we may be unable to
accurately forecast our production schedule. If we underestimate our production
schedule, suppliers may be unable to meet our demand for components. This delay
in the supply of key components may materially adversely affect our business.
The non-automated programming system products we acquired when we acquired SMS
in November 1998 are currently manufactured to our specifications by a
third-party contract manufacturer. We may not be able to obtain a sufficient
quantity of these products if and when needed, which may result in lost sales.
Page 12
<PAGE>
Reliance on Third-Party Distribution Channels
We have a small internal sales force. We depend heavily on third-party
representatives, Value Added Resellers (VARs) and distributors. Therefore, the
financial stability of these distributors is important to us. Highly skilled
professional engineers use most of our products. To be effective, third-party
distributors must possess significant technical, marketing and sales resources
and must devote their resources to sales efforts, customer education, training
and support. These required qualities limit the number of potential third-party
distributors. Our business will suffer if we cannot attract and retain a
sufficient number of qualified third-party distributors to market our products.
International Operations
International sales represented 58% of our net revenue for the fiscal year ended
December 30, 1999. We expect that international sales will continue to be a
significant portion of our net revenue. International sales may fluctuate due to
various factors, including:
o unexpected changes in regulatory requirements
o tariffs and taxes
o difficulties in staffing and managing foreign operations
o longer average payment cycles and difficulty in collecting accounts
receivable
o fluctuations in foreign currency exchange rates
o compliance with applicable export licensing requirements
o product safety and other certification requirements
o political and economic instability
The European Community and European Free Trade Association have established
certain electronic emission and product safety requirements ("CE"). Certain of
our new products have not yet met these requirements. Failure to obtain either a
CE certification or a waiver for any product may prevent us from marketing that
product in Europe.
We operate subsidiaries in Germany and Canada. Our business and financial
condition is, therefore, sensitive to currency exchange rates or any other
restrictions imposed on their currencies. Currency exchange fluctuations in
Canada and Germany may adversely affect our investment in our subsidiaries.
Protection of Intellectual Property
Refer to the section captioned "Patents, Copyrights, Trademarks and Licenses" in
Item 1 above.
Acquisitions
We may pursue acquisitions of complementary technologies, product lines or
businesses. Future acquisitions may include risks, such as:
o burdening management and our operating teams during the integration of
the acquired entity
o diverting management's attention from other business concerns
o failure to successfully integrate the acquired products
o lack of acceptance of the acquired products by our sales channels or
customers
o entering markets where we have no or limited prior experience
o potential loss of key employees of the acquired company
o additional burden of support for an acquired programmer architecture
Future acquisitions may also impact our financial position. For example, we may
use significant cash or incur additional debt, which would weaken our balance
sheet. We may also amortize expenses related to the goodwill and intangible
assets acquired, which may reduce our profitability.
We cannot guarantee that future acquisitions will improve our business or
operating results.
Page 13
<PAGE>
Dependence on Key Personnel
Refer to the section captioned "Employees" above.
Potential Volatility of Stock Price
The stock prices of technology companies tend to fluctuate significantly. We
believe factors such as announcements of new products by us or our competitors
and quarterly variations in financial results may cause the market price of our
Common Stock to fluctuate substantially. In addition, overall volatility in the
stock market, particularly in the technology company sector, is often unrelated
to the operating performance of companies. If these market fluctuations continue
in the future, they may adversely affect the price of our Common Stock.
Item 2. Properties
In May 1997, the Company completed the sale of the land and building comprising
its Redmond, Washington corporate headquarters and is currently leasing the
96,000 square foot building back on a 10-year lease-back agreement with an
option to renew the lease for an additional 10 years. This lease requires base
annual rental payments in 1999 of approximately $981,000. See Note 7 of "Notes
to Consolidated Financial Statements." As part of its restructuring plan
implementation, the Company vacated one floor of the leased Redmond facility
(approximately 25,000 square feet) and has sublet the majority of this space for
a period of 28 months beginning January 1, 2000, at a rate of approximately
$33,000 per month.
In addition to the Redmond facility, approximately 13,500 square feet is leased
at three foreign locations including its Canadian sales and service office
located in Mississauga, Ontario, and its German sales, service and engineering
operations located in Wangen and Munich, Germany. During the first quarter 2000,
the Wangen operations plan to move from its 5,000 square foot leased facility to
a new 11,000 square foot leased facility near Wangen. The lease for this new
facility extends through March 2010. See Note 11 of "Notes to Consolidated
Financial Statements."
Item 3. Legal Proceedings
Nothing to report.
Item 4. Submission of Matters to a Vote of Stockholders
No matters were submitted for a vote of stockholders of the Company during the
fourth quarter of the fiscal year ended December 30, 1999.
Page 14
<PAGE>
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
1999 Fourth Quarter $3.50 $1.06
Third Quarter 2.00 1.25
Second Quarter 1.47 1.00
First Quarter 2.75 1.25
1998 Fourth Quarter $2.63 $1.44
Third Quarter 4.13 2.13
Second Quarter 5.63 3.00
First Quarter 6.50 4.88
The approximate number of shareholders of record and approximate number of
beneficial shareholders of record on March 7, 2000 was 820 and 3,500,
respectively.
Except for a special cash dividend of $4.15 per share paid on March 8, 1989, the
Company has not paid cash dividends on its common stock and does not anticipate
paying regular cash dividends in the foreseeable future. The Company's U.S. line
of credit agreement, which is up for renewal in May 2000, restricts the payment
of cash dividends through a requirement for a minimum level of tangible net
worth of $15.0 million.
Page 15
<PAGE>
Item 6. Selected Five-Year Financial Data
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained herein in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Ended
- --------------------------------------------------------------------------------------
Dec. 30, Dec. 31, Dec. 25, Dec. 26, Dec. 28,
(in thousands, except employee and 1999 1998 1997 1996 1995
per share data
- --------------------------------------------------------------------------------------
For The Year:
Net sales $34,113 $35,338 $46,284 $48,860 $57,496
Gross margin 16,165 10,405 23,536 22,926 30,110
Research and development 8,403 9,109 7,807 8,121 6,581
Selling, general and administrative 11,022 14,386 13,924 14,618 15,719
Write-off acquired in-process R&D (1) - 1,959 - - -
Net provision for business
restructuring (2) (215) 4,370 - - -
Operating income (loss) (3,045) (19,418) 1,805 187 7,810
Non-operating income (expense) 1,920 952 2,757 (59) 125
Income (loss) from continuing
operations before income taxes (1,125) (18,466) 4,562 128 7,935
Income tax expense (55) (58) (176) (121) (892)
Income (loss) from continuing
operations (1,180) (18,524) 4,386 7 7,043
Income (loss) from discontinued
operations (3) 831 894 7,114 (1,108) (2,282)
Net income (loss) ($349) ($17,630) $11,500 ($1,101) $4,761
- --------------------------------------------------------------------------------------
At Year-end:
Working capital $16,179 $15,084 $33,226 $10,054 $12,005
Total assets $30,050 $40,089 $57,736 $39,319 $44,776
Long-term debt - - - $1,500 $1,500
Total debt - $564 $2,000 $1,605 $1,617
Stockholders' equity $18,058 $18,909 $34,614 $22,559 $25,929
Number of employees from continuing
operations 199 270 328 332 349
- --------------------------------------------------------------------------------------
Common Stock Data (4):
Basic earnings per share:
From continuing operations ($0.16) ($2.59) $0.63 $0.00 $0.94
Net income (loss) ($0.05) ($2.46) $1.66 ($0.16) $0.64
Diluted earnings per share:
From continuing operations ($0.16) ($2.59) $0.62 $0.00 $0.89
Net income (loss) ($0.05) ($2.46) $1.62 ($0.16) $0.60
Book value per share at year-end $2.48 $2.63 $4.92 $3.33 $3.66
Shares outstanding at year-end 7,290 7,187 7,039 6,778 7,084
Weighted-average basic shares
outstanding 7,254 7,154 6,909 6,857 7,515
Weighted-average diluted shares
outstanding 7,254 7,154 7,087 7,035 7,879
- ---------------------------------------------------------------------------------------
Key Ratios:
Current ratio 2.7 1.8 2.7 1.7 1.7
Gross margin to sales 47.4% 29.4% 50.9% 46.9% 52.4%
Operating income (loss) to sales (8.9%) (54.9%) 3.9% 0.4% 13.6%
Income (loss) from continuing
operations to sales (3.5%) (52.4%) 9.5% 0.0% 12.2%
Return on average stockholders'
equity (6.3%) (63.5%) 16.8% 0.0% 26.9%
- ---------------------------------------------------------------------------------------
Footnotes:
(1) For further discussion, see Note 3 of
"Notes to Consolidated Financial Statements."
(2) For further discussion, see Note 2 of
"Notes to Consolidated Financial Statements."
(3) For further discussion, see Note 4 of
"Notes to Consolidated Financial Statements."
(4) For further discussion, see Notes 1 and
13 of "Notes to Consolidated Financial Statements."
</TABLE>
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves as long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Annual Report on Form 10-K are forward-looking. In particular,
statements herein regarding industry prospects; future results of operations or
financial position; integration of acquired products and operations; market
acceptance of the Company's newly introduced or upgraded products; development,
introduction and shipment of new products; and any other guidance on future
periods are forward-looking statements. Forward-looking statements reflect
management's current expectations and are inherently uncertain. The Company's
actual results may differ significantly from management's expectations. The
following discussions and the section entitled "Business - Cautionary Factors
That May Affect Future Results" describes some, but not all, of the factors that
could cause these differences.
Business Restructuring Progress
During 1999 the Company continued to implement the restructuring of its Redmond
operations and certain of its international subsidiaries. This restructuring
plan was initiated in the second half of 1998 with the following four
objectives: (1) to reduce the Company's corporate overhead costs; (2) to reduce
research and development expenses and to focus its on-going research and
development spending in the segments of the market that show the best potential
for growth and return on investment for the Company; (3) to create a more
variable cost operating structure including the outsourcing of certain of its
manufacturing operations during 1999; and (4) to eliminate redundant products
and operations after the acquisition of SMS Holding GmbH in November 1998.
The Company has altered its original restructuring plan objective of outsourcing
its manufacturing operations resulting in less outsourcing than originally
planned. The outsourcing for the Company's existing products has been completed.
To best support its long-term direction, the Company continues to evaluate its
manufacturing capabilities against future requirements for new products and
technologies and the related investment required to enhance or upgrade
manufacturing capabilities versus its options for outsourcing.
During 1999 the Company paid approximately $1.6 million in accrued restructuring
costs, primarily severance related. Also, the Company reversed reserves of
$215,000 during the second quarter of 1999 primarily related to the Company's
settlement of certain supplier related claims for less than the anticipated
amounts accrued at the time the restructuring charge was accrued in 1998. The
remaining restructure reserve of $493,000 primarily relates to lease abandonment
costs and foreign subsidiary operations realignment which are expected to be
paid by the end of 2000 other than payments on abandoned leased space.
Operating expenses for 1998 included restructuring charges of $4.4 million
related to these restructuring activities. Related primarily to its
restructuring plan, the Company recorded inventory reserves during 1998 of
approximately $4.6 million on products that were discontinued as a result of the
business restructuring. These inventory reserves are included in cost of goods
sold. In addition, the Company incurred operating expenses during 1998 of
approximately $220,000 related to facility consolidation restructuring
activities that were included in selling, general and administrative expenses.
Page 17
<PAGE>
Results of Continuing Operations
For all periods presented in this section, results of operations reflect the
classification of the Company's Semiconductor Equipment and Synario Design
Automation Divisions as discontinued operations (see "Discontinued Operations").
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Sales
(in thousands)
Net sales by product line: 1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------------
Non-automated programming $21,043 (20.5%) $26,459 (13.2%) $30,498
systems
Automated programming systems 13,070 47.2% 8,879 (43.8%) 15,786
---------- ----------- ----------
Total Programming Systems $34,113 (3.5%) $35,338 (23.6%) $46,284
Division =========== =========== ==========
Net sales by location:
United States $14,330 (15.2%) $16,900 (24.2%) $22,290
% of total 42.0% 47.8% 48.2%
International $19,783 7.3% $18,438 (23.2%) $23,994
% of total 58.0% 52.2% 51.8%
- --------------------------------------------------------------------------------------
</TABLE>
1999 vs. 1998
Overall sales decreased for the Company's programming system products during
1999 as compared to 1998. Overall orders during the year were essentially flat,
increasing approximately 1% to $32.0 million compared with $31.5 million in
1998. Orders during 1999 for the Company's automated programming systems
increased 93% compared to 1998. This increase was offset by an 18% decline in
orders for the Company's non-automated programming systems.
The increase in sales and orders of the Company's automated programming systems
is primarily attributable to the PP100(TM) automated programming system which
was integrated into the Data I/O product line during the first half of 1999
following the acquisition of SMS in November 1998. The PP100 replaced the
Company's PM970 fine pitch automated programming system. Sales during 1999 of
the Company's non-automated programming systems decreased significantly compared
to 1998 due to a decline in sales of the Company's older non-automated products,
some of which have been discontinued, offset partially by sales of the SMS
Sprint non-automated products which were integrated into the Data I/O product
line during the first half of 1999 following the acquisition of SMS.
During 1999 sales to Europe increased, but sales in the U.S. and other foreign
countries decreased. Partially offsetting the increased sales in Europe was a
negative impact from foreign currency translation due primarily to the German
Mark to U.S. Dollar exchange rate. The net impact of exchange rate changes
during 1999 was approximately $1.0 million. When the U.S. Dollar is weaker,
sales of the Company's products in local currency translate into more U.S.
Dollars. However, offsetting the revenue translation impact is the translation
of local currency costs and expenses.
1998 vs. 1997
Sales and orders decreased for the Company's programming system products during
1998 as compared to 1997. Orders during the year decreased approximately 35% to
$31.5 million, compared with $48.4 million in 1997. The sales and orders
declines during the year are attributable to both non-automated and automated
programming system products, but are primarily attributable to the decline in
automated programming systems sales. Sales of the Company's PM970 Fine Pitch
Automated Programming System, which was developed to replace the PM9500, were
negatively impacted during the year by delays in completion of certain
configuration requirements and performance enhancements. As a result, sales of
fine pitch automated programming systems declined $2.0 million from 1997. Sales
of the Company's other automated programming system products, accessories and
service contracts decreased by approximately $5.0 million compared to 1997 due
primarily to increased competition in areas where these products are nearing the
end of their product life cycles.
During 1998 sales decreased in all geographic regions. These declines were
partially offset by exchange rate changes for the German Mark and the Japanese
Yen. The foreign currency exchange rate changes, primarily in the German Mark
and Japanese Yen, increased sales by approximately $480,000 during 1998 as
compared to 1997.
Page 18
<PAGE>
Gross Margin
(in thousands) 1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------
Gross margin $16,165 55.4% $10,405 (55.8%) $23,536
Percentage of net sales 47.4% 29.4% 50.9%
- --------------------------------------------------------------------------------
1999 vs. 1998
The gross margin increased significantly in amount and as a percentage of sales
during 1999 compared to 1998. This increase is primarily due to $4.6 million of
inventory reserves recorded during 1998 related to discontinued products as a
result of the Company's restructuring activities (see "Business Restructuring
Progress"). Also contributing to the increased gross margin as compared to 1998
was less spending during 1999 on PM970 customer support as this product became
more stable, and lower overall costs in the manufacturing organization due to
headcount reductions from the Company's restructuring.
1998 vs. 1997
The gross margin decreased significantly in amount and as a percentage of sales
during 1998 compared to 1997. The decrease is primarily due to the 24% decrease
in sales volume and $4.6 million of inventory reserves for primarily
discontinued products recorded during the year related to restructuring
activities. Also contributing to the decline in gross margins are high costs
associated with ProMaster 970 customer support during the year.
Research and Development
(in thousands) 1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------
Research and development $8,403 (7.8%) $9,109 16.7% $7,807
Percentage of net sales 24.6% 25.8% 16.9%
- --------------------------------------------------------------------------------
1999 vs. 1998
Research and development spending decreased in 1999 as compared with 1998 both
in amount and as a percentage of sales. The Company initiated a restructuring
plan in the third quarter of 1998 which resulted in certain new product
development program cancellations and significant layoffs in the Redmond
headquarters engineering staff in the third and fourth quarters of 1998, as well
as the first quarter of 1999. Partially offsetting the cost reductions realized
from the Company's restructuring activities were incremental research and
development expenses in the Company's Wangen, Germany operations, which were
acquired in November 1998, and an increased investment in certain areas of new
product development and software support during 1999. The November 1998
acquisition of SMS has also allowed the Company to reduce its emphasis on
support of certain older products that have been replaced due to overlap with
SMS products which were integrated into the Data I/O product line during the
first half of 1999.
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 programming systems for the manufacturing environment, particularly
for high-density Flash memory applications. During 1999 the Company invested in
its Sprint family of non-automated programmers and in the PP100 automated
programming system, both of which were acquired with SMS in November 1998. The
Company believes this investment was required to raise the level of performance
of these products. Also during 1999 the Company invested substantial resources
in the development of a new automated programming system that employs a unique
concept for in-line programming using an on-line implementation. This product,
called the ProLINE Roadrunner, is targeted at high-volume production
applications using high-density Flash memory, and was introduced in the first
quarter of 2000.
At the time of the acquisition of SMS in 1998 the Company recognized a charge
for in-process research and development of $2.0 million. During 1999 this
research and development work continued although at a reduced pace as the
majority of engineering resources were dedicated toward support and enhancement
of existing products and the development of the ProLINE Roadrunner, as described
above. The Company continues to evaluate the results of this acquired research
and development work and will continue development of those elements which are
deemed to be commercially viable.
Page 19
<PAGE>
1998 vs. 1997
Research and development spending increased both in amount and as a percentage
of sales. The increase in spending was primarily due to aggressive spending for
new product development through the first half of 1998 in engineering staff and
materials, and due to incentive programs that were implemented during the second
half of the year related to product development programs. Also, spending for
consultants used in new product development was increased during 1998, and a
Vice President of Engineering was hired in September 1998.
Selling, General and Administrative
(in thousands) 1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------
Selling, general and administrative $11,022 (23.4%) $14,386 3.3% $13,924
Percentage of net sales 32.3% 40.7% 30.1%
- --------------------------------------------------------------------------------
1999 vs. 1998
The decrease in selling, general and administrative expenditures in 1999 as
compared to 1998 both in amount and as a percentage of sales is due primarily to
a reduction in headcount across most SG&A departments as a result of the
Company's restructuring which was initiated in the second half of 1998 (see
"Business Restructuring Progress"). Also, the sale of the Company's Japan
subsidiary in February 1999 resulted in lower spending in selling, general and
administrative expenses as compared to the prior year. Furthermore, 1998
expenses included a non-cash charge in the amount of $540,000 related to the
modification of stock options of a former CEO of the Company, and decreased
employee performance bonuses in 1999. Partially offsetting the reduced spending
are incremental expenses of the Company's Wangen, Germany operations which were
acquired in November 1998.
1998 vs. 1997
The increase in selling, general and administrative expenditures in 1998 as
compared to 1997 is due primarily to a first quarter non-cash charge in the
amount of $540,000 related to the modification of stock options of a former CEO
of the Company, additional spending in marketing related to new products and
promotions, incremental professional services engaged to assist in strategic
planning, additional expenses related to facility consolidation, and expenses
related to the search for a new Chief Executive Officer. This additional
spending was partially offset by lower sales commissions due to the lower sales
volume during 1998, and by lower spending following the Company's restructuring
initiatives in the third and fourth quarters of 1998.
Interest
(in thousands) 1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------
Interest income $741 (51.0%) $1,513 99.1% $760
Interest expense ($37) (73.2%) ($138) (37.0%) ($219)
- --------------------------------------------------------------------------------
1999 vs. 1998
The decrease in interest income for 1999 as compared to 1998 is due to the
decrease in cash, cash equivalents and marketable securities, due primarily to
the funding of operating losses and the purchase of SMS in the fourth quarter of
1998. The decrease in interest expense for 1999 as compared to 1998 is due
primarily to the retirement of debt in 1998 and the repayment of the Company's
Japan debt in February 1999.
1998 vs. 1997
The increases in interest income in 1998 as compared to 1997 are due to an
increase in cash, cash equivalents and marketable securities, due primarily to
the proceeds received from the Company's land sale and business dispositions
during 1997 (see "Discontinued Operations" and "Sale of Headquarters Property").
Page 20
<PAGE>
Income Taxes
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------
Income tax expense $55 $58 $176
Effective tax rate 4.9% 0.3% 3.9%
- ---------------------------------------------------------------------------
1999 vs. 1998
Income tax expense in 1999 and 1998 relates primarily to foreign income taxes.
The effective income tax rate for 1999 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 deferred tax assets from temporary differences due to uncertainty
regarding the Company's ability to utilize such assets (see Note 15 of "Notes to
Consolidated Financial Statements"). The Company had valuation allowances of
$6.9 million at December 30, 1999 compared to $5.9 million at December 31, 1998.
1998 vs. 1997
The effective income tax rate for 1998 differed from the expected provision at
the statutory 34% tax rate primarily due to the addition of tax valuation
reserves due to operating losses incurred in 1998.
Sale Of Headquarters Property
In May 1997 the Company completed the sale of the land and building comprising
its Redmond, Washington corporate headquarters and excess land that had been
held for resale for approximately $13.8 million, less net transaction related
expenses and reimbursements of approximately $400,000. The sale includes a 10
year lease-back of the building to the Company, with an option to renew the
lease for an additional 10 years. The Company realized approximately $12 million
in cash after payment of transaction fees and taxes. The sale resulted in an
overall pre-tax gain of approximately $5.6 million, of which approximately $2.3
million related to the excess land was recognized in the second quarter of 1997.
The remaining gain has been deferred and will be amortized over the life of the
lease.
Income and Earnings Per Share
(in thousands, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------
Income (loss) from continuing ($1,180) ($18,524) $4,386
operations
Percentage of net sales (3.5%) (52.4%) 9.5%
Earnings (loss) per share from
continuing operations
Basic earnings per share ($0.16) ($2.59) $0.63
Diluted earnings per share ($0.16) ($2.59) $0.62
- ---------------------------------------------------------------------------
1999 vs. 1998
The decrease in loss and loss per share from continuing operations in 1999
compared with 1998 is primarily due to large losses in 1998 related to the
Company's restructuring, including a $4.4 million restructuring charge and a
$4.6 million charge to cost of sales for inventory reserves related to
discontinued products. Also during 1998 the Company recognized a $2.0 million
charge to write-off in-process research and development related to the November
1998 acquisition of SMS. Spending was also higher in research and development
and selling, general and administrative during 1998 prior to the Company's
restructuring in the second half of that year, which resulted in lower spending
during 1999.
1998 vs. 1997
The change to loss and loss per share from continuing operations in 1998
compared with income and income per share in 1997 is primarily due to a
combination of decreased sales volume, the restructuring charges recorded during
the year, a lower gross margin percentage attributable in part to large
inventory reserves related to discontinued products, and increased spending on
new development projects.
Page 21
<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:
(in thousands) 1999 1998 1997
-------- ------- --------
Net sales $ - $ - $7,640
======== ======= ========
Income from operations, net of income tax $ - $ - $ 926
Gain (loss) on disposal, net of income tax - (265) 8,329
-------- ------- --------
Total income (loss) on discontinued segment $ - ($265) $9,255
======== ======= ========
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(R) Design Automation Division.
Under this licensing agreement, the Company's Electronic Design Automation (EDA)
products were to be integrated and sold with the EDA product line of MINC
Incorporated. This transaction discontinued the Synario Design Automation
Division operations of the Company. Although the Company was entitled to receive
certain licensing, source code and training and support services revenues
related to certain of its former SDAD products through December 31, 1999, during
the second quarter 1999 the Company closed final settlements and transfer of its
retained licensing rights. Operating results and the loss on the disposal of
this segment are as follows:
(in thousands) 1999 1998 1997
-------- ------- --------
Net sales (1) $944 $1,381 $7,172
======== ======= ========
Gain (loss)from operations, net of $831 $1,344 ($1,358)
income tax
Loss on disposal, net of income tax - (185) (783)
-------- ------- --------
Total income (loss) on discontinued $831 $1,159 ($2,141)
segment ======== ======= ========
(1) All 1999 and 1998 net sales are for retained licensing rights. 1997
net sales includes $851,000 retained licensing rights recognized after the
disposition in 1997.
Inflation and changes in Foreign currency exchange rates
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 27% of the Company's sales are made by foreign subsidiaries and
independent currency fluctuations tend to minimize the translation effect of any
individual currency exchange fluctuations, and the effect of individual rate
changes on sales and expenses tend to offset each other. Additionally, the
Company hedges its foreign currency exposure on sales of inventory and certain
loans to its foreign subsidiaries through the use of foreign exchange contracts.
See Note 1 of "Notes to Consolidated Financial Statements."
Page 22
<PAGE>
Financial Condition
Liquidity and Capital Resources
(in thousands) 1999 Change 1998 Change 1997
- -------------------------------------------------------------------------------
Working capital $16,179 $1,095 $15,084 ($18,142) $33,226
Total debt - ($564) $564 ($1,436) $2,000
- -------------------------------------------------------------------------------
In 1999, net cash used by operating activities was $5.6 million. Included in
this is an income tax refund of $3.2 million collected during the year. Cash was
used to purchase inventories which increased by $2.0 million primarily due to a
ramp up in the production of the PP100 automated programming system. Cash was
also used to pay an earnout related to the 1997 Reel-Tech disposition, to pay
accrued liabilities, primarily related to the Company's restructuring and
employee compensation, and for property, plant and equipment additions during
the year.
Cash and working capital was provided by the sale of the Company's minority
interest in JTAG Technologies for $1.1 million. Total cash, cash equivalents and
short-term marketable securities are $13.2 million at December 30, 1999, a
decrease of $5.7 million from December 31, 1998.
The Company estimates that capital expenditures for property, plant and
equipment during 2000 will be between $2.0 million and $4.0 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 30, 1999, the Company had a foreign line of credit of $387,000
maturing in December 2000, with an interest rate of 8.5%, and an unused $4.0
million U.S. secured line of credit maturing in May 2000 under which borrowings
would incur interest at the bank's published prime rate or the LIBOR rate plus
250 basis points. These lines of credit have been structured as short-term and
the Company expects to be able to renew them on their respective maturity dates
under substantially the same terms as those presently in place. No assurances
can be made, however, in regard to the renewal of these agreements.
Share Repurchase Program
Under a previously announced share repurchase program, the Company is authorized
to repurchase up to 1,123,800 shares (approximately 15.6%) of its outstanding
common stock. These purchases may be executed through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and may commence or be discontinued at any time. As of December
30, 1999, the Company has repurchased 1,016,200 shares under this repurchase
program at a total cost of approximately $7.1 million. The Company has not
repurchased shares under this plan since the second quarter of 1997 although it
still has the authority to do so.
General
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $300,000 through December 30, 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
Page 23
<PAGE>
European Monetary Conversion
On January 1, 1999, the European Economic and Monetary Union (the "EMU")
introduced the Euro, which became a functional legal currency of the EMU
countries. From 1999 to 2001 business in the EMU member states will be conducted
in both the existing national currency, such as the Franc or Deutsche Mark, and
the Euro. As a result, companies operating in or conducting business in the EMU
member states will need to ensure that their financial and other software
systems are capable of processing transactions and properly handling these
currencies, including the Euro.
The Company has taken certain steps to address this issue but continues to
assess what further impact the EMU formation will have on both its internal
systems and its products sold. The Company plans to take appropriate corrective
actions based on the results of its continued assessment. The costs related to
addressing this issue have not been determined, however, management believes
that this issue and its related costs will not have a material adverse effect on
the Company's business, financial condition and operating results.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company currently uses only foreign currency hedge derivative instruments
which, at a given date, are not material. However, the Company is exposed to
interest rate risks. The Company generally invests in high-grade commercial
paper with original maturity dates of twelve months or less and conservative
money market funds to minimize its exposure to interest rate risk on its
marketable securities, which are classified as available-for-sale as of December
30, 1999. The Company believes that the market risk arising from holdings of its
financial instruments is not material. The table below provides information
about the Company's marketable securities, including principal cash flows for
2000 and the related weighted average interest rates (in thousands):
Estimated Fair
Principal Value at
Cash Flows December 30,
For 2000 1999
----------- ------------
Corporate bonds $3,524 $3,536
5.73%
Medium- and short-term notes 2,569 2,576
5.624%
Euro-dollar bonds 3,012 3,018
5.50%
Zero coupon notes 476 484
4.85%
----------- ------------
Total portfolio value $9,581 $9,614
=========== ============
Item 8. Financial Statements and Supplementary Data
See pages 25 through 43.
Page 24
<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 30, 1999 and December 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 30, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Data I/O
Corporation at December 30, 1999 and December 31, 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 30, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Seattle, Washington //S//Ernst & Young LLP
February 8, 2000 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 accounting principles generally
accepted in the United States. 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//Fredrick R. Hume //S//Joel S. Hatlen
FREDERICK R. HUME Joel S. Hatlen
President and Chief Vice President Finance
Executive Officer Chief Financial Officer
Secretary and Treasurer
Page 25
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Dec. 30, Dec. 31,
1999 1998
- --------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,597 $ 4,008
Marketable securities 9,614 14,894
Trade accounts receivable, less allowance for
doubtful accounts of $464 and $445 5,548 5,352
Inventories 6,237 4,442
Recoverable income taxes 205 3,366
Deferred income taxes - 331
Other current assets 545 1,117
-------- ---------
TOTAL CURRENT ASSETS 25,746 33,510
Property, plant and equipment - net 2,180 2,174
Other assets 2,124 4,345
Deferred income taxes - 60
--------- --------
TOTAL ASSETS $30,050 $40,089
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,592 $ 3,781
Accrued compensation 2,080 2,926
Deferred revenue 2,626 3,895
Other accrued liabilities 2,204 3,328
Accrued costs of business restructuring 493 2,339
Income taxes payable 572 1,593
Notes payable and current maturities of long-term
debt - 564
--------- --------
TOTAL CURRENT LIABILITIES 9,567 18,426
Deferred gain on sale of property 2,425 2,754
--------- --------
TOTAL LIABILITIES 11,992 21,180
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, 7,290,165
and 7,186,851 shares 17,813 17,637
Retained earnings 366 715
Accumulated other comprehensive income (loss) (121) 557
--------- --------
TOTAL STOCKHOLDERS' EQUITY 18,058 18,909
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,050 $40,089
========= ========
See notes to consolidated financial statements.
Page 26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------
Dec. Dec. Dec.
30, 31, 25,
For the years ended 1999 1998 1997
- ---------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $34,113 $35,338 $46,284
Cost of goods sold 17,948 24,933 22,748
-------- -------- --------
Gross margin 16,165 10,405 23,536
-------- -------- --------
Operating expenses:
Research and development 8,403 9,109 7,807
Selling, general and administrative 11,022 14,385 13,924
Write-off acquired in-process research &
development - 1,959 -
Net provision for business restructuring (215) 4,370 -
-------- -------- --------
Total operating expenses 19,210 29,823 21,731
-------- -------- --------
Operating income (loss) (3,045) (19,418) 1,805
Non-operating income (expense):
Interest income 741 1,513 760
Interest expense (37) (138) (219)
Foreign currency exchange - (3) (51)
Gain (loss) on dispositions and other 1,216 (420) 2,267
-------- -------- --------
Total non-operating income 1,920 952 2,757
-------- -------- --------
Income (loss) from continuing operations before (1,125) (18,466) 4,562
Income tax expense (55) (58) (176)
-------- -------- --------
Income (loss) from continuing operations (1,180) (18,524) 4,386
Discontinued operations net of income taxes:
Income (loss) from operations, net of income tax 831 1,344 (432)
Gain (loss) on disposals, net of income tax - (450) 7,546
-------- -------- --------
Income from discontinued operations 831 894 7,114
-------- -------- --------
Net income (loss) ($349) ($17,630) $11,500
======== ======== ========
Basic earnings (loss) per share:
From continuing operations ($0.16) ($2.59) $0.63
From discontinued operations 0.11 0.13 1.03
-------- -------- --------
Total basic earnings (loss) per share ($0.05) ($2.46) $1.66
======== ======== ========
Diluted earnings (loss) per share:
From continuing operations ($0.16) ($2.59) $0.62
From discontinued operations 0.11 0.13 1.00
--------- -------- --------
Total diluted earnings (loss) per share ($0.05) ($2.46) $1.62
========= ======== ========
Weighted-average basic shares outstanding 7,254 7,154 6,909
======== ======== ========
Weighted-average diluted shares outstanding 7,254 7,154 7,087
======== ======== ========
See notes to consolidated financial statements.
</TABLE>
Page 27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------
Dec. 30, Dec. 31, Dec. 25,
For the years ended 1999 1998 1997
- -----------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Income (loss) from continuing operations ($1,180) ($18,524) $ 4,386
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,145 2,077 1,740
Write-off of acquired in-process research &
development - 1,959 -
Net (gain) loss on dispositions (1,113) 355 (2,267)
Equity income from and gain on sale of equity
interest, JTAG Technologies (102) 64 -
Deferred income taxes 391 2,710 (459)
Amortization of deferred gain on sale (329) (329) (213)
Non-cash stock-based compensation expense - 583 -
Inventory write-downs due to business
restructure - 4,557 -
Net change in:
Trade accounts receivable (546) 315 1,547
Inventories (1,969) (841) (618)
Recoverable income taxes 3,161 (3,366) -
Other current assets 532 2,793 (3,277)
Business restructure (1,846) 2,339 (312)
Accounts payable and accrued liabilities (4,838) (1,632) 4,185
Deferred revenue (786) (900) 286
--------- --------- ---------
Cash provided by (used in) operating activities
of continuing operations (6,480) (7,840) 4,998
Cash provided by (used in) operating activities
of discontinued operations 831 894 (3,839)
--------- --------- ---------
Net cash provided by (used in) operating
activities (5,649) (6,946) 1,159
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,245) (482) (1,197)
Net proceeds on sale of property - - 13,430
Net proceeds on sale of subsidiary 72 - -
Acquisition of SMS GmbH and technology - (5,224) -
Investment in JTAG Technologies 1,067 (979) -
Additions to other assets - - (14)
Purchases of available-for-sale securities (8,610) (20,717) (45,687)
Proceeds from sales of available-for-sale
securities 13,890 31,055 20,100
Proceeds from sale of discontinued operations - - 15,525
--------- --------- ---------
Cash provided by (used in) investing activities 5,174 3,653 2,157
FINANCING ACTIVITIES:
Additions to (repayment of) notes payable - (1,442) 412
Sale of common stock 166 259 344
Proceeds from exercise of stock options 10 383 824
Repurchase of common stock - - (3)
Net financing activities of discontinued
operations - - (854)
--------- --------- ---------
Cash provided by (used in) financing activities 176 (800) 723
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (299) (4,093) 4,039
Effects of exchange rate changes on cash (112) (12) 26
Cash and cash equivalents at beginning of year 4,008 8,113 4,048
--------- --------- ---------
Cash and cash equivalents at end of year $ 3,597 $ 4,008 $ 8,113
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 116 $ 88 $ 152
Income taxes $ 71 $ 2,145 $ 1,748
See notes to consolidated financial statements.
</TABLE>
Page 28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Other Total
------------------ Retained Comprehensive Stockholders'
Shares Amount Earnings Income(Loss) Equity
-------- ------- -------- ------------ ------------
(in thousands, except share data)
Balance at December 26, 1996 6,777,720 15,247 6,845 467 22,559
Stock options exercised 168,125 735 - - 735
Issuance of stock
through Directors Fee
Plan 13,508 89 - - 89
Issuance of stock
through Employee Stock
Purchase Plan 79,933 344 - - 344
Purchase of common stock (500) (3) - - (3)
Comprehensive income:
Net income - - 11,500 - 11,500
Cumulative translation
adjustment - - - 122 122
Unrealized loss on
marketable securities - - - (732) (732)
------------
Total comprehensive income 10,890
--------- ------- -------- ------------ ------------
Balance at December 25, 1997 7,038,786 16,412 18,345 (143) 34,614
Stock options exercised 55,000 276 - - 276
Issuance of stock
through Director Fee Plan 20,932 107 - - 107
Issuance of stock through
Employee Stock
Purchase Plan 72,133 259 - - 259
Stock-based compensation - 583 - - 583
Comprehensive loss:
Net loss - - (17,630) - (17,630)
Cumulative translation
adjustment - - - (32) (32)
Unrealized loss on
marketable securities - - - 732 732
------------
Total comprehensive loss (16,930)
--------- ------- -------- ------------ ------------
Balance at December 31, 1998 7,186,851 $17,637 $ 715 557 $18,909
Stock options exercised 4,375 10 - - 10
Issuance of stock through
Employee Stock
Purchase Plan 98,939 166 - - 166
Comprehensive loss:
Net loss - - (349) - (349)
Cumulative translation
adjustment - - - (35) (35)
Cumulative translation
related to sold foreign
subsidiary - - - (643) (643)
------------
Total comprehensive loss (1,027)
--------- ------- -------- ------------ ------------
Balance at December 30, 1999 7,290,165 $17,813 $ 366 ($121) $18,058
========= ======= ======== ============ ============
See notes to consolidated financial statements.
</TABLE>
Page 29
<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. The Company's manufacturing operations
are currently located in the United States. Manufacturing of the Company's
Sprint non-automated programming systems is provided by an outside supplier
located in Germany.
During 1997, the Company disposed of its Semiconductor Equipment and Synario
Design Automation Divisions, which removed Electronic Design Software (EDA)
software products and semiconductor equipment products from the Company's
product offerings. See Note 4 - Discontinued Operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Data I/O
Corporation and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reporting Period
The Company reports on a fifty-two, fifty-three week basis. Results of
operations for 1999 and 1997 are for a fifty-two week period, whereas results
for 1998 are for a fifty-three week period.
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 30, 1999, the Company had approximately $978,000 in one
foreign exchange contract outstanding, with the contract exchange rate being
approximately equal to the market exchange rate. This contract term is 76 days.
Page 30
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with insignificant
interest rate risk and maturities of less than three months when purchased.
Marketable Securities
The Company generally invests in high-grade commercial paper with original
maturities of twelve months or less and conservative money market funds, all of
which are classified as available-for-sale and recorded at fair value, as
defined below. Unrealized holding gains and losses are recorded, net of any tax
effect, as a component of accumulated other comprehensive income (loss) within
stockholders' equity. Interest earned is reported in non-operating income as
interest income. Marketable securities are classified in the balance sheet as
current and noncurrent based on maturity dates and the Company's expectation of
sales and redemptions in the following year.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents and marketable securities
approximates fair value because of the short-term maturity of those instruments.
The fair value of the Company's marketable securities is based upon the quoted
market price on the last business day of the fiscal year plus accrued interest,
if any.
Inventories
Inventories are stated at the lower of cost or market with cost being the
currently adjusted standard cost, which approximates cost on a first-in,
first-out basis.
Property, Plant and Equipment
Property, plant and equipment, including leasehold improvements, are stated at
cost and depreciation is calculated over the estimated useful lives of the
related assets or lease terms on the straight-line basis. Substantially all
manufacturing and office equipment is depreciated over periods of three to seven
years.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment, or at customer
acceptance, if an acceptance clause is specified in the sales terms. 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 $1,212,000, $1,121,000 and $1,676,000 in
1999, 1998 and 1997, respectively.
Warranty Expense
The Company warrants its products against defects for periods ranging from
ninety days to one year. The Company provides currently for the estimated cost
which may be incurred under its product warranties.
Income Taxes
Income tax expense includes U.S. Federal, state and foreign income taxes.
Certain items of income and expense are not reported in both the tax returns and
financial statements in the same year. The Company accounts for income taxes
under the liability method. Under the liability method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
Page 31
<PAGE>
Earnings (Loss) Per Share
Basic earnings per share excludes any dilutive effects of stock options. Basic
earnings per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted-average number of common shares and common stock equivalent
shares outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is antidilutive.
Diversification of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of trade receivables. The Company's cash, cash
equivalents and marketable securities consist of high quality financial
instruments. The Company's trade receivables are geographically dispersed and
include customers in many different industries. Management believes that any
risk of loss is significantly reduced due to the diversity of its end-customers
and geographic sales areas. The Company performs on-going credit evaluations of
its customers' financial condition and requires collateral, such as letters of
credit and bank guarantees, whenever deemed necessary.
Other Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The only items of other
comprehensive income (loss) which the Company currently reports are unrealized
gains (losses) on available-for-sale securities and foreign currency translation
adjustments.
Business Segments
As of January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which establishes standards
for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. Information related to
segment disclosures is contained in Note 16.
Derivatives
In June 1998, the Company adopted SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. The Company currently uses only foreign currency hedge derivative
instruments which, at a given date, are not material.
Page 32
<PAGE>
NOTE 2 - PROVISION FOR BUSINESS RESTRUCTURING
During the third quarter of 1998, the Company recorded a restructuring charge of
$2.0 million as the Company began the implementation of a plan to restructure
its Redmond and foreign subsidiary operations to a level more in line with the
lower sales it was experiencing. During the fourth quarter of 1998, the Company
recorded further restructuring charges of $2.4 million related to the continuing
restructure of the Company's Redmond operations and foreign subsidiaries and
related to activities directly associated with the fourth quarter 1998
acquisition of SMS Holding GmbH ("SMS," see Note 3 - Acquisition of SMS Holding
GmbH). The acquisition of SMS created certain redundancies in product offerings
and in the operations of the combined company. A restructuring plan was
implemented after the acquisition was completed to eliminate such redundant
operations and to phase out overlapping products.
An analysis of the restructuring is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1998 Reserve Reserve
Restructuring 1998 Balance at 1999 Balance at
Description Charge Activity 12/31/98 Activity 12/30/99
----------- ----------- -------- --------- -------- ----------
Downsizing U.S. Operations:
Employee severances $1,997 $947 $1,050 $1,024 $ 26
Fixed asset write-offs 835 566 269 218 51
Redmond facility consolidation 407 151 256 108 148
and abandonment
Supplier-related settlements 404 155 249 249 -
Consulting and legal expenses 177 155 22 22 -
Other 36 22 14 14 -
Downsizing foreign subsidiaries 514 35 479 211 268
----------- ------- -------- -------- --------
Total $4,370 $2,031 $2,339 $1,846 $493
=========== ======= ======== ======== =========
</TABLE>
Many of the costs associated with the reduction of work force were paid during
the fourth quarter 1998 and first quarter 1999. The total number of employees
terminated due to the restructure was 133 (approximately 39% of the total
workforce), which was lower than originally planned in 1998 due to the reduction
in the scale of the Company's manufacturing outsourcing plans. Employees were
terminated from almost all areas of the Company.
In the table above, the 1999 activity primarily represents actual amounts paid
out. However, because certain categories of the original reserve established in
1998 have proven to cost more than the original estimate, such as the facility
abandonment related to the Company's leased Redmond facility, and certain
categories have proven to cost less than the original estimate, such as the
fixed asset write-offs related to the manufacturing outsourcing program,
portions of the reserve have also been reclassified between categories.
Furthermore, during the first quarter of 1999 reserves of approximately $215,000
were reversed primarily related to the Company's settlement of certain supplier
related claims for less than had been anticipated at the time the restructuring
charge was taken in 1998. The remaining reserves outstanding at December 30,
1999 relate primarily to facility abandonment and foreign subsidiary operations
realignment which are expected to be paid by the end of 2000 other than payments
on abandoned leased space.
Related primarily to its restructuring plan, the Company recorded inventory
reserves during the third and fourth quarters of 1998 of approximately $4.6
million on products that were discontinued as a result of the business
restructuring. These reserves are included in cost of goods sold.
NOTE 3 - ACQUISITION of SMS Holding GMBH
In November 1998, the Company acquired SMS Holding GmbH ("SMS"), a privately
held programming equipment company located in Wangen, Germany. The acquisition
was accounted for using the purchase method of accounting with the Company
paying $5,224,000 in cash, including $456,000 of direct acquisition costs. Net
assets acquired included working capital and other assets of $294,000 and
capitalized technology and other intangible assets of $2,971,000 which are being
amortized over their estimated useful lives of 3 to 5 years on a straight-line
basis. The Company recorded a charge in the fourth quarter 1998 of approximately
$1,959,000 for in-process research and development relating to the acquisition.
Page 33
<PAGE>
NOTE 4 - DISCONTINUED OPERATIONS
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc., 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 were to be integrated and sold with the EDA
product line of MINC Incorporated. This transaction discontinued the Synario
Design Automation Division operations of the Company. Although the Company was
entitled to receive certain licensing, source code and training and support
services revenues related to certain of its former SDAD products through
December 31, 1999, during the second quarter 1999 the Company closed final
settlements and transfer of its retained licensing rights.
The income from operations of these discontinued segments has been accounted for
as discontinued operations, and accordingly, their operations are segregated in
the accompanying statements of operations. Operating results of the discontinued
segments and the gain on the sale of these segments are as follows:
Semiconductor Equipment Division Year Ended December
---------------------------- --------------------------------
(in thousands) 1999 1998 1997
-------- -------- ---------
Net sales $ - $ - $7,640
======== ======== =========
Income from operations before income taxes $ - $ $ 926
Income tax expense - - -
-------- -------- ---------
Income from operations - - 926
-------- -------- ---------
Gain (loss) on disposal before income taxes - (25) 10,422
Income tax expense - (240) (2,093)
-------- -------- ---------
Gain (loss) on disposal - (265) 8,329
-------- -------- ---------
Total income (loss) from discontinued
segment $ - ($265) $9,255
======== ======== =========
Synario Design Automation Division Year Ended December
------------------------------------ --------------------------------
(in thousands) 1999 1998 1997
-------- -------- ---------
Net sales (1) $944 $1,381 $7,172
======== ======== =========
Income (loss)from operations before
income taxes $831 $1,344 ($2,088)
Income tax benefit - - 730
-------- -------- ---------
Income (loss) from operations 831 1,344 (1,358)
-------- -------- ---------
Loss on disposal before income taxes - (185) (1,205)
Income tax benefit - - 422
-------- -------- ---------
Loss on disposal - (185) (783)
-------- -------- ---------
Total income (loss)from discontinued
segment $831 $1,159 ($2,141)
======== ======== =========
---------------------
(1) All 1999 and 1998 net sales are for retained licensing rights. 1997
net sales includes $851,000 retained licensing rights recognized after the
disposition in 1997.
Page 34
<PAGE>
NOTE 5 - MARKETABLE SECURITIES
The estimated fair value of marketable securities consisted of the following (in
thousands):
Dec. 30, Dec. 31,
1999 1998
---------- ----------
Corporate bonds $3,536 $5,949
Medium- and short-term notes 2,576 3,421
Euro-dollar bonds 3,018 5,063
Zero coupon bonds 484 461
---------- ----------
$9,614 $14,894
========== ==========
At December 30, 1999, cost approximated market value for the Company's portfolio
of marketable securities and there were no significant unrealized gains or
losses. The cost of securities sold is determined by the specific identification
method. At December 25, 1997, the marketable security which had declined in
value was the investment in General Scanning common stock for which the Company
recorded an unrealized loss of $732,000 in 1997. In 1998, these securities were
sold.
NOTE 6 - INVENTORIES
Net inventories consisted of the following components (in thousands):
Dec. 30, Dec. 31,
1999 1998
---------- ----------
Raw material $2,567 $1,357
Work-in-process 1,665 877
Finished goods 2,005 2,208
---------- ----------
$6,237 $4,442
========== ==========
Reserves for excess and obsolete inventory are $4,569,000 and $5,968,000 at
December 30, 1999 and December 31, 1998, respectively.
NOTE 7 - SALE OF LAND
In May 1997, the Company completed the sale of the land and building comprising
its Redmond, Washington, corporate headquarters for $13.8 million, less net
transaction-related expenses and reimbursements of approximately $400,000. The
sale includes a 10-year lease-back of the building to the Company, with an
option to renew the lease for an additional 10 years. The Company realized $12
million in cash after payment of transaction fees and taxes. The sale
represented an overall pre-tax gain to the Company of $5.6 million. Of this
amount, $2.3 million was recognized in 1997, with the remainder to be amortized
over the life of the lease.
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Dec. 30, Dec. 31,
1999 1998
---------- ----------
Building and improvements $ 179 $ 181
Equipment 12,030 15,155
---------- ----------
12,209 15,336
Less accumulated depreciation 10,029 13,162
---------- ----------
Property, plant and equipment - net $2,180 $2,174
========== ==========
Page 35
<PAGE>
NOTE 9 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
Dec. 30, Dec. 31,
1999 1998
---------- ----------
Long-term lease deposits $ - $ 245
Investment in product lines: SMS 3,272 3,272
Investment in JTAG Technologies - 915
---------- ----------
3,272 4,432
Less accumulated amortization 1,148 87
---------- ----------
Other assets - net $2,124 $4,345
========== ==========
Total amortization recorded for 1999, 1998 and 1997 was $1,061,000, $399,000 and
$470,000, respectively.
Investment in Product Lines: SMS
In November 1998, the Company acquired SMS Holding GmbH (see Note 3 -
Acquisition of SMS Holding GmbH). In related transactions, the Company acquired
a license to the technology, manufacturing and worldwide distribution rights to
Unmanned Solutions' AH 400 robotic handler, which is used in the SMS fine pitch
automated programming system. Of the total acquisition costs of these
transactions, approximately $3.3 million of developed technology and other
various intangible assets are 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 $2.1 million and $3.2
million at December 30, 1999 and December 31, 1998, respectively.
Investment in JTAG Technologies
In April 1998, the Company signed an agreement for a strategic alliance with
JTAG Technologies, a Netherlands-based manufacturer and developer of boundary
scan test and programming solutions. Under the terms of the agreement, the
Company purchased a one-third interest in JTAG Technologies for approximately
$979,000, and began selling in-system programming products under the Data I/O
name. During the second quarter of 1999 the Company sold its minority interest
in JTAG Technologies back to JTAG Holdings BV for $1,067,000 and recognized a
gain on disposal of $85,000. At that time the Company also terminated its
distribution agreement with JTAG due to the Company's low sales volume of JTAG
products.
NOTE 10 - NOTES PAYABLE AND LONG-TERM DEBT
The Company has a foreign line of credit of $387,000 maturing in December 2000
with a rate of 8.5%, and has a U.S. revolving line of credit of $4 million
maturing May 2000 with variable interest rates of the lender's prime rate or
LIBOR plus 2.5% at the Company's option. This U.S. line of credit is secured by
the assets of the Company and is subject to certain affirmative and negative
financial covenants. The Company was in compliance with all financial covenants
at December 30, 1999. The Company anticipates renewing these lines of credit in
2000 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.
Notes payable as of December 31, 1998 consisted of borrowings under a $1.0
million unsecured foreign revolving line of credit with balances outstanding of
$564,000 at December 31, 1998. This line of credit was assumed by the purchaser
of the Company's Japan sales and service subsidiary in February 1999. This line
of credit had a weighted-average interest rate of 2.2% for the year ended
December 31, 1998.
Page 36
<PAGE>
NOTE 11 - COMMITMENTS
The Company has commitments under non-cancelable operating leases and other
agreements, primarily for factory and office space, with initial or remaining
terms of one year or more are as follows (in thousands):
2000 $1,232
2001 1,219
2002 1,287
2003 1,289
2004 1,288
Thereafter 2,897
----------
Total $9,212
==========
Lease and rental expense was $759,000, $1,069,000 and $1,060,000 in 1999, 1998
and 1997, respectively. The Company has renewal options on substantially all of
its major leases.
As part of its restructuring plan implementation, the Company vacated one floor
of its leased Redmond facility (approximately 25,000 square feet) and has sublet
the majority of this space for a period of 28 months beginning January 1, 2000.
This sublease income of approximately $33,000 per month is not reflected in the
table above.
NOTE 12 - STOCK AND RETIREMENT PLANS
Stock Option Plans
At December 30, 1999, there were 1,204,500 shares of common stock reserved for
issuance of which 258,175 shares are available for future grant under the
Company's employee stock option plans. Pursuant to these plans, options are
granted to officers and key employees of the Company with exercise prices equal
to the fair market value of the common stock at the date of grant and generally
vest over four years. Certain options granted during 1998 and 1999 vest over two
years. Options granted under the plans generally have a maximum term of six
years from the date of grant except for certain options granted in January 1999
that have a maximum term of ten years.
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 1999, 1998 and 1997, a total of
98,939, 72,133 and 79,933 shares, respectively, were purchased under the plan at
average prices of $1.69, $3.58 and $4.30 per share, respectively. At December
30, 1999, a total of 233,740 shares were reserved for future issuance.
Stock Appreciation Rights Plan
The Company has a Stock Appreciation Rights Plan ("SAR") under which each
director, executive officer or holder of 10% or more of the Company's common
stock has a SAR with respect to each exercisable stock option. The SAR entitles
the SAR holder to receive cash from the Company for the difference between the
market value of the stock and the exercise price of the option in lieu of
exercising the related option. SARs are only exercisable following a tender
offer or exchange offer for the Company's stock, or following approval by
stockholders of the Company of any merger, consolidation, reorganization or
other transaction providing for the conversion or exchange of more than 50% of
the common shares outstanding. As no event has occurred which would make the
SARs exercisable, no compensation expense has been recorded under this plan.
Director Fee Plan
The Company has a Director Fee Plan which provides for payment to directors who
are not employees of Data I/O Corporation by delivery of shares of the Company's
common stock. For directors' service for 1999 and 1997, a total of 14,228 and
20,932 shares were issued under the plan at a weighted average price of $1.41
and $5.13, respectively. Such shares were issued in the year following the year
of service. No shares were issued from the plan to directors for 1998 board
service. Compensation expense recorded in 1999 and 1997 related to the share
issues was approximately $20,000 and $107,000, respectively.
Page 37
<PAGE>
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 IRS limitations. In fiscal years 1999, 1998 and 1997, 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 $262,000, $315,000
and $432,000 in 1999, 1998 and 1997, respectively.
Share Repurchase Program
Under a previously announced share repurchase program, the Company is authorized
to repurchase up to 1,123,800 shares (approximately 15.5%) of its outstanding
common stock. These purchases may be executed through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and may commence or be discontinued at any time. As of December
30, 1999, the Company has repurchased 1,016,200 shares under this repurchase
program at a total cost of approximately $7.1 million. The Company has not
repurchased shares under this plan since the second quarter of 1997, although it
still has the authority to do so.
NOTE 13 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share data):
Year Ended December
--------------------------------
1999 1998 1997
--------- ---------- ---------
Numerator for basic and diluted earnings per share:
Income (loss)from continuing
operations ($1,180) ($18,524) $ 4,386
Income from discontinued
operations 831 894 7,114
--------- ---------- ---------
Net income (loss) ($349) ($17,630) $11,500
========= ========== =========
Denominator:
Denominator for basic earnings
per share - weighted-average shares 7,254 7,154 6,909
Employee stock options (1) - - 178
--------- ---------- ---------
Denominator for diluted earnings
per share - adjusted weighted-average
shares and assumed conversions 7,254 7,154 7,087
========= ========== =========
Basic earnings (loss) per share
From continuing operations ($0.16) ($2.59) $0.63
From discontinued operations 0.11 0.13 1.03
--------- ---------- ---------
Total basic earnings per share ($0.05) ($2.46) $1.66
========= ========== =========
Diluted earnings (loss) per share
From continuing operations ($0.16) ($2.59) $0.62
From discontinued operations 0.11 0.13 1.00
--------- ---------- ---------
Total diluted earnings per share ($0.05) ($2.46) $1.62
========= ========== =========
(1) Excludes employee stock options which were antidilutive of 20,516,
70,489, and 71,000 in 1999, 1998 and 1997, respectively.
Page 38
<PAGE>
NOTE 14 - STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options, employee stock purchase plan options and directors' fee
shares under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Employee Stock Employee Stock Director
Options Purchase Plan Options Fee Plan
--------------------- ---------------------- ---------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------- ------ ------ ------
Risk-free interest rates 5.66% 4.90% 6.23% 5.19% 5.48% 5.58% 5.66% 5.52% 5.98%
Volatility factors 0.54 1.86 1.28 0.54 1.86 1.28 0.54 1.86 1.28
Expected life of
the option in years 5.48 5.02 5.06 0.50 0.50 0.50 1.00 5.13 1.00
Expected dividend
yield None 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 $1.19, $1.86 and $2.75 per share for 1999,
1998 and 1997, respectively, is amortized to expense over the options' vesting
period. During the phase in period of Statement 123, which has been applied only
for options granted after 1994, the effects of applying the Statement for
providing pro forma disclosure are not indicative of future amounts until the
new rules are applied to all outstanding nonvested awards. The Company's pro
forma information follows (in thousands, except per share data):
Year Ended December
----------------------------------
1999 1998 1997
----------- --------- -----------
Net income (loss) - as reported ($349) ($17,630) $11,500
Net income (loss) - pro forma ($1,009) ($18,856) $10,144
Diluted earnings (loss) per share
- as reported ($0.05) ($2.46) $1.62
Diluted earnings (loss) per share
- pro forma ($0.14) ($2.64) $1.43
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 30, 1999 December 31, 1998 December 25, 1997
-------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- -------------------- --------- ---------
Outstanding - beginning
of year 1,249,750 $3.51 917,000 $4.82 912,000 $5.22
Granted 521,750 2.15 1,307,975 3.90 542,000 5.01
Exercised (4,375) 2.09 (55,000) 4.41 (168,125) 3.46
Expired or forfeited (820,800) 3.74 (920,225) 5.31 (368,875) 6.70
--------- ---------- ---------
Outstanding - end of year 946,325 $2.57 1,249,750 $3.51 917,000 $4.82
========= ========== =========
Exercisable at end of
year 299,608 $3.03 420,938 $3.86 433,313 $4.74
</TABLE>
Options granted and expired include options which were repriced during 1998 and
1997. In August 1998, the Company cancelled and regranted at a lower exercise
price 469,125 options, which included most options that had an exercise price
greater than $3.60 at that time. The exercise price of those options regranted
was $3.48. In addition, in May 1998, the Company cancelled and regranted 214,000
options granted to the CEO at the time of his hiring. During 1997 the Company
cancelled and regranted 232,000 options with exercise prices greater than $6.00,
regranted at exercise prices between $4.56 and $5.00.
In May 1998, the shareholders approved an amendment to the Company's 1986 Stock
Option Plan whereby the number of shares of the Company's Common Stock reserved
for reissuance under the Plan was increased by 300,000 shares. These shares were
registered on June 3, 1998.
Page 39
<PAGE>
The following table summarizes information about stock options outstanding at
December 30, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices 12/30/99 Life in Years Price 12/30/99 Price
-------------- -------------- ----------- ----------- --------------
$1.33 - $1.75 282,000 5.10 $1.69 35,500 $1.59
$2.38 - $2.45 360,500 6.46 2.42 84,000 2.39
$2.63 - $3.22 5,750 5.97 2.93 - -
$3.48 - $5.19 298,075 3.81 3.59 180,108 3.61
------------ -----------
$1.33 - $5.19 946,325 5.22 $2.57 299,608 $3.03
============ ===========
</TABLE>
During the first quarter of 1998, the Company recorded a stock-based
compensation charge of $540,000 related to the modification of stock options of
a former CEO of the Company. Additionally, during the second quarter of 1998,
the Company recorded an additional charge of $43,000 related to stock option
modifications.
NOTE 15 - INCOME TAXES
Components of income (loss) from continuing operations before taxes:
Year Ended December
------------------------------------
(in thousands) 1999 1998 1997
---------- ---------- -----------
U.S. operations ($1,194) ($16,750) $4,034
Foreign operations 69 (1,716) 528
---------- ---------- -----------
($1,125) ($18,466) $4,562
========== ========== ===========
Income tax expense (benefit) consists of:
Current tax expense (benefit):
U.S. federal ($ 398) ($ 2,719) $ 506
State 7 28 58
Foreign 55 58 71
---------- ---------- -----------
(336) (2,633) 635
Deferred tax expense (benefit)
- U.S. federal 391 2,691 (459)
---------- ---------- -----------
Total income tax expense $ 55 $ 58 $ 176
========== ========== ===========
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 $1,000, $35,000, and $158,000 in 1999, 1998 and 1997, respectively.
A reconciliation of the Company's effective income tax rate and the U.S. federal
tax rate is as follows:
Year Ended December
-----------------------------------
1999 1998 1997
---------- ----------- ---------
Statutory rate (34.0%) (34.0%) 35.0%
Foreign Sales Corporation tax benefit (3.1) (0.7) (3.6)
State and foreign income tax, net of
federal income tax benefit (9.3) 2.0 1.5
Valuation allowance for deferred tax assets 32.2 32.9 (26.0)
Stock based compensation expense 17.6 - -
Other 1.5 0.1 (3.0)
---------- ----------- ---------
4.9% 0.3% 3.9%
========== =========== =========
Page 40
<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):
Dec. 30, Dec. 31,
1999 1998
---------- -----------
Deferred income tax assets:
Allowance for doubtful accounts $ 95 $ 124
Inventory and product return reserves 2,346 3,027
Compensation accruals 171 409
Accrued liabilities 1,245 1,949
Book-over-tax depreciation and amortization 753 621
Net operating loss carryforwards 1,171 -
Credit carryforwards 989 -
Other, net 146 206
---------- -----------
6,916 6,336
Valuation allowance (6,916) (5,945)
---------- -----------
Total deferred income tax assets $ 0 $ 391
========== ===========
Balance sheet classification:
Current assets $ - $ 331
Noncurrent assets - 60
---------- -----------
$ - $ 391
========== ===========
The valuation allowance for deferred tax assets increased $971,000 during the
year ended December 30, 1999, due primarily to the taxable loss generated in
1999, and increased $5,781,000 during the year ended December 31, 1998, due
primarily to the taxable loss generated in 1998. The net deferred tax assets
have a full valuation allowance provided due to uncertainty regarding the
Company's ability to utilize such assets in future years. Credit carryforwards
consist primarily of research and development and alternative minimum tax
credits. Net operating loss carryforwards expire in 2019.
Page 41
<PAGE>
NOTE 16 - SEGMENT AND GEOGRAPHIC INFORMATION
Prior to 1998, Data I/O Corporation and its subsidiaries operated within three
major divisions: (1) electronic programming systems used by customers to handle,
program, test and mark programmable ICs (Programming Systems); (2) semiconductor
equipment used to handle, transport and mark integrated circuits (Reel-Tech);
and (3) electronic design automation software used to create designs for
programmable ICs (Synario Design Automation). The Reel-Tech and Synario Design
Automation Divisions were discontinued during 1997. See Note 4 - Discontinued
Operations for further discussion of these discontinued operations including
results of these operations.
No one customer accounted for more than 10% of the Company's revenues in 1999,
1998 and 1997. Major operations outside the U.S. include sales and service
support subsidiaries in Germany, Canada and Japan through February 1999. The
Company sold its Japan sales and service subsidiary in February 1999 for a gain
of $1,113,000 which was primarily non-cash.
Geographic information of the continuing operations for the three years ended
December 30, 1999 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. For purposes of the table below, the profit on the transfers
between geographic areas has been shown in operating income in the geographic
area where the final sale to non-affiliated customers took place. Certain
general corporate expenses are charged to the U.S. segment. Identifiable assets
are those assets that can be directly associated with a particular geographic
area.
Year Ended December
--------------------------------------------
(in thousands) 1999 1998 1997
--------- --------- ----------
Net sales:
U.S. $14,330 $16,900 $22,290
Europe 12,598 9,533 11,548
Other 7,185 8,905 12,446
--------- --------- ----------
$34,113 $35,338 $46,284
========= ========= ==========
Operating income (loss) from continuing operations:
U.S. ($2,637) ($14,839) ($ 219)
Europe ( 68) ( 2,838) 1,323
Other ( 340) ( 1,741) 701
--------- --------- ----------
($3,045) ($19,418) $ 1,805
========= ========= ==========
Identifiable assets of the continuing operations:
U.S. $24,077 $31,097 $51,539
Europe 4,232 5,702 2,737
Other 1,741 3,290 3,460
--------- --------- ----------
$30,050 $40,089 $57,736
========= ========= ==========
Page 42
<PAGE>
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth unaudited selected quarterly financial data for
the Company for 1999 and 1998. 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 dispositions,
business restructuring, 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>
<S> <C> <C> <C> <C>
(in thousands except per share data) Year Ended December 1999
---------------------------------------------
For the quarters ended: Apr.1(1)(2) July 1(2) Sept. 30 Dec. 30
--------- -------- --------- ----------
Net sales $7,758 $8,939 $9,439 $7,977
Gross margin 3,657 4,463 4,035 4,010
Income (loss) from continuing
operations 38 (104) (540) (574)
Income from discontinued operations 326 505 - -
Net income (loss) 364 401 (540) (574)
Diluted earnings (loss) per share
from continuing operations (5) $ 0.01 ($0.01) ($ 0.07) ($0.08)
Diluted earnings (loss) per share $0.05 $ 0.06 ($0.07) ($0.08)
(5)
(in thousands except per share data) Year Ended December 1998
-----------------------------------------------
For the quarters ended: Mar. 26 June 25 Sept.24 (3) Dec. 31(3)(4)
--------- -------- --------- ----------
Net sales $8,426 $8,782 $8,028 $10,102
Gross margin 3,656 3,528 1,103 2,118
Loss from continuing operations (2,233) (2,625) (6,378) (7,288)
Income from discontinued operations 180 527 158 29
Net loss (2,053) (2,098) (6,220) (7,259)
Diluted loss per share from
continuing operations (5) ($0.32) ($0.36) ($0.89) ($1.01)
Diluted loss per share (5) ($0.29) ($0.29) ($0.87) ($1.01)
</TABLE>
(1) During the first quarter of 1999, the Company sold its Japan sales
subsidiary to Synchro-Work Corporation, one of its sub-distributors in
Japan, for total consideration of approximately $100,000. The sale resulted
in a gain before taxes of approximately $1.1 million primarily due to
previously unrecognized accumulated currency translations.
(2) During the first and second quarters of 1999, the Company realized licensing
revenues related to its Synario Design Automation Division. This Division
was disposed of during 1997, however certain licensing rights were retained.
Related to these licensing revenues the Company recognized net earnings of
$326,000 and $505,000 in the first and second quarters, respectively.
(3) During the third and fourth quarters of 1998, the Company recorded
restructuring charges of $2.0 million and $2.3 million, respectively. See
Note 2 - Provision for Business Restructuring. Related to the restructuring
activities, the Company also recorded inventory reserves during the third
and fourth quarters of $2.3 million and $2.3 million, respectively. These
inventory reserves are included in cost of goods sold.
(4) During the fourth quarter of 1998, the Company recorded a one-time charge
for in-process research and development of $2.0 million related to the
acquisition of SMS Holding GmbH (See Note 3 - Acquisition of SMS
Holding GmbH).
(5) The sum of quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted-average shares outstanding and the effects of rounding for each
period.
Page 43
<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 19, 2000 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 19, 2000 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 19, 2000 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 44
<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 10.7.
(2) Retirement Plan and Trust Agreement. See Exhibit 10.2, 10.3, 10.4,
10.12, 10.15, 10.16, and 10.17.
(3) Summary of Management Incentive Compensation Plan. See Exhibit 10.13.
(4) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1.
(5) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.18 and 10.27.
(6) Form of Change in Control Agreements. See Exhibit 10.5.
(7) 1996 Director Fee Plan. See Exhibit 10.6 and 10.20.
(8) Separation Agreement with William C. Erxleben. See Exhibit 10.21.
(9) Consulting Agreement with William C. Erxleben. See Exhibit 10.22.
(10) Service Agreement with Helmut Adamski. See Exhibit 10.28.
(11) Employment Agreement with Helmut Adamski. See Exhibit 10.29.
(12) Letter Agreement with Jim Rounds. See exhibit 10.31.
(13) Letter Agreement with David C. Bullis as amended and supplemented. See
exhibit 10.32.
(14) Letter Agreement with Frederick R. Hume. See exhibit 10.35.
<TABLE>
<CAPTION>
<S> <C> <C>
(a) List of Documents Filed as a Part of This Report: Page
------------------------------------------------- ----
(1) Index to Financial Statements:
Report of Ernst & Young LLP, Independent Auditors 25
Report of Management 25
Consolidated Balance Sheets as of December 30, 1999 and
December 31, 1998 26
Consolidated Statements of Operations for each of the
three years ended December 30, 1999 27
Consolidated Statements of Cash Flows for each of the
three years ended December 30, 1999 28
Consolidated Statements of Stockholders' Equity for
each of the three years ended December 30, 1999 29
Notes to Consolidated Financial Statements 30
Page 45
<PAGE>
(2) Index to Financial Statement Schedules:
Schedule II - Consolidated Valuation and Qualifying Accounts 51
All other schedules not listed above have been omitted because the
required information is included in the consolidated financial statements
or the notes thereto, or is not applicable or required.
(3) Index to Exhibits:
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession:
2.1 Subsidiary Technology Purchase Agreement dated as of November 19,
1998 between SMS-Mikrocomputer-Systeme GmbH and Data I/O
Corporation (Incorporated by reference to Exhibit 2.1 of the
Company's 1998 Annual Report on Form 10-K (File No. 0-10394)). N/A
2.2 Excalibur Technology Purchase Agreement dated as of November 19,
1998 between SMS Holding GmbH and Data I/O Corporation
(Incorporated by reference to Exhibit 2.2 of the Company's 1998
Annual Report on Form 10-K (File No. 0-10394)). N/A
2.3 Agreement Of Purchase And Transfer Of GmbH Shares dated as of
November 19, 1998 among Data I/O Corporation, Data I/O European
Operations GmbH and Shareholders of SMS Holding GmbH
(Incorporated by reference to Exhibit 2.3 of the Company's 1998
Annual Report on Form 10-K (File No. 0-10394)). N/A
2.4 Amended and restated OEM Agreement dated December 16, 1998
between Data I/O Corporation and Unmanned Solutions, Inc.
(Incorporated by reference to Exhibit 2.4 of the Company's 1998
Annual Report on Form 10-K (File No. 0-10394)). N/A
2.5 Support Agreement dated December 16, 1998 between
Data I/O Corporation and Unmanned Solutions, Inc.
(Incorporated by reference to Exhibit 2.5 of the
Company's 1998 Annual Report on Form 10-K (File
No. 0-10394)). N/A
3 Articles of Incorporation:
3.1 The Company's restated Articles of Incorporation filed
November 2, 1987 (Incorporated by reference to Exhibit
3.1 of the Company's 1987 Annual Report on Form 10-K
(File No. 0-10394)). N/A
3.2 The Company's Bylaws as amended and restated as of
February 7, 1999. N/A
3.3 Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 1 of the
Company's Registration Statement on Form 8-A filed
March 13, 1998 (File No. 0-10394)). N/A
4 Instruments Defining the Rights of Security Holders,
Including Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between
Data I/O Corporation and ChaseMellon Shareholder
Services, L.L.C. as Rights Agent, which includes: as
Exhibit A thereto, the Form of Right Certificate; and,
as Exhibit B thereto, the Summary of Rights to Purchase
Series A Junior Participating Preferred Stock
(Incorporated by reference to the Company's Current
Report on Form 8-K filed on March 13, 1998). N/A
Page 46
<PAGE>
4.2 Rights Agreement, dated as of March 31, 1988,
between Data I/O Corporation and First Jersey
National Bank, as Rights Agent, as amended by
Amendment No. 1 thereto, dated as of May 28, 1992
and Amendment No. 2 thereto, dated as of July 16,
1997 (Incorporated by reference to the Company's
current Report on Form 8-K filed on March 13,
1998). N/A
4.3 Amendment No. 1, dated as of February 10, 1999,
to Rights Agreement, dated as of April 4, 1998,
between Data I/O Corporation and ChaseMellon
Shareholder Services, L.L.C. as Rights Agent
(Incorporated by reference to Exhibit 4.1 of the
Company's Form 8-A/A dated February 10, 1999). N/A
10 Material Contracts:
10.1 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
10.2 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
10.3 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
10.4 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
10.5 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
10.6 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
10.7 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
10.8 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
10.9 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
10.10 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
Page 47
<PAGE>
10.11 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
10.12 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
10.13 Amended and Restated Management Incentive Compensation Plan
dated January 1, 1997 (Incorporated by reference to Exhibit 10.25
of the Company's 1997 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.14 Amended and Restated Performance Bonus Plan
dated January 1, 1997 (Incorporated by reference
to Exhibit 10.26 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.15 Fourth Amendment to the Data I/O Tax
Deferred Retirement Plan (Incorporated by
reference to Exhibit 10.27 of the Company's 1997
Annual Report on Form 10K (File No. 0-10394)). N/A
10.16 Fifth Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.28 of the Company's 1997 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.17 Sixth Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.29 of the Company's 1997 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.18 Amended and Restated 1986 Stock Option Plan dated May 13, 1997
(Incorporated by reference to Exhibit 10.30 of the Company's 1997
Annual Report on Form 10K (File No. 0-10394)). N/A
10.1 Amendment, dated May 13, 1997, to the business loan agreement
dated April 24, 1996, with Seattle First National Bank
(Incorporated by reference to Exhibit 10.31 of the Company's 1997
Annual Report on Form 10K (File No. 0-10394)). N/A
10.20 Amended and Restated Data I/O Corporation
1996 Director Fee Plan (Incorporated by reference
to Exhibit 10.32 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.21 Separation Agreement with William C.
Erxleben (Incorporated by reference to Exhibit
10.33 of the Company's 1997 Annual Report on Form
10K (File No. 0-10394)). N/A
Page 48
<PAGE>
10.22 Consulting Agreement with William C.
Erxleben (Incorporated by reference to Exhibit
10.35 of the Company's 1997 Annual Report on Form
10K (File No. 0-10394)). N/A
10.23 Standstill Agreement, dated as of February
10, 1999, among Data I/O Corporation, Bisco
Industries, Inc., Bisco Industries, Inc. Profit
Sharing and Savings Plan, and Glen F. Ceiley
(Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated
February 12, 1999). N/A
10.24 Shareholders Agreement dated April 15, 1998 among JTAG
Technologies B.V., Data I/O Corporation, Harry Bleeker and Peter
Van Den Eijnden (Incorporated by reference to Exhibit 2.1 of the
Company's quarterly report on Form 10Q/A
dated February 16, 1999). N/A
10.25 Amendment, dated December 31, 1998, to the business loan
agreement dated April 24, 1996, with Seattle First National Bank,
including promissory note (Incorporated by reference to Exhibit
10.35 of the Company's 1998 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.26 Security Agreement dated December 31, 1998, related to the
business loan agreement dated April 24, 1996 and amended December
31, 1998, with Seattle First National Bank (Incorporated by
reference to Exhibit 10.36 of the Company's 1998
Annual Report on Form 10K (File No. 0-10394)). N/A
10.27 Amended and Restated 1986 Stock Option Plan dated May 12, 1998
(Incorporated by reference to Exhibit 10.37 of the Company's 1998
Annual Report on Form 10K (File No. 0-10394)). N/A
0.28 Service Agreement dated November 19, 1998 between SMS Holding
GmbH and Helmut Adamski (Incorporated by reference to Exhibit
10.38 of the Company's 1998 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.29 Employment Agreement dated November 19, 1998 between SMS Holding
GmbH and Helmut Adamski (Incorporated by reference to Exhibit
10.39 of the Company's 1998 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.30 Lease Agreement between Dipl. Ing. Hans
Walter Ott GmbH and SMS Holding GmbH (Incorporated by reference
to Exhibit 10.40 of the Company's 1998 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.31 Letter Agreement with Jim Rounds dated
August 7, 1998 (Incorporated by reference to
Exhibit 10.41 of the Company's 1998 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.32 Letter Agreement with David C. Bullis dated March 25, 1998
amended and supplemented by the letter agreement dated August 19,
1998 (Incorporated by reference to Exhibit 10.42 of the Company's
1998 Annual Report on Form 10K (File No. 0-10394)). N/A
10.33 Stock Purchase Agreement dated February 12, 1999 between
Data I/O Corporation and Synchro-Work Corporation. 60
10.34 Sublease dated December 22, 1999 between
Data I/O Corporation and Imandi.com, Inc. 69
10.35 Letter Agreement with Fred R. Hume dated January 29, 1999. 78
Page 49
<PAGE>
10.36 Letter Agreement dated May 28, 1999, among
Data I/O Corporation, JTAG Technologies B.V., and
JTAG Holding B.V. 80
10.37 Amendment, dated May 28, 1999, to the business loan agreement
dated April 24, 1996, with Seattle First National Bank, and Loan
Modification Agreement, dated May 11, 1999, to the Promissory
Note dated December 22, 1998. 82
21 Subsidiaries of the Registrant 52
23 Consent of Ernst & Young LLP, Independent Auditors 53
</TABLE>
(b) Form 8-K:
--------
None
Page 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
DATA I/O CORPORATION
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Charged/
(Credited)
Balance at to Costs Balance at
Beginning and Deductions- End of
of Period Expenses Describe Period
----------- ---------- ---------- ------------
(in thousands)
Year Ended December 25, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for bad debts $ 362 $ 53 ($ 21)(1) $ 394
Inventory reserves $2,271 ($ 225) ($ 398)(2) $1,648
Year Ended December 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for bad debts $ 394 $ 94 ($ 43)(1) $ 445
Inventory reserves $1,648 $4,529(3) ($ 209)(2) $5,968
Year Ended December 30, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for bad debts $ 445 $ 44 ($ 25)(1) $ 464
Inventory reserves $5,968 $ 502(3) ($1,901)(2) $4,569
</TABLE>
(1) Uncollectable accounts written off, net of recoveries.
(2) Obsolete inventories disposed of.
(3) Primarily related to products which will be discontinued as a result of
the business restructuring implemented in 1998.
Page 51
<PAGE>
EXHIBIT 21
DATA I/O CORPORATION
SUBSIDIARIES OF THE REGISTRANT
The following table indicates the name, jurisdiction of incorporation and basis
of ownership of each of the Company's subsidiaries:
State or Percentage
Jurisdiction of Voting
of Securities
Name of Subsidiary Organization Owned
------------------ ------------ -----
Data I/O International, Inc. Washington 100%
Data I/O FSC International, Inc. Territory of Guam 100%
Data I/O Canada Corporation Canada 100%
Data I/O GmbH Germany 100%
RTD, Inc. (formerly Reel-Tech, Inc.) Washington 100%
SMS Mikrokomputer-Systeme GmbH Germany 100%
Page 52
<PAGE>
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Stockholders
Data I/O Corporation
We consent to the incorporation by reference in the: (a) Registration Statements
(Form S-8 No. 333-20657 and No. No. 33-66824) pertaining to the Company's 1982
Employee Stock Purchase Plan and Director Fee Plan, (b) Registration Statements
(Form S-8 No. 33-95608, No. 33-54422, No. 333-55911, and No. 333-48595)
pertaining to the Company's 1986 Stock Option Plan, of our report dated
February 8, 2000, 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 30, 1999.
//S//ERNST & YOUNG LLP
ERNST & YOUNG LLP
Seattle, Washington
March 27, 2000
Page 53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATA I/O CORPORATION
(REGISTRANT)
DATED: March 27, 2000 By: //S//Frederick R. Hume
-----------------------
Frederick R. Hume
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 27, 2000 by the following persons on behalf of
the Registrant and in the capacities indicated.
NAME TITLE
By: //S//Frederick R. Hume President and Chief Executive
-------------------------------- Officer
Frederick R. Hume (Principal Executive Officer)
By: //S//Joel S. Hatlen Chief Financial Officer
-------------------------------- Vice President of Finance
Joel S. Hatlen Secretary, Treasurer
(Principal Financial and
Accounting Officer)
By: //S//Keith L. Barnes Director
--------------------------------
Keith L. Barnes
By: //S//Glen F. Ceiley Director
--------------------------------
Glen F. Ceiley
By: //S//Paul A. Gary Director
--------------------------------
Paul A. Gary
By: //S//Edward D. Lazowska Director
--------------------------------
Edward D. Lazowska
Page 54
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INDEX
<S> <C> <C>
Exhibit Title Page Number
Number
- -------------- ---------------------------------------------------- -------------
2 Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession:
2.1 Subsidiary Technology Purchase Agreement dated as of November 19,
1998 between SMS-Mikrocomputer-Systeme GmbH and Data I/O
Corporation (Incorporated by reference to Exhibit 2.1 of the
Company's 1998 Annual Report on Form 10-K (File No. 0-10394)). N/A
2.2 Excalibur Technology Purchase Agreement dated as of November 19,
1998 between SMS Holding GmbH and Data I/O Corporation
(Incorporated by reference to Exhibit 2.2 of the Company's 1998
Annual Report on Form 10-K (File No. 0-10394)). N/A
2.3 Agreement Of Purchase And Transfer Of GmbH Shares dated as of
November 19, 1998 among Data I/O Corporation, Data I/O European
Operations GmbH and Shareholders of SMS Holding GmbH
(Incorporated by reference to Exhibit 2.3 of the Company's 1998
Annual Report on Form 10-K (File No. 0-10394)). N/A
2.4 Amended and restated OEM Agreement dated December 16, 1998
between Data I/O Corporation and Unmanned Solutions, Inc.
(Incorporated by reference to Exhibit 2.4 of the Company's 1998
Annual Report on Form 10-K (File No. 0-10394)). N/A
2.5 Support Agreement dated December 16, 1998 between
Data I/O Corporation and Unmanned Solutions, Inc.
(Incorporated by reference to Exhibit 2.5 of the
Company's 1998 Annual Report on Form 10-K (File No. 0-10394)). N/A
3 Articles of Incorporation:
3.1 The Company's restated Articles of Incorporation filed
November 2, 1987 (Incorporated by reference to Exhibit
3.1 of the Company's 1987 Annual Report on Form 10-K
(File No. 0-10394)). N/A
3.2 The Company's Bylaws as amended and restated as of
February 7, 1999. N/A
3.3 Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 1 of the
Company's Registration Statement on Form 8-A filed
March 13, 1998 (File No. 0-10394)). N/A
4 Instruments Defining the Rights of Security Holders,
Including Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between
Data I/O Corporation and ChaseMellon Shareholder
Services, L.L.C. as Rights Agent, which includes: as
Exhibit A thereto, the Form of Right Certificate; and,
as Exhibit B thereto, the Summary of Rights to Purchase
Series A Junior Participating Preferred Stock
(Incorporated by reference to the Company's Current
Report on Form 8-K filed on March 13, 1998). N/A
Page 55
<PAGE>
4.2 Rights Agreement, dated as of March 31, 1988,
between Data I/O Corporation and First Jersey
National Bank, as Rights Agent, as amended by
Amendment No. 1 thereto, dated as of May 28, 1992
and Amendment No. 2 thereto, dated as of July 16,
1997 (Incorporated by reference to the Company's
current Report on Form 8-K filed on March 13, 1998). N/A
4.3 Amendment No. 1, dated as of February 10, 1999,
to Rights Agreement, dated as of April 4, 1998,
between Data I/O Corporation and ChaseMellon
Shareholder Services, L.L.C. as Rights Agent
(Incorporated by reference to Exhibit 4.1 of the
Company's Form 8-A/A dated February 10, 1999). N/A
10 Material Contracts:
10.1 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
10.2 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
10.3 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
10.4 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
10.5 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
10.6 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
10.7 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
10.8 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
10.9 Purchase and Sale Agreement dated as of July 9, 1996 (Relating to
the sale of Data I/O Corporation's headquarters property in
Redmond, Washington consisting of approximately 79 acres of land
and an approximately 96,000 square foot building. (Portions of
this exhibit have been omitted pursuant to an application for an
order granting confidential treatment. The omitted portions have
been separately filed with the Commission) (Incorporated by
reference to Exhibit 10.32 of the Company's 1996 Annual Report on
Form 10K (File No. 0-10394)). N/A
Page 56
<PAGE>
10.10 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
10.11 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
10.12 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
10.13 Amended and Restated Management Incentive
Compensation Plan dated January 1, 1997
(Incorporated by reference to Exhibit 10.25 of
the Company's 1997 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.14 Amended and Restated Performance Bonus Plan
dated January 1, 1997 (Incorporated by reference
to Exhibit 10.26 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.15 Fourth Amendment to the Data I/O Tax
Deferred Retirement Plan (Incorporated by
reference to Exhibit 10.27 of the Company's 1997
Annual Report on Form 10K (File No. 0-10394)). N/A
10.16 Fifth Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.28 of the Company's 1997 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.17 Sixth Amendment to the Data I/O Tax Deferred
Retirement Plan (Incorporated by reference to
Exhibit 10.29 of the Company's 1997 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.18 Amended and Restated 1986 Stock Option Plan dated May 13, 1997
(Incorporated by reference to Exhibit 10.30 of the Company's 1997
Annual Report on Form 10K (File No. 0-10394)). N/A
Page 57
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10.19 Amendment, dated May 13, 1997, to the business loan agreement
dated April 24, 1996, with Seattle First National Bank
(Incorporated by reference to Exhibit 10.31 of the Company's 1997
Annual Report on Form 10K (File No. 0-10394)). N/A
10.20 Amended and Restated Data I/O Corporation
1996 Director Fee Plan (Incorporated by reference
to Exhibit 10.32 of the Company's 1997 Annual
Report on Form 10K (File No. 0-10394)). N/A
10.21 Separation Agreement with William C.
Erxleben (Incorporated by reference to Exhibit
10.33 of the Company's 1997 Annual Report on Form
10K (File No. 0-10394)). N/A
10.22 Consulting Agreement with William C.
Erxleben (Incorporated by reference to Exhibit
10.35 of the Company's 1997 Annual Report on Form
10K (File No. 0-10394)). N/A
10.23 Standstill Agreement, dated as of February
10, 1999, among Data I/O Corporation, Bisco
Industries, Inc., Bisco Industries, Inc. Profit
Sharing and Savings Plan, and Glen F. Ceiley
(Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated
February 12, 1999). N/A
10.24 Shareholders Agreement dated April 15, 1998 among JTAG
Technologies B.V., Data I/O Corporation, Harry Bleeker and Peter
Van Den Eijnden (Incorporated by reference to Exhibit 2.1 of the
Company's quarterly report on Form 10Q/A dated February 16,
1999). N/A
10.25 Amendment, dated December 31, 1998, to the business loan
agreement dated April 24, 1996, with Seattle First National Bank,
including promissory note (Incorporated by reference to Exhibit
10.35 of the Company's 1998 Annual Report
on Form 10K (File No. 0-10394)). N/A
10.26 Security Agreement dated December 31, 1998, related to the
business loan agreement dated April 24, 1996 and amended December
31, 1998, with Seattle First National Bank (Incorporated by
reference to Exhibit 10.36 of the Company's 1998
Annual Report on Form 10K (File No. 0-10394)). N/A
10.27 Amended and Restated 1986 Stock Option Plan dated May 12, 1998
(Incorporated by reference to Exhibit 10.37 of the Company's 1998
Annual Report on Form 10K (File No. 0-10394)). N/A
10.28 Service Agreement dated November 19, 1998 between SMS Holding
GmbH and Helmut Adamski (Incorporated by reference to Exhibit
10.38 of the Company's 1998 Annual Report on Form 10K
(File No. 0-10394)). N/A
10.29 Employment Agreement dated November 19, 1998 between SMS Holding
GmbH and Helmut Adamski (Incorporated by reference to Exhibit
10.39 of the Company's 1998 Annual Report on Form 10K
(File No. 0-10394)). N/A
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10.30 Lease Agreement between Dipl. Ing. Hans Walter Ott GmbH and
SMS Holding GmbH (Incorporated by reference to Exhibit 10.40 of
the Company's 1998 Annual Report on Form 10K (File No. 0-10394)). N/A
10.31 Letter Agreement with Jim Rounds dated August 7, 1998
(Incorporated by reference to Exhibit 10.41 of the
Company's 1998 Annual Report on Form 10K (File No. 0-10394)). N/A
10.32 Letter Agreement with David C. Bullis dated March 25, 1998
amended and supplemented by the letter agreement dated August 19,
1998 (Incorporated by reference to Exhibit 10.42 of the Company's
1998 Annual Report on Form 10K (File No. 0-10394)). N/A
10.33 Stock Purchase Agreement dated February 12, 1999 between
Data I/O Corporation and Synchro-Work Corporation. 60
10.34 Sublease dated December 22, 1999 between
Data I/O Corporation and Imandi.com, Inc. 69
10.35 Letter Agreement with Fred R. Hume dated January 29, 1999. 78
10.36 Letter Agreement dated May 28, 1999, among
Data I/O Corporation, JTAG Technologies B.V., and
JTAG Holding B.V. 80
10.37 Amendment, dated May 28, 1999, to the business loan agreement
dated April 24, 1996, with Seattle First National Bank, and Loan
Modification Agreement, dated May 11, 1999, to
the Promissory Note dated December 22, 1998. 82
</TABLE>
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<PAGE>
Exhibit 10.33
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into as of February 12, 1999, between
DATA I/O CORPORATION ("DAIO") and SYNCHRO-WORK CORPORATION ("SWC") based upon
the following facts:
A. DAIO is the owner of 192,000 shares of common stock, par value(Y)1,000
per share (the "Shares"), of Data I/O Japan Co., Ltd., a Japanese
corporation (the "Company"). The Shares constitute all of the issued and
outstanding shares of common stock of the Company.
B. DAIO desires to sell, and SWC desires to purchase, the Shares on the terms
and conditions contained herein. In connection with such purchase and
sale, DAIO and SWC are subsequently entering into (i) a "Distribution
Agreement" whereby SWC will obtain certain rights to distribute DAIO's
products and (ii) an "Algorithm Development Agreement" whereby SWC will
develop algorithms for DAIO (collectively with the Distribution Agreement,
the "Related Agreements").
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties represent, warrant and agree as follows:
Structure of Transaction.
- -------------------------
Sale of Shares. Subject to the terms and conditions set forth herein, DAIO
agrees to sell, assign and transfer to SWC, and SWC agrees to purchase and
accept, the Shares, free and clear of any and all liens, charges, assessments,
mortgages, pledges, claims, options, conditional sales agreements, security
agreements and encumbrances of any nature (collectively, "Liens").
Purchase Price; Adjustment.
- --------------------------
Payment of Purchase Price. The aggregate purchase price for the Shares (the
"Purchase Price") is (Y)8,300,000, which is equal to (Y)20,000,000 minus (Y)
11,700,000 for the Moving Expenses (as defined below), subject to possible
adjustment pursuant to (b) and (c) below. The Purchase Price is delivered by
SWC concurrently herewith, the receipt of which is hereby acknowledged by
DAIO. All payments by either party under this Agreement shall be made in
Japanese Yen by wire transfer of same day funds or certified or cashiers
check.
Possible Adjustment for Moving Expenses. For purposes of this
Agreement, "Moving Expenses" means (i) the termination fee under Section 4 of
the lease agreement dated November 25, 1994 relating to the lease of the
Company's current office, plus (ii) the reasonable moving expenses,
restoration cost of the Company's current office, fixed assets write-off and
disposition fee related to the relocation of the Company's current office to
another location in Tokyo, Japan, but excluding any broker's or finder's fees
and tenant improvements. A final account of the Moving Expenses will be
delivered by SWC to DAIO in writing within 60 days after such relocation is
completed. If DAIO disputes such Moving Expenses, DAIO will give written
notice to SWC within 30 days after its receipt of such final account, and
such dispute will be resolved in accordance with Section 5.4. If DAIO does
not timely contest such final account, such final account will be binding
upon the parties. If the
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Moving Expenses are less than (Y)11,700,000, then within 60 days after the
date of such final account, SWC will pay to DAIO the difference obtained by
subtracting the Moving Expenses from (Y)11,700,000. In no event will DAIO
be liable for Moving Expenses in excess of (Y)11,700,000, and any such
excess will be the sole responsibility of SWC.
Possible Adjustment for Certain Liabilities. If at any time until and
including the 90th day after the date hereof (the "Adjustment Date") SWC
discovers any liability of the Company that was not (but, under generally
accepted accounting principles in the United States, should have been)
disclosed on the Company's unaudited United States balance sheet as of
December 31, 1998 (an "Undisclosed Liability"), a copy of which is attached
hereto as Exhibit 1.2, then SWC will give written notice (an "Adjustment
Notice") to DAIO by the Adjustment Date setting forth in reasonable detail
any such Undisclosed Liability. If DAIO disputes any such Adjustment Notice,
DAIO will give written notice to SWC within 30 days after its receipt of such
Adjustment Notice, and such dispute will be resolved in accordance with the
procedures set forth in Section 5.4. If DAIO does not timely contest such
Adjustment Notice pursuant to the immediately preceding sentence, such
Adjustment Notice will be binding upon DAIO and within 60 days after receipt
of such Adjustment Notice, DAIO will pay to SWC an amount equal to the
Undisclosed Liability, as an adjustment to the Purchase Price. The parties
agree that in no event will DAIO be liable hereunder for any Undisclosed
Liability which is (i) discovered by SWC before the Adjustment Date, but
written notice thereof is not given by SWC on or prior to the Adjustment Date
or (ii) discovered by SWC after the Adjustment Date. Notwithstanding anything
to the contrary in this Agreement, DAIO will not be liable for Undisclosed
Liabilities, alone or in the aggregate, in excess of the Purchase Price
received by DAIO hereunder. The foregoing possible adjustment for certain
liabilities of DAIO will be based solely on Exhibit 1.2. Both parties
acknowledge that the financial statements which the Company will prepare for
closing of its account under the corporation law of Japan and for tax
accounting purposes will be prepared under different rules from the
accounting standards prevailing in the United States and, therefore, may
differ from Exhibit 1.2.
Delivery of Certificates for Shares. DAIO hereby delivers to SWC a certificate
or certificates representing the Shares, receipt of which is hereby acknowledged
by SWC.
Further Acts. DAIO will from time to time after the date hereof take such
further actions, including the execution and delivery of any instruments or
certificates, as may be reasonably requested by SWC for the transfer of the
Shares in accordance with this Agreement.
Representations and Warranties of DAIO.
- ---------------------------------------
As an inducement to the execution of this Agreement by SWC, DAIO
represents and warrants as follows:
Title to Shares. DAIO is the true and lawful owner of the Shares and has full
and unrestricted legal power and authority to sell, assign and transfer the
Shares hereunder and that upon such transfer SWC will obtain good, valid and
marketable title to and ownership of the Shares, free and clear of any and all
Liens. There are no options, warrants or other rights outstanding which entitle
any person or entity to purchase any of the Shares.
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Authority. DAIO has full legal power and authority to enter into this Agreement,
to sell, assign, transfer and deliver the Shares and otherwise perform its
obligations and undertakings set forth herein. This Agreement has been duly
executed and delivered by DAIO and constitutes its legal, valid and binding
obligation, enforceable against it in accordance with the terms hereof.
No Conflicts. The execution, delivery and performance of this Agreement by DAIO
will not: (i) result in the creation of any Lien upon any of the Shares; or (ii)
result in a breach or violation of, or be in conflict with, or constitute (with
or without the giving of notice or the passage of time or both) a default under
any statute, law, ordinance, rule, regulation, judgment, order or decree
applicable to it or the terms, conditions or other provisions of any contract,
pledge or other agreement or arrangement to which DAIO is a party or the Shares
are or may be bound.
No Legal Proceedings. There is no claim, action, suit, litigation or other
proceeding pending or, to DAIO's knowledge, threatened against DAIO which in any
way would affect its ability to enter into and perform its obligations under
this Agreement or otherwise affect the Shares.
Required Consents. All consents, approvals or authorizations of, or
declarations, filings or registrations with, any person or governmental agency
required in connection with performance by DAIO of its obligations under this
Agreement have been duly obtained or made.
Brokerage. Neither DAIO nor the Company, nor any of their respective directors,
officers or agents has retained any broker or finder in connection with the
transactions contemplated hereby.
2.7 No Material Adverse Change. The Company has maintained its business
in the ordinary and normal course of business since January 1, 1999 and there
has not been any material adverse change in the financial position of the
Company since January 1, 1999.
2.8 Board Approval. The Board of Directors of DAIO has approved the
transfer by DAIO to SWC of the Shares contemplated hereunder.
Representations and Warranties of SWC.
- --------------------------------------
As an inducement to the execution of this Agreement by DAIO, SWC
represents and warrants as follows:
Authority. SWC has full legal power and authority to enter into this Agreement,
to purchase and accept the Shares and otherwise perform its obligations and
undertakings set forth herein. This Agreement has been duly executed and
delivered by SWC and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with the terms hereof.
No Conflicts. The execution, delivery and performance of this Agreement by SWC
will not result in a breach or violation of, or be in conflict with, or
constitute (with or without the giving of notice or the passage of time or both)
a default under any statute, law, ordinance, rule, regulation, judgment, order
or decree applicable to it or the terms, conditions or other provisions of any
contract, pledge or other agreement or arrangement to which SWC is a party.
No Legal Proceedings. There is no claim, action, suit, litigation or other
proceeding pending or, to SWC's knowledge, threatened against SWC which in any
way would affect its ability to enter into and perform its obligations under
this Agreement.
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<PAGE>
Required Consents. All consents, approvals or authorizations of, or
declarations, filings or registrations with, any person or governmental agency
required in connection with performance by SWC of its obligations under this
Agreement have been duly obtained or made.
Brokerage. Neither SWC nor any of its directors, officers or agents has
retained any broker or finder in connection with the transactions
contemplated hereby.
Indemnification.
- ----------------
Indemnities. DAIO agrees to indemnify and hold harmless SWC and its directors,
officers, affiliates, successors and assigns from and against any and all
losses, liabilities, claims, damages and expenses (including without limitation,
reasonable attorneys' fees) ("Losses") incurred by such persons as a result of
or arising from a breach of any representation, warranty or covenant of DAIO
contained herein. SWC agrees to indemnify and hold harmless DAIO and its
directors, officers, affiliates, successors and assigns from and against any and
all Losses (including without limitation, reasonable attorneys' fees) incurred
by such persons as a result of or arising from (i) a breach of any
representation, warranty or covenant of SWC contained herein or (ii) the
operation of the Company's business after the date hereof or the operation of
SWC's business.
Procedure. A party entitled to indemnification under Section 4.1 will give
prompt written notice to the indemnifying party of any Loss with respect to
which it seeks indemnification. In case any action, proceeding or claim is
brought against an indemnified party in respect of which indemnification is
sought hereunder, the indemnifying party will be entitled to participate in and
assume the defense thereof, with counsel reasonably satisfactory to the
indemnified party; provided, that the indemnified party will be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense. If the indemnifying party advises an indemnified party that it will
contest such a claim for indemnification hereunder, or fails, within 30 days of
receipt of any indemnification notice to notify, in writing, such indemnified
party of its election to defend, settle or compromise, at its sole cost and
expense, any action, proceeding or claim (or discontinues its defense at any
time after it commences such defense), then the indemnified party may, at its
option, defend, settle or otherwise compromise or pay such action or claim. In
any event, unless and until the indemnifying party elects in writing to assume
and does so assume the defense of any such claim, proceeding or action, the
indemnified party's costs and expenses arising out of the defense, settlement or
compromise of any such action, claim or proceeding shall be Losses subject to
indemnification under this Section 4. The indemnified party will cooperate fully
with the indemnifying party in connection with any negotiation or defense of any
such action or claim by the indemnifying party and will furnish to the
indemnifying party all information reasonably available to the indemnified party
which relates to such action or claim. If the indemnifying party elects to
defend any such action or claim, then the indemnified party will be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense. The indemnifying party will not be liable for any settlement of any
action, claim or proceeding effected without its written consent, which will not
be unreasonably withheld or delayed.
Limitations. Notwithstanding Section 4.1, (i) neither party will be liable for
any Losses until such time as the aggregate amount thereof reaches (Y)2,000,000
(but then such party will be liable for the entire (Y)2,000,000 plus any such
Losses in excess thereof), subject to Section 4.4 below and (ii) the aggregate
amount payable by DAIO pursuant to this Agreement or otherwise with respect to
all Losses will not exceed the amount of the Purchase Price received by DAIO
hereunder.
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Survival; Exclusivity. The representations and warranties of the parties
contained in this Agreement will survive for a period of six months after the
date hereof, and thereafter, no claims for breach of any of such representations
and warranties may be made by either party. Except as expressly set forth in
this Section 4, neither party hereto will have any right to money damages from
the other party with respect to breaches of the representations, warranties and
covenants contained in this Agreement.
Miscellaneous.
- --------------
Notices. All notices, demands and other communications called for or required by
this Agreement will be in writing and will be addressed to the parties at their
respective addresses stated below or to such other address as a party may
subsequently designate by ten days' advance written notice to the other party.
Communications hereunder will be deemed to have been received (i) upon delivery
in person, (ii) the second business day after depositing it with a commercial
overnight carrier which provides written verification of delivery or (iii) the
day of transmission by telefacsimile if sent before 2:00 p.m., recipient's time
(or the next business day after transmission if sent after 2:00 p.m. recipient's
time), provided that a copy of such notice is sent on the same day via
commercial overnight carrier postage prepaid, with an indication that the
original was sent by facsimile and the date of its transmittal:
If to DAIO: Data I/O Corporation
10525 Willows Road N.E.
P.O. Box 97046
Redmond, WA 98073 USA
Attention: President
Phone: (425) 881-6444
Facsimile: (425) 881-2917
cc: General Counsel
If to SWC: Synchro-Work Corporation
1-24-6, Minami-Ikebukuro
Toshima-ku, Tokyo 171-0022 JAPAN
Attention: President
Phone: 81-3-3980-6871
Fax: 81-3-3980-5391
Entire Agreement. This Agreement, including all exhibits hereto, sets forth the
entire agreement between the parties with respect to the subject matter hereof,
and replaces and supersedes all prior or contemporaneous agreements, written or
oral, as to the subject matter. No modifications or amendments shall be binding
upon the parties unless made in writing and signed by both parties. In
interpreting and construing this Agreement, the fact that one or the other of
the parties may have drafted this Agreement or any provision hereof shall not be
given any weight or evidence, each of the parties having had adequate
opportunity to negotiate all the provisions hereof.
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<PAGE>
Waiver. Failure or delay on the part of either party in exercising any rights,
power or privileges under this Agreement will not be deemed a waiver of any
exercise of any right, power or privilege.
Dispute Resolution. If any dispute, controversy or claim arises between the
parties out of or in relation to this Agreement, the parties will attempt, by
mutual negotiation, to come to a reasonable settlement of the same as soon as
possible. If no settlement is reached within 30 days from the first notification
of a dispute in writing by either party, the same will be solely and finally
settled by binding arbitration in Vancouver, British Columbia, Canada by the
British Columbia International Commercial Arbitration Centre in accordance with
the Commercial Arbitration Rules and Supplementary Procedures for International
Commercial Arbitration of the American Arbitration Association ("AAA") as
modified by the provisions of this Section 5.4. All negotiations and proceedings
will be conducted in English, and all documents not in English submitted by
either party must be accompanied by an English translation. The number of
arbitrators will be one, unless the parties cannot agree on a single arbitrator.
In such event, the parties will each choose one arbitrator from a neutral
country, and these two arbitrators will choose a third arbitrator from a neutral
country who will preside over the proceedings. The awards rendered by the
arbitrators will be final and binding upon both parties, and judgment upon the
award may be entered and enforced in any court having jurisdiction. Monetary
awards will include interest from the date of breach or other violation of this
Agreement to the date when the award is paid in full. The interest rate or rates
applied during such period will be the prime commercial lending rate announced
form time to time by Bank of America in New York, New York. The laws of Japan
will be applied to all procedural and substantive law issues in any dispute
arising under this Agreement without regard to its international conflicts of
laws rules. The mostly prevailing party in any arbitration or other proceeding
arising under this Agreement will be awarded its reasonable costs and expenses,
including reasonable attorneys fees, at all levels of proceedings.
Expenses. Each party will pay its expenses, costs and fees (including, without
limitation, attorneys' and accountants' fees) incurred in connection with the
negotiation, preparation, execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby.
Counterparts. This Agreement may be executed in one or more counterparts, all of
which will be considered one and the same agreement, and will become a binding
agreement when one or more counterparts have been signed by each of the parties
and either original or facsimile counterparts have been delivered to the other
party.
Severability. If any provision of this Agreement is held to be invalid, illegal
or unenforceable, it shall nevertheless be enforced to the fullest extent
permitted by law and the validity and enforceability of the remainder of this
Agreement shall not in any way be impaired.
Assignment. This Agreement may be assigned by DAIO or SWC to any entity that
agrees in writing to be bound by the terms hereof. This Agreement will be
binding upon and inure to the benefit of each of DAIO, SWC and their respective
successors and assigns.
Taxes. Any and all sales, excise, transfer or similar taxes payable by reason
of the sale and transfer of the Shares will be paid by SWC.
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Retained Rights; License. Subject to the license granted in the next sentence,
SWC agrees that no trademark, trade name, service mark, patent, copyright or
other intellectual property used by the Company, other than customer lists, are
being sold or otherwise transferred to SWC hereunder and that all right, title
and interest in and to all such intellectual property remains solely vested in
DAIO. DAIO hereby grants to SWC a fully-paid, non-exclusive right to use the
name "Data I/O Japan Co., Ltd." for the corporate name of the Company for so
long as the Distribution Agreement remains in full force and effect; thereafter,
SWC will immediately cease and refrain from using, and will cause the Company to
change its corporate name to delete any reference to, "Data I/O" or any
variation thereof.
Publicity. SWC agrees that no public release or announcement concerning this
Agreement or any Related Agreement or the transactions contemplated hereby or
thereby will be issued by or on behalf of it without the prior consent of DAIO,
such consent not to be unreasonably withheld, except as such release or
announcement may be required by applicable law, rules or regulations.
Board Matters. On or prior to the date hereof, DAIO will have obtained (i) the
approval of the Company's board of directors of the transfer and sale of the
Shares contemplated herein and (ii) letters of resignation of all of the
Company's directors and the Company's statutory auditor, copies of which will
have been delivered to SWC.
Effectiveness. Notwithstanding anything to the contrary contained herein, the
effectiveness of this Agreement shall be conditioned upon the validity of each
of the Related Agreements.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the date and year first above written.
DATA I/O CORPORATION
By://S//David C. Bullis
Title:Chief Executive Officer
SYNCHRO-WORK CORPORATION
By://S//Kiyotomo Osawa
Title:President
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EXHIBIT 1.2
December 31, 1998 Unaudited
United States Balance Sheet
of the Company
DATA I/O JAPAN
FINANCIAL STATEMENTS
December 31, 1998
Balance Balance
BALANCE SHEET Yen $US
-----------------------
ASSETS
Cash 68,200,562 592,122
Accounts Receivable: 0
Trade 39,818,061 345,703
Employee 73,050 634
Other 0 0
Allow.Bad Debts (1,863,373) (16,178)
Total A/R 38,027,738 330,159
Inventory-Raw 9,713,039 84,329
Material
Inventory-WIP 0 0
Inventory-Product 29,391,250 255,177
Inventory-Freight & 532,121 4,620
Duty
Inventory-Other 0 0
Inventory-Reserves (20,690,320) (179,635)
Total Inventory 18,946,090 164,491
Other Long-Term Assets 28,177,940 244,643
Prepaids Other 4,570,638 39,683
Bldgs & Improvements 6,921,985 60,097
Equipment 59,180,860 513,812
Equipment-DIO 20,265,376 175,945
Products
Demo Inventory 6,976,375 60,569
Less A/D (79,844,621) (693,216)
Net PPE 13,499,975 117,208
------- ---------- --------
TOTAL ASSETS 171,422,943 1,488,305
------------ ----------- ---------
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LIABILITIES & SE
Accounts Payable 4,432,332 38,482
Note Payable 65,000,000 564,334
Accrued Expenses 26,955,622 234,030
Deferred Revenue 60,281,274 523,366
Income Tax 0 0
Total Current Liab 156,669,228 1,360,212
Intercompany:
Data I/O 836,561 7,263
Interco Loan 0 0
Total Intercompany 836,561 7,263
Equity:
Common Stock 192,000,000 1,666,956
Beg R/E (151,315,376)(1,313,730)
Translation 0 (44,151)
Current R/E (26,767,470) (188,246)
Total Equity 13,917,154 120,830
----------- ---------
TOTAL LIAB & SE 171,422,943 1,488,305
----------- ---------
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Exhibit 10.34
SUBLEASE
THIS SUBLEASE is entered into as of December 22, 1999, by and between
DATA I/O CORPORATION, a Washington corporation ("Sublessor") and imandi.com,
Inc. ("Sublessee"), a Washington corporation .
RECITALS
A. Sublessor entered into that certain Lease dated May 9, 1997 (the
"Master Lease") between CarrAmerica Realty Corporation, a Maryland corporation,
as Landlord ("Landlord") and Sublessor, as Tenant (the "Master Lease Lessee"),
for the lease of the property located at 10525 Willows Road N.E. situated on the
real property legally described in Exhibit A to the Master Lease in the City of
Redmond, County of King, State of Washington, all as described in the Master
Lease (the "Premises"). A copy of the Master Lease is attached hereto as Exhibit
A1.
B. Sublessor and Sublessee desire to enter into a sublease of
approximately 20,000 rentable square feet of the Premises (the "Subleased
Premises") upon the terms and conditions set forth herein.
AGREEMENTS
In consideration of the mutual promises and covenants herein contained,
and other good and valuable consideration, the receipt and sufficiency of which
are acknowledged, the parties agree:
1. Subleased Premises. Sublessor leases to Sublessee and Sublessee
leases from Sublessor the Subleased Premises. The Subleased Premises are shown
on Exhibit A2. The size of the Subleased Premises is approximate and not subject
to remeasurement by either Sublessor or Sublessee; provided, however, that
Sublessor shall be responsible for installing a demising wall in a location that
ensure that the Subleased Premises contain no less than 19,900 rentable square
feet. Sublessee's employees shall be provided access to the cafeteria, locker
room and lunchroom, and restrooms on the second floor of the building (herein
"Shared Premises"). Such access shall be shared with Sublessor and available
during Sublessor's normal working hours, and subject to Sublessor's rules. Upon
reasonable notice, Sublessee shall grant Sublessor reasonable access to the
Subleased Premises for purposes of using and/or maintaining Sublessor's first
floor space, but such access shall not include routine access by Sublessee's
employees to Sublessor's first floor space.
2. Term. The term of this Sublease shall commence on the later to occur
of the (i) the date on which the Landlord has completed the work to demise the
Subleased Premises, or (ii) the date of the Landlord's Consent (defined below)
to this Sublease, or (iii) January 1, 2000, and shall expire on May 8, 2002 (the
"Sublease Term") unless extended as provided herein. Sublessor shall use its
reasonable best efforts to obtain the Landlord's Consent and to cause the term
to commence by no later than January 1, 2000 and if the Landlord's Consent is
not received within five (5) business days after the date hereof or if the term
has not commenced by January 15, 2000, then Sublessee shall have the right to
terminate this Sublease and receive a refund of all prepaid rent and the
security deposit. Sublessee and Sublessee's contractors shall have access to
Subleased Premises, inclusive of access to Sublessor's server room beginning
December 22, 1999 provided such access does not delay or increase cost to
Sublessor in completing the tenant improvements. Such access shall be for
purposes of installation of furniture, equipment, telephone lines, data network
wiring and security systems, improvements, and shall be coordinated with
applicable Data I/O personnel. All such installations and related costs shall be
at the expense of Sublessee.
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3. Incorporation of Master Lease. Except as otherwise provided herein,
this Sublease is made upon and shall be subject to all of the terms and
conditions set forth in the Master Lease, including all addenda and amendments
thereto as of the date hereof, which terms and conditions are incorporated
herein by this reference, as if Sublessor were the Landlord and Sublessee were
the Tenant under the Master Lease. Sublessee shall not be obligated to perform
any of the obligations in the Master Lease with respect to (a) payment of rent,
operating expense or tax payments; (b) commencement or termination dates; (c)
maintenance, repairs, upgrades or compliance with laws obligations that require
any capital expenditures with respect to any portion of the Premises or the
landscaped areas or parking areas; (d) replacement of any Standard Capital
Improvements (as defined in the Master Lease); or (e) the TI Cap Amount (as
defined in the Master Lease) and Sublessor shall be solely responsible for such
obligations to the Landlord. In case of any default hereof by Sublessee,
Sublessor shall have all rights against Sublessee as would be available to
Landlord against Tenant under the Master Lease if such default were by Tenant
thereunder. Sublessee acknowledges that Sublessee has read and understands the
Master Lease. Effective as of the date hereof, Sublessee agrees to perform,
observe, and be bound by all of the promises, obligations, acknowledgments,
terms, and conditions by, of, or applicable to Sublessor under the Master Lease
to the extent applicable to the Subleased Premises and except as set forth above
Notwithstanding anything herein to the contrary, Sublessor does not by this
Sublease promise or agree to perform any obligation undertaken or assumed by the
Landlord under the Master Lease. Sublessor will, however, use Sublessor's best
efforts to obtain performance by Landlord for Sublessee's benefit under the
Master Lease. Sublessor hereby agrees to perform all of its obligations as
tenant under the Master Lease as and when due and to keep the Master Lease in
good standing. Sublessor shall indemnify and hold Sublessee harmless from any
loss or damage incurred by Sublessee as a result of Sublessor's breach of its
obligations under the Master Lease unless such breach is caused by Sublessee's
breach of its obligations hereunder. Sublessor shall provide Sublessee with
copies of all notices received from Landlord under the Master Lease with respect
to Sublessor defaults, changes in tax rates, or changes in rules or regulations
or interpretations of the Master Lease that affect Sublessee's use and occupancy
or with which Sublessee is expected to comply. If Sublessee receives notice that
Sublessor is in default under the Master Lease, Sublessee may pay rent under
this Sublease directly to Landlord and such payment shall satisfy Sublessee's
obligations under this Sublease. Sublessee shall be entitled to exercise all
rights and remedies granted to Sublessor as tenant under the Master Lease with
respect to any default by Landlord or Sublessor.
4. Security Deposit. As security for the performance of this Sublease
by Sublessee, Sublessee has paid Sublessor a security deposit in the amount of
$33,923.00. Sublessor may hold such amount in a non-interest bearing account and
may co-mingle the deposit with other funds. Sublessor may apply all or part of
any security deposit to payment of any sum in default or paid by Sublessor, in
its reasonable discretion, by reason of Sublessee's default after notice and
expiration of any applicable cure period. The security deposit then held by
Sublessor will be repaid to Sublessee within thirty (30) days after the
expiration of this Sublease. Sublessee shall not be entitled to any interest on
the security deposit.
5. Rent. The rent paid by Sublessee to Sublessor shall be due and
payable on the first day of each month for the term of the Sublease and shall be
as follows:
January 1, 2000 - December 31, 2000 $32,500.00/month
January 1, 2001 - December 31, 2001 $32,707.00/month
January 1, 2002 - May 8, 2002 $33,923.00/month
For any partial month, the foregoing amount shall be pro-rated to reflect the
actual number of days in the term. The above stated rent is a modified full
service rent that will be adjusted to reflect changes in real estate taxes and
Sublessee's Operating Hours. The rent will not be increased or reduced by
increases or reductions in the rates of utilities, maintenance costs or other
expenses identified in Paragraph 5 ("Additional Rent") of the Master Lease.
a. Real Estate Taxes. The real estate taxes portion of the rent
for the Subleased Premises for year 1999 is $1,449.92 per month. Beginning on
the first anniversary of the term commencement date Sublessee will pay
Sublessor, as additional rent, amounts by which the real estate taxes are
increased above the real estate taxes for the year 2000 base year. For example,
if the real estate taxes were increased from the 2000 base year to 2001, the
additional rent would be equal to such increase. If the real estate taxes are
reduced, the rent shall likewise be reduced by the same aforementioned method.
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b. Operating Hours. Sublessee shall have access to and use of
the Premises (including all utilities and HVAC) twenty-four hours a day but the
aforementioned rent assumes that Sublessee shall have operating hours of 60
hours per week. "Operating Hours" is defined as the time when Sublessee uses the
building's HVAC or lights as can be reasonably evidenced by the building
systems. Sublessor shall provide documentation of such use with each billing for
excess HVAC and lights and other services. Both parties acknowledge that
Sublessee may have Operating Hours that exceed 60 hours per week, that increased
Operating Hours will increase costs to Sublessor, and that Sublessor is not in
the business of operating buildings as a landlord. Accordingly, if the Operating
Hours are increased above 60 hours per week average in any two month period,
then Sublessee shall pay, as additional rent for that period, an Operating Hours
charge. The Operating Hours charge shall be as follows:
Increased Operating Hours Increased Operating Hours Charge
Accumulated in These Months
January 1, 2000 - December 31, 2000 $63/hour
January 1, 2001 - December 31, 2001 $65/hour
January 1, 2002 - May 8, 2002 $68/hour
Operating Hours shall be computed by Sublessor at the end of every two
month period if Sublessor determines any Operating Hours charge will be due from
Sublessee, provided to Sublessee within two weeks of the end of each such two
month period, and the Operating Hours charge shall be due and payable as
additional rent on the first day of the first month following the date they are
provided by Sublessor. If Sublessor does not provide Sublessee with such
Operating Hours computation for any required two month period, no Operating
Hours charge shall be due for such period. The rent shall not be reduced if the
Operating Hours are less than 60 hours per week. Sublessor represents that the
Operating Hours charge represents a fair and reasonable estimate of Sublessor's
actual costs of providing HVAC, lighting and other services and does not include
any administrative charge or profit margin. If it becomes possible to monitor
consumption by zone rather than by the entirety of the Subleased Premises, then
the Sublessee shall only pay a prorated portion of the Operating Hours charge
based on the zones to which HVAC and lights and other services are actually
provided; provided, however that Sublessor shall not be required to install any
new monitoring systems or equipment to accomplish this.
6. Expansion Option. Sublessee shall have the right to expand into
the remaining approximate 5,486 square feet of the first floor (the "Expansion
Space") as outlined in bold on Exhibit B on the first anniversary of the term
commencement date, provided the following conditions precedent are satisfied:
a) Sublessee is not, and has not been, in default of this Sublease
after receipt of notice and expiration of any applicable cure
period;
b) Sublessee provides Sublessor ninety (90) days prior written
notice;
c) Sublessee accepts the space in "as is" condition except
that Sublessor shall remove the demising wall and redistribute
any lights, mechanical and HVAC if necessary to accommodate
single tenant floor;
d) Sublessee has neither subleased all or any portion of the
Subleased Premises nor assigned the Sublease, and
e) Sublessee provides Sublessor additional security deposit of
$9,305.00 in the form of cash or its equivalent at the same
time Sublessee provides Sublessor with its written notice to
exercise its expansion option.
If Sublessee exercises its expansion option, the rents for the
Subleased Premises and the Expansion Space shall be as follows:
January 1, 2000 - December 31, 2000 $41,415.00/month
January 1, 2001 - December 31, 2001 $41,679.00/month
January 1, 2002 - May 8, 2002 $43,228.00/month
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If Sublessee exercises its expansion option, the Operating Hours
charges for the Subleased Premises and the Expansion Space shall be:
January 1, 2000 - December 31, 2000 $80.28
January 1, 2001 - December 31, 2001 $82.83
January 1, 2002 - May 8, 2002 $86.65
7. Option to Renew. If Sublessor does not terminate its Master Lease,
pursuant to Paragraph 2 ("Term") of the Master Lease, then Sublessee shall have
the option to renew this Sublease for a term to be mutually agreed upon if the
following conditions precedent are satisfied:
a. Sublessee is not, and has not been in default of this Sublease after
receipt of notice and expiration of any applicable cure period;
b. Sublessee provides written notice of its intent to extend no sooner
than November 8, 2001 and no later than February 8, 2002; and
c. Sublessee has neither subleased all or any portion of the Subleased
Premises nor assigned the sublease.
d. Sublessor has determined in its sole discretion that it does not
require any part of the Subleased Premises or Expansion Space for
its own use.
Sublessor shall notify Sublessee promptly if it terminates the Master
Lease. Once Sublessor has received Sublessee's written notice, Sublessor shall
provide Sublessee with an amendment to this Sublease identifying the term of the
extension, the rents, and the Operating Hours Charges applicable to the renewal
term. The rents shall be increased to reflect ninety five percent (95%) of the
then current market rate for comparable office properties along Willows Road for
leases of comparable length in which the premises were delivered in an as is
condition without payment of any tenant improvement allowance, but in no event
less than the existing rent then being paid by Sublessee. Such new rent shall
commence May 9, 2002. The same terms and conditions of this Sublease shall apply
and the Subleased Premises shall be accepted in "as is" conditions. If the
parties have not agreed on the renewal term rent within fifteen (15) days after
Sublessor's presentation of the draft amendment then the rent shall be
determined by arbitration. Sublessor and Sublessee shall mutually agree to
appoint one (1) independent arbitrator, who shall be appointed within fifteen
(15) days after Sublessor's presentation of the draft amendment. Failing such
agreement, either Sublessor or Sublessee shall have the right to petition for
the appointment of the arbitrator by the Presiding Judge of the Superior Court
of King County. The arbitrator shall be a licensed MAI appraiser or a commercial
real estate agent with at least five (5) years' experience in the Redmond
commercial leasing market. Within ten (10) days after the appointment of the
arbitrator, Sublessee and Sublessor shall each submit to the arbitrator (and one
another) their written opinion regarding current market rent. Within ten (10)
days after the arbitrator's receipt of the last such opinion, the arbitrator
shall decide which of the two opinions most accurately reflects current market
rent. Such selected opinion shall be the rent for purposes of this Sublease and
the selection by the arbitrator shall be final and binding upon the parties. The
arbitrator must select one of the two alternative opinions and may not select
any other alternatives. The cost of the arbitrator shall be split equally
between Sublessor and Sublessee. The amount of the charge for Operating Charges
for the renewal term shall be calculated by Sublessor and any increase shall be
comparable to the amount of such increases during the initial term but shall not
be included in the arbitration under this paragraph.
Sublessee will include, with the amendment, payment in cash or its
equivalent, as additional security deposit, the difference between the security
deposit held by Sublessor and the amount of the rent for the last month of the
extended term. Such additional security deposit will be identified in the
amendment.
8. Use. The Subleased Premises shall be used for the purpose of general
office uses and other uses associated with operation of an online internet
business and permitted by the Master Lease, but shall not include retail sales
made in person on site, distribution, or manufacturing. The Subleased Premises
shall not be open to the public for direct sale of products or services or
delivery of products.
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9. Indemnity. Sublessee shall indemnify Sublessor and hold Sublessor
harmless from and against any and all liabilities that may arise under or
pursuant to the Master Lease to the extent arising as a result of Sublessee's
failure fully to comply with or perform Sublessee's promises, obligations,
acknowledgments, terms, and conditions herein. To the extent allowed by law,
Sublessee shall further hold Sublessor and Sublessor's agents harmless from and
against any and all damages of every kind and nature whatsoever that may be
claimed or incurred to the extent arising by reason of any accident in or about
the Subleased Premises or Shared Premises during the term of this Sublease or by
reason of Sublessee's use or occupation of the Subleased Premises or Shared
Premises or by reason of the acts or omissions of Sublessee or any agent of
Sublessee. Except to the extent of Sublessor's or its agent's or employee's act
or omission and to the extent permitted by law, Sublessor and Sublessee agree
that neither Sublessor shall not be liable for the death of or injury to any
person in or about the Subleased Premises or for loss of or damage to any of
Sublessee's property. If any action or proceeding is brought against Sublessor
by reason of any such claim, Sublessee, upon notice from Sublessor, shall defend
such claim at Sublessee's expense. Notwithstanding the foregoing, Sublessor
shall be liable for and shall indemnify, defend, and hold harmless Sublessee and
Sublessee's agents from and against any and all losses, damages, liabilities,
and expenses (including attorneys' fees) to the extent resulting from the acts
or omissions of Sublessor or Sublessor's agents.
10. Insurance. Sublessee shall carry the insurance required by the
Master Lease to the extent applicable to the Subleased Premises or Sublessee's
actions. Sublessee shall provide any certificate of insurance as required by
the Master Lease.
11. Acceptance of Subleased Premises. Sublessee accepts the
Subleased Premises in "as is" condition, however, Sublessor will, at its sole
cost and expense:
a) Construct a demising wall (including paint and finish)
separating the Subleased Premises from the expansion space as
approximately shown on Exhibit A2;
b) Provide mechanical and lighting balance or distribution
necessitated by demising the space, as reasonably necessary
as determined by Sublessor;
c) Construct any additional ingress/egress requirements or other
retrofitting (including sprinklers), if any, as may be required
by the City of Redmond or Landlord for multi-tenanting; and
d) Remove furniture from the Subleased Premises by
December 22, 1999.
e) Reimburse Sublessee up to $6,147.59 for the costs solely
related to moving the network wiring from Sublessor's server
room to Sublessee's server room immediately adjacent to
Sublessor's server room. Such work shall be performed by
Sublessee.
f) Clean the carpets in the Subleased Premises prior to the
commencement of the Sublease Term, provided such cleaning
shall be reasonably coordinated with Sublessee.
12. Alterations/Signage. Sublessee shall be permitted at its expense to
install the tenant improvements and to alter the Subleased Premises as shown on
Exhibit C attached hereto and shall not be required to remove or restore such
alterations in the Subleased Premises at the expiration of this Sublease.
Sublessee shall be permitted signage consistent with the Master Lease, however,
exterior signage, where allowed by Landlord, shall be permitted only on the
first floor of the building.
13. Default by Sublessee; Re-entry. If Sublessee fails to pay rent or
other sums due hereunder or pursuant to the Master Lease within five (5) days
after receipt of notice that the same was not received when due or if Sublessee
violates, breaches, or fails to keep or perform any covenant, agreement, term,
or condition of this Sublease (other than payment of rent and other sums), and
if Sublessee does not remedy or take reasonable action to remedy such default or
violation within fifteen (15) days after notice in writing thereof given by
Sublessor to Sublessee specifying the matter claimed to be in default (provided,
that if such default cannot, despite good faith efforts, be cured within such
period, Sublessee shall not be in default if it commences and diligently pursues
cure thereof), Sublessor, at Sublessor's option, may (a) immediately declare
Sublessee's rights under this Sublease terminated and re-enter the Subleased
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Premises, using such lawful force as may be necessary, and repossess the
Subleased Premises, and remove all persons and property from the Subleased
Premises; (b) maintain Sublessee's right to possession, in which event this
Sublease shall continue in effect whether or not Sublessee shall have abandoned
the Subleased Premises; and (c) pursue any other remedy now or hereafter
available to Sublessor under the laws of the state in which the Subleased
Premises are located. Any property removed by Sublessor may be stored in a
public warehouse or elsewhere at the cost and for the account of Sublessee, all
without service of notice or resort to legal process, and without liability for
trespass or any loss or damage caused thereby.
14. Surrender of Subleased Premises. Sublessee shall promptly yield and
deliver to Sublessor possession of the Subleased Premises at the expiration or
sooner termination of the term of this Sublease, including extensions thereof,
in its then current condition. If Sublessee holds over after the expiration or
termination of the Sublease, the monthly rent shall be 150% times the rent in
effect for the preceding month plus additional Operating Hours Charges.
15. Parking. Sublessee shall have the right, at no additional charge,
to use, on a non-reserved, first come first serve basis, eighty (80) parking
stalls at no additional charge. If Sublessee exercises its option to expand, it
shall then have an additional twenty-four (24) parking stalls. Sublessee shall
not use more than these amounts of parking stalls.
16. Subleasing and Assignment. Sublessee shall be permitted to assign
or sublease all of the Subleased Premises only with Sublessor's and Landlord's
prior written consent. Sublessor shall not unreasonably withhold its consent to
an assignment or sublease of the entire Subleased Premises. Sublessee shall not
have the right to sublease a portion of the Subleased Premises. In determining
reasonableness of an assignment or sublease, Sublessor may consider, among other
factors, the financial capabilities of the intended parties and their use of the
Subleased Premises. Sublessee shall pay Sublessor's reasonable attorney's fees
for review and execution of any associated documents up to a maximum of One
Thousand Dollars ($1,000.00).
17. Notices. All notices to be given hereunder shall be deemed to have
been given when given in writing by delivery by hand or by depositing the same
in the United States mail, postage prepaid, registered or certified mail, and
addressed to the party at the respective mailing address as herein set forth,
and shall be deemed effective 48 hours thereafter unless otherwise specified
herein.
Sublessor: Data I/O Corporation
10525 Willows Road, NE
P.O. Box 97046
Redmond, WA 98073-9746
Attention: Tom Hogan, General Counsel
with a copy to Joel Hatlen, Vice President/CFO
Sublessee: imandi.com, Inc.
10525 Willows Road N.E.
Redmond, WA 98073-9746
Attention: CFO
with a copy to Office Manager at the same address
It is understood that each party may change the address to which notices may be
sent by giving a written notice of such change to the other party hereto in the
manner herein provided.
18. Successors or Assigns. Except as otherwise expressly provided in
this Sublease, all the terms, conditions, covenants, and agreements of this
Sublease shall extend to and be binding upon Sublessor and Sublessee and their
respective heirs, administrators, executors, successors, and assigns, and upon
any person or persons coming into ownership or possession of any interest in the
Subleased Premises by operation of law or otherwise.
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19. Partial Invalidity. If any term, covenant, or condition of this
Sublease or the Master Lease, or the application thereof to any person or
circumstance is, to any extent, invalid or unenforceable, the remainder of this
Sublease and the Master Lease, or the application of such term, covenant, or
condition to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term,
covenant, or condition of this Sublease shall be valid and shall be enforced to
the fullest extent permitted by law.
20. Waiver. The waiver by either Sublessor or Sublessee of a breach
of any term or condition of this Sublease shall not be deemed to constitute the
waiver of any other breach of the same or any other term or condition hereof.
21. Entire Agreement. This Sublease and the Master Lease under which it
is entered set forth the entire agreement of Sublessor and Sublessee concerning
the lease of the Subleased Premises, and there are no other agreements or
understandings, oral or written, between Sublessor and Sublessee concerning the
lease of the Subleased Premises. Any subsequent modification or amendment of
this Sublease shall be binding upon Sublessor and Sublessee only if in writing
and signed by both parties.
22. Applicable Law. This Sublease shall be governed by and construed
in accordance with the laws of the State of Washington.
23. Time. Time is of the essence hereof.
24. Brokers/Commissions. Sublessee is represented by Colliers
International and Sublessor is represented by Pacific Real Estate Partners, Inc.
Both brokers will be paid by Sublessor pursuant to the agreement between
Sublessor and Pacific Real Estate Partners, Inc. Sublessor shall pay a similar
commission if Sublessee exercises its expansion option. Each party promises that
it has dealt with no other persons in connection with this Sublease and that no
broker, agent or other person brought about this transaction, and each party
shall defend, indemnify and hold harmless the other for claims by any other
person claiming a commission or compensation by virtue of having dealt with the
indemnitor with regard to this Sublease.
25. Approval of Landlord. This Sublease is subject to the written
approval of Landlord under the Master Lease ("Landlord's Consent") and shall be
of no force or effect unless such approval is obtained.
EXECUTED by authorized representatives of the parties as of the day and
year first above written.
SUBLESSOR:
DATA I/O CORPORATION
By://S//Joel S. Hatlen
Its:VP/CFO
SUBLESSEE:
imandi.com, Inc.
By://S//Raghav P. Kher
Its: CEO
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<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this day personally appeared before me Joel S. Hatlen, to me known
to be VP/CFO of DATA I/O CORPORATION, the corporation that executed the within
and foregoing instrument, and acknowledged the said instrument to be the free
and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he is authorized to execute said
instrument and that the seal affixed, if any, is the corporate seal of said
corporation.
GIVEN under my hand and official seal this 22nd day of December, 1999.
//S//Penelope K. Standal
Penelope K. Standal
(Print name of notary)
NOTARY PUBLIC in and for the State of
Washington, residing at Redmond, WA
My commission expires May 9, 2001
STATE OF WASHINGTON )
) ss.
COUNTY OF King )
On this day personally appeared before me Raghav P. Kher, to me known
to be CEO of imandi.com, Inc. the corporation that executed the within and
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he is authorized to execute said instrument
and that the seal affixed, if any, is the corporate seal of said corporation.
GIVEN under my hand and official seal this 22nd day of December, 1999.
//S//Penelope K. Standal
Penelope K. Standal
(Print name of notary)
NOTARY PUBLIC in and for the State of
Washington, residing at Redmond, WA
My commission expires May 9, 2001
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<PAGE>
CONSENT OF LANDLORD
(Sublease)
Subject to the conditions set forth herein, the undersigned (sometimes
referred to herein as the "Landlord") hereby consents to the attached Sublease
Agreement (defined below) dated December 22, 1999 between DATA I/O CORPORATION,
a Washington corporation ("Sublessor") and imandi.com, Inc. ("Sublessee"), a
Washington corporation ("Sublessee"), and all its terms (the "Sublease
Agreement"). This Consent does not release or discharge Sublessor from any
liability as lessee under that certain Lease dated May 9, 1997, between Landlord
and Sublessor (the "Lease") including, without limitation, the obligation to pay
rent. This consent is granted by Landlord subject to the following terms and
conditions:
1. Sublessee shall not assign the Sublease Agreement nor sublet the
premises described in the Sublease Agreement (the "Subleased Premises") in whole
or part; and shall not permit Sublessee's interest in the Sublease Agreement to
be vested in any third party by operation of law or otherwise.
2. This Consent shall not be deemed to be a consent to any subsequent
assignment or subletting. No subsequent amendment to the Sublease Agreement may
be made without Landlord's prior written consent. Landlord shall not be deemed
to have waived any rights under the Lease by virtue of this Consent.
3. The Sublease Agreement is in all respects subordinate to the terms of
the Lease, and Sublessee shall perform all of the obligations of Sublessor as
lessee under the Lease which are applicable to the Subleased Premises. As
between Sublessor and Landlord, insofar as the specific terms of the Sublease
Agreement purport to amend or modify or are in conflict with the specific terms
of the Lease, the terms of the Lease shall control. Landlord assumes no
liability whatsoever on account of anything contained in the Sublease Agreement.
4. Sublessee acknowledges that any rights under the Sublease Agreement
may be enforced only against Sublessor, and that Sublessee shall have no right
to enforce any of Sublessor's rights under the Lease against Landlord by virtue
of the Sublease Agreement, this Consent, or otherwise.
IN WITNESS WHEREOF, the undersigned has executed this Consent of
Landlord as of this 23rd day of December, 1999
LANDLORD:
CarrAmerica Realty Corporation
By://S//Clete Casper
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Exhibit 10.35
Data I/O Corporation
10525 Willows Road, NE
Redmond, WA 98053
January 29, 1999
Mr. Frederick R. Hume
9242 East Ironbark Street
Tucson, Arizona 85747
Dear Fred:
We would like to offer you the position of CEO/President for Data I/O
Corporation. We would like you to start as soon as possible.
The total cash compensation for this position is comprised of two major
elements, an annual base salary of $225,000 plus participation in our Management
Incentive Compensation Program (MICP) at 40% of your base salary (490,000). This
bonus will be pro-rated from your start date at Data I/O. You will need to work
out the elements of this incentive plan for you and the executive team with the
Board of Directors for 1999.
An award of 200,000 shares of non qualified options will be granted to you.
These options have a four year vesting period and are priced at the average Fair
Market Value of our stock on the effective date of your first day of employment.
You will also receive a $50,000 signing bonus which will be payable on your
first regularly scheduled payday. Should you voluntarily terminate your
employment with Data I/O during the 24 months following your start date, you
will be responsible to promptly reimburse the pro-rated portion of the signing
bonus paid to you.
The Board of Directors has authorized the reimbursement of up to $25,000 in
direct relocation expenses. This includes, but is not limited to, real estate
fees, movement of household goods, temporary storage and delivery of household
goods, house hunting expenses, temporary living and commuting expenses until
primary residence is sold. Data I/O will gross up to cover all tax consequences
of the relocation package.
You will be eligible for all company benefit programs as outlined in our Team
Member Handbook. Your medical, dental, vision, and life insurance benefits are
effective on your first day of employment. You have 30 days after you begin work
to choose the type of coverage you desire. You are eligible to participate in
our 401(k) plan after three months of employment. This plan provides the
opportunity for salary deferrals and a company match.
Page 78
<PAGE>
While this offer does not express or imply an employment contract between you
and Data I/O for any specific period of time, we believe that the relationship
will be productive and mutually beneficial.
You employment is conditional upon execution of our Employment Agreement (see
attached) and completion of an I-9 form. Your signature below indicates
acceptance of this offer. The terms and conditions outlined above are all of the
terms and conditions of this offer. Your signature below indicates acceptance of
this offer.
Sincerely,
//S//David C. Bullis
Dave Bullis
CEO and President, Data I/O
Cc: Joel Hatlen, Data I/O
- -------------------------
I agree to the offer as stated above.
Signed: //S//Frederick R. Hume Date: January 29, 1999
Page 79
<PAGE>
Exhibit 10.36
May 28, 1999
Toon Lips, Esq.
Banning, De Ruijter & Wiegman
Eindhoven / The Netherlands
Dear Toon:
JTAG Technologies B.V. ("JTAG") - Letter agreement (vaststellingsovereenkomst)
This letter serves to reflect the outcome of our meetings in New York on March
18 and 19, 1999 between you, Harry Bleeker and Peter van den Eijnden on the side
of JTAG and Fred Hume, Joel Hatlen, Mark Edelsward and Tom Hogan on the side of
Data I/O, our discussions since then, and our teleconference on May 27, 1999.
1. Data I/O will sell and transfer on May 31, 1999 ("Transfer Date") to JTAG
Holding B.V. all 140 shares it acquired in JTAG in accordance with the
Shareholders Agreement of April 15, 1998.
2. The purchase price will be the total amount equal to NLG 2,000,000 paid by
Data I/O for those shares increased by an annual interest rate of 10% equal to
NLG 225,000; the total amount of NLG 2,225,000 to be deposited ultimately one
business day before Transfer Date with the civil law notary before whom the deed
of transfer will be passed and to be paid to Data I/O via wire transfer on the
Transfer Date.
3. Toon Lips will arrange for the draft notarial deed of transfer soonest.
4. As of the Transfer Date, the Shareholders Agreement will terminate and the
parties thereto waive all rights, claims and obligations they may have against
each other under the Shareholders Agreement.
5. Data I/O and JTAG will continue to observe the provisions of the Evaluation
and Non-Disclosure Agreement dated April 15, 1998 in accordance with the terms
thereof. Within 10 days of the Transfer Date, Data I/O shall return all JTAG
confidential information to JTAG, except that Data I/O may retain any such
material it reasonably believes necessary for it to comply with applicable laws,
regulations or audit requirements.
6. As of the Transfer Date, the Distribution Agreement dated April 15, 1998 will
terminate and the parties thereto and to the present letter agreement waive all
rights, claims and obligations they may have against each other under the
Distribution Agreement or in connection with the termination thereof, including
but not limited to any undischarged, accrued obligations, except that :
(i) clauses 7, Infringement Indemnification, and 8, Limitation of
Liability, thereof shall survive; and
(ii) JTAG purchases from Data I/O its JTAG inventory/demonstration
products in Data I/O's possession for an amount of NLG 75,000 to be deposited by
JTAG with the civil law notary prior to the Transfer Date, such products to be
mailed to JTAG at Data I/O's expense within 10 days of the Transfer Date. Upon
receipt of such products, JTAG shall notify the civil law notary who shall
promptly pay NLG 50,000 to Data I/O via wire transfer and NLG 25,000 to JTAG as
full payment of JTAG invoice numbers 99321 and 99410. If Data I/O locates any
other such products, it shall promptly forward them at no charge to JTAG.
7. Each of the parties hereto will bear the costs it incurs in connection
with this letter agreement and the transactions herein described.
8. This letter agreement contains the entire understanding of the parties
regarding its subject matter and is governed by the laws of the Netherlands.
Page 80
<PAGE>
You are kindly requested to have both originals of this letter agreement signed
by JTAG, JTAG Holding B.V., Harry Bleeker and Peter van den Eijnden and return
one original copy to me both by fax and by airmail.
Very truly yours,
Data I/O Corporation
//S//Joel S. Hatlen
Joel S. Hatlen
Vice President, Chief Financial Officer
cc: Marja Gorter
Tom Hogan, Fred Hume, Mark Edelsward
Acknowledged and Agreed:
JTAG Technologies B.V. JTAG Holding B.V.
By: //S//Harry Bleeker By: //S// Harry Bleeker
Harry Bleeker, Shareholder Harry Bleeker, Shareholder
By: //S//Peter van den Eijnden By: //S//Peter van den Eijnden
Peter van den Eijnden, Shareholder Peter van den Eijnden, Shareholder
Page 81
<PAGE>
Exhibit 10.37
Amendment to Business Loan Agreement
This Agreement is made between Bank of America national Trust and Savings
Association, doing business as Seafirst Bank ("Bank"), and Data I/O Corporation,
a Washington Corporation ("Borrower"). Bank and Borrower are parties to a
Business Loan Agreement dated May 14, 1996, as amended on May 13, 1997, May 29,
1998 and December 22, 1998, 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, 2000.
Part B, Section 11.5 is hereby added in its entirety as follows:
Additional Provisions:
---------------------
At the time of request for an advance under the Line of Credit, Borrower
shall provide Bank a written certificate (signed by an authorized officer
of the Borrower) stating that, at the time of the advance request,
Borrower is currently in compliance with all terms and conditions of the
Business Loan Agreement, as amended.
Except as specifically set forth herein, all provisions of the Agreement remain
in full force and effect.
The parties execute this Amendment to Business Loan agreement on this 28 day of
May 1999.
SEAFIRST BANK
Western Commercial Banking Division
By: //S//Steven E. Melby
Steven E. Melby
Vice President
DATA I/O CORPORATION
BY: //S//Joel S. Hatlen
Joel S. Hatlen
Vice President & Chief Financial Officer
Page 82
<PAGE>
SEAFIRST BANK
Loan Modification Agreement
This agreement amends the PROMISSORY NOTE dated DECEMBER 22, 1998 ("Note")
executed by Data I/O Corporation ("Borrower") in favor of Bank of America
National Trust and Savings Association, doing business as Seafirst Bank
("Bank"), regarding a loan in the maximum principal amount of $4,000,000.00 (the
"Loan"). For mutual consideration, borrower and Bank agree to amend the above
loan documents as follows:
1. Maturity Date. The maturity date of the Note is changed to May
31, 2000. Bank's commitment to make advances to Borrower under its line of
credit is also extended to May 31, 2000.
2. Other Terms. Except as specifically amended by this agreement or any
prior amendment, all other terms, conditions, and definitions of the Note and
all other security agreements, guaranties, deeds of trust, mortgages, and other
instruments or agreements entered into with regard to the Loan shall remain in
full force and effect.
DATED May 11, 1999
Bank: Borrower:
SEAFIRST BANK DATA I/O CORPORATION
By //S//Steven E. Melby BY //S//Joel S. Hatlen
Title: Vice President Title: VICE PRESIDENT/CFO
Page 83
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