UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A (Amendment No.1)
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the period from ___________ to _____________
Commission File No. 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0864123
(State or other Incorporation) (I.R.S. Employer Identification Number)
P.O. Box 97046, 10525 Willows Road N.E., Redmond, Washington, 98052
(425)881-6444
(Address, including zip code, of registrant's principle executive
offices and telephone number, including area code)
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 Value)
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes __ No X
Aggregate market value of voting and non-voting
Common Stock held by non-affiliates of the
registrant as of June 30, 2003
$ 15,688,788
8,008,561 shares of Common Stock, no par value, outstanding as of March 22, 2004
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating
to its May 20, 2004 Annual Meeting of
Shareholders are incorporated into Part III
of this Annual Report on Form 10-K.
EXPLANATORY NOTE
We filed a Form 8-K on February 14, 2005 regarding our intention to restate our
annual financial statements for the fiscal year December 31, 2003. This
amendment on Form 10-K/A amends our Annual Report on Form 10-K for the year
ended December 21, 2003 as filed with the Securities and Exchange Commission on
March 30, 2003 and is being filed to reflect the restatement of the consolidated
financial statements.
During the preparation of our 2004 year-end financial statements and more
specifically the inter-company profit eliminations associated with demonstration
inventory equipment amounts, Data I/O Corporation ("the Company") identified
elimination calculation omission errors that had resulted in the understatement
of inter-company expense eliminations on foreign subsidiary demonstration
inventory equipment depreciation, with a corresponding overstatement of
demonstration inventory equipment accumulated depreciation. The errors, which
had occurred over a period of more than five years, overstate depreciation
(international selling) expense associated with demonstration inventory
equipment in service in the Company's foreign subsidiaries.
The errors resulted in a cumulative overstatement of demonstration inventory
equipment accumulated depreciation and a corresponding overstatement of
depreciation (international selling) expense of approximately $112,000 through
December 31, 2004. The cumulative impact of this error as of December 31, 2003,
including the related income tax effect, resulted in a $112,000 overstatement of
demonstration inventory equipment accumulated depreciation reserve and a
$112,000 overstatement of depreciation (international selling) expense. The
income tax effects from the cumulative effect of this error had no impact on
income tax expense and just impacted the related disclosure of net operating
losses in carry forward and the related valuation allowances.
While the Company believes the impacts of these elimination errors are not
material to any previously issued financial statements, the Company determined
that the cumulative adjustment required to correct these errors was material to
record in 2004, and that the calculation errors were most appropriately
corrected through restatement of previously issued financial statements for the
fiscal years ended December 31, 2003. The Company's decision to restate
previously issued financial statements was based on the impact of a cumulative
correction on the 2004 financial statements rather than the impact on any
previously issued financial statements.
The Company has evaluated that the adjustments to the quarters other than the
fourth quarter are immaterial and the entire 2003 adjustment will be reflected
as a correction to the fourth quarter of 2003 of $65,000 in the restated Form
10-K and that accordingly no restatement is necessary for the interim quarterly
Form 10-Q filings.
This Form 10-K/A corrects the previously issued financial statements. See
Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, the Consolidated Financial Statements
including Notes to Consolidated Financial Statements, and Controls and
Procedures, for the impact of the restatement.
This amendment to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 amends and restates only those items of the previously
filed Form 10-K which have been affected by the restatement. In order to
preserve the nature and character of the disclosures set forth in such items as
originally filed, no attempt has been made in this amendment to modify or update
such disclosures except as required to reflect the effects of the restatement
and to make non-substantive revisions to the notes to the consolidated financial
statements. For additional information regarding the restatement, see "Note 3 to
Consolidated Financial Statements" included in Part II, Item 8.
DATA I/O CORPORATION
FORM 10-K/A
For the Fiscal Year Ended December 31, 2003
INDEX
Part I Page
Item 1. Business 4
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 42
Part III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 42
Item 13. Certain Relationships and Related Transactions 43
Item 14. Accounting Fees 43
Part IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 43
Signatures 47
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 Data I/O(R) Corporation'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 Corporation ("Data I/O") designs, manufactures, and sells programming
systems used by designers and manufacturers of electronic products. Our
programming system products are used to program integrated circuits ("ICs" or
"devices" or "semiconductors") so that the ICs will function as desired in the
customer's electronic product. They are an important tool for the electronics
industry experiencing growing use of programmable ICs. Data I/O markets and
distributes our programming systems worldwide, and is a global leader in this
market. Data I/O incorporated in the State of Washington in 1969.
Data I/O Mission. Data I/O's mission is to design and deliver innovative
customer-focused programming solutions, which enable customers to manage their
firmware supply chain, getting their products to market faster, while reducing
costs in their process. We align our products and services to make programming
easy, delight our customers and satisfy their whole product needs.
Helping customers manage their firmware supply chain. Much of the innovation and
competitive advantage of today's electronic products comes from the software
embedded inside the product, which is commonly referred to as "firmware."
Companies use firmware to differentiate their products from their competitors'
products, constantly writing new code to add features. This allows them to build
multiple models with identical hardware and many versions of firmware, all on
one production line. Any improvement in production efficiency boosts the
profitability of all products on that line. Many original equipment
manufacturers ("OEMs") now outsource production to specialists in electronic
manufacturing services ("EMS") to maximize the profit impact from highly
efficient production. The challenges of managing the firmware supply chain
remain, however, and can even increase with this additional interface. Our
systems allow our customers - both OEM and EMS companies - to build products
with the exact firmware features that consumers specify, virtually real-time
with the latest software release. We help our customers eliminate inventory
risks, delays, rework, and lost market opportunities while enabling them to
better serve their customers.
Connected Strategy. Data I/O's connected strategy leverages network capable
products to move the customer's intellectual property seamlessly and securely up
and down the supply chain. Our connected strategy allows customers to connect
engineering to manufacturing to end customers.
Business Restructuring. During 2003, we completed the restructuring process,
which began in 2001. We took restructuring charges in 2001 and 2002 that were
associated with actions taken to reduce our breakeven point and realign Data I/O
with our market opportunities. We required this operational repositioning
because of the impact of the economic slowdown and the decline in capital
spending across a high number of customer groups on general demand for
programming equipment over the past few years. We believe these actions made
possible our turnaround and profitable operations in 2003. At the end of 2003
our breakeven point was approximately $6.2 million in net sales with 127
employees worldwide. Our breakeven point increased in 2003 primarily due to cost
increases resulting from the impact of the weaker dollar on foreign currency
based costs and from personnel costs due to salary increases, incentive
compensation and selective hiring of individuals with critical skills to help
position us as the continuing technology leader in our market.
During 2002, we reduced our quarterly breakeven point from approximately $7
million of net sales at the beginning of 2002 to approximately $5.7 million at
the end of 2002. We achieved most of these reductions by reducing our personnel
from 155 at the beginning of 2002 to 125 at the end of 2002.
During 2001, we took a number of strategic restructuring actions to reduce our
breakeven point. Repositioning included the following: a reduction in our global
workforce from 224 at the start of the year to 155 at the end of 2001;
discontinuance or reallocation of numerous projects and activities not essential
to our long-term goals; streamlining activities to decrease discretionary
marketing, distribution and promotional expenses, consolidation of numerous
functions across the organization to create a team, which was more productive
and able to respond faster to global customer needs; and closure of a facility
in Germany and moving its operations to other locations within Data I/O.
At December 31, 2003 all restructuring expenses associated with the activities
detailed above were paid and the excess restructure accrual of $39,000 had been
reversed.
Industry Background
Data I/O operates in a niche of the electronics equipment industry that provides
programming systems used to load specific data and design information into
programmable devices. Companies that design and manufacture electronic products
that utilize programmable devices purchase these systems from us. These
companies, our primary customers, design and manufacture a broad range of
electronic products for both consumer and industrial use.
Programmable devices represent an over $10 billion segment of the semiconductor
industry, and have grown more rapidly than the semiconductor industry as a whole
in recent years. Flash memory, NAND-Flash, and programmable micro-controllers
are typical of these devices. Programmable devices offer advantages to the
electronic product designer allowing them to bring products to market more
quickly and inexpensively than using fixed-function devices, and can offer the
advantage of simpler rapid product upgrades. Programmable devices 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 devices is growing rapidly in both high-volume consumer electronic
products and more complex electronic systems.
Due to this growth, more than 100 semiconductor manufacturers offer thousands of
different programmable devices. The technology trends driving the programmable
device market result in a broad range of requirements for programming
information into these devices. Programmable memory devices continue to have
higher capacity and occupy smaller circuit board space. Programmable
microcontroller devices are now more prevalent because semiconductor vendors are
standardizing their manufacturing processes. These technology advances require
advanced programming equipment like Data I/O manufactures.
Our automated programming systems integrate programming and handling functions
into one product for increasing handling and programming capacity. Quality
conscious customers continue to drive this portion of our business, which
includes high-volume manufacturing and high-volume programming center customers.
Products
In order to accommodate the expanding variety and quantities of programmable
devices being manufactured today, Data I/O offers multiple solutions for the
numerous types of devices used by our customers in the various market segments
and applications. We work closely with major manufacturers of programmable
devices to develop our products to meet the requirements of a particular device.
Data I/O's line of programming systems includes a broad range of products,
systems, modules, and accessories, which we group into two general categories:
automated programming systems and non-automated programming systems. We provide
automated programming systems in two categories: off-line and in-line. In
addition, we provide device support and service on all of our products. Device
support is a critical aspect of our business and consists of writing algorithms
for devices and developing socket adapters to hold and connect to the device for
programming.
Within the categories of automated and non-automated systems, Data I/O targets
specific solutions at specific market segments. Data I/O optimizes the solution
based on the customer's device, process and business needs. We think the market
growth opportunity is not a relatively costly universal solution with very broad
device support, but optimized systems focused on a narrower range of devices
(such as Flash devices), which provide customers with the economical programming
solutions for high volumes of devices and lean processes. Our recent product
introductions have focused on these growth markets and targeted their specific
needs.
TaskLink(R) is our software platform that provides a common intuitive user
interface and enhances the quality of the customer's programming process. As
part of our core technology, TaskLink also supports Data I/O's connected
strategy, allowing customers to connect engineering to manufacturing to end
customers.
Automated Programming Systems
Data I/O provides our manufacturing and programming center customers with
automated programming systems solutions that include robotic handlers, a variety
of programmers, input and output media handling (such as tray stackers, tubes,
loaders or taping), and marking solutions. Our ProLINE-RoadRunner(TM) is a
unique in-line programming system with programming speed capability, which
approaches the speed at which Flash devices can currently accept data. Many of
our customers need to program Flash and microcontroller devices in large
quantities and very quickly. ProLINE-RoadRunner mounts directly on the assembly
machine in the production line (Siemens, Fuji, Universal, Panasonic and
Assembleon machines) and delivers programmed parts from reels of blank devices
to the production line in a just-in-time fashion. Our ProLINE-RoadRunner
eliminates production bottlenecks associated with high-density Flash and
microcontroller devices, allowing last minute firmware changes and eliminating
programmed part inventories, ultimately streamlining and reducing the customer's
production and process costs. ProLINE-RoadRunner enables customers to implement
lean processes and is a key element in Data I/O's connected strategy, allowing
customers and partners to more effectively manage their firmware supply chain.
ProLINE-RoadRunner currently retails from $60,000 to $95,000, depending on
programming capability. We continue to leverage our ProLINE-RoadRunner in our
platform to reach a broader market, which during 2003 included focusing on the
FlashCORE(TM) architecture by expanding its capability to address newer
technologies like NAND Flash support for M-Systems DiskOnChip(R) technology.
Data I/O's PS family of automated programming solutions offers highly flexible
solutions for off-line batch programming. Data I/O can configure PS systems to
support not only Flash devices, but also a wide variety of other devices, such
as microcontrollers. These systems provide a number of marking, labeling, and
input/output options. Most importantly, customers can make changeovers extremely
fast. This feature allows the customer to rapidly respond to diverse demands
with very little downtime. Customers can optimize the PS family systems for any
job to maximize throughput and, when combined with fast changeover times and
high reliability, provide the highest levels of output during a production
shift. Our latest product, the PS288, integrates the same FlashCORE programmer
we use in our PS300 FlashCORE, ProLINE-RoadRunner and FlashPAK(TM) and builds on
our connected strategy and common architecture. For smaller memory,
microcontroller and logic devices, our ProMaster systems offer a cost-effective,
high-yield automated solution. Prices for our off-line systems range from
$50,000 to $500,000, with an average configuration selling between
$200,000-$300,000.
Non-Automated Programming Systems
Our 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 devices being
programmed. These types of programmers are also sometimes referred to as
"manual" or "desktop" programmers. We now have three families of non-automated
programmers: Sprint, UniSystem and FlashPAK.
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 device at a time.
Data I/O offers a range of high quality, universal single socket manual
programming solutions through our UniSystem family of programming systems. Our
UniSite and 3980 xpi programming systems offer the highest levels of signal
integrity, which ensure the highest programming standards. Popular in military,
aerospace, telecommunications and other mission critical applications, the
systems range from $11,000 to $35,000.
For more cost constrained or higher volume applications, the Sprint family of
products offers excellent value for the money and versatility. The Sprint Quad
and Octal programming systems offer 4 and 8 socket universal programming
configurations for the higher volume applications. These two families of
products range in price from under $1,000 to $16,000 for the multiple socket
solutions.
Our newest programmer, the FlashPAK, leverages the high-speed proprietary
FlashCORE programming technology in the ProLINE-RoadRunner system. We believe
FlashPAK, priced at $6,000, is the world's fastest programming architecture,
limited today only by the speed at which Flash devices can accept data. FlashPAK
is another key element of Data I/O's connected strategy, providing OEMs and new
product introduction facilities with a high performance Flash programming system
that can be used to validate designs before moving down the firmware supply
chain. For manufacturing applications, the FlashPAK, a high speed, multi-socket,
small footprint desktop solution, provides manual programming operations with
the highest level of flexibility at the lowest cost per part. Manufacturers that
use manual programming because of lower labor costs in areas like Asia find
FlashPAK an attractive solution.
Data I/O supports and completes our product offering with a full range of
software and device update products and worldwide service and repair capability.
Customers
Data I/O sells our products to customers worldwide in a broad range of
industries, including wireless handset manufacturers and other telecommunication
companies, consumer electronics, computers, test and measurement, medical,
transportation, military, aerospace, electronic contract manufacturing, and
semiconductors. Our principal customers include Motorola, Nokia, and Siemens.
Our customers either design and/or manufacture electronic products that
incorporate programmable devices or provide device programming services. During
2003, we sold products to over 2,000 customers throughout the world, and one
customer accounted for 18% of our net sales and no others accounted for over
10%.
Programmable device consumption continues to grow as more and more electronic
product manufacturers take advantage of the flexibility and cost effectiveness
of programmable memory, microcontroller and logic devices. Electronic products
today utilize programmable technology in one form or another, from
microcontrolled home appliance devices to set top boxes and wireless devices,
which use increasingly vast amounts of memory for Internet connectivity and new
leading edge features. Therefore, our customers come from virtually all
industries manufacturing electronic products, and include the consumer
electronic products, cell phone, personal data assistants ("PDAs") and other
wireless device manufacturers, home entertainment product sectors, aerospace and
military applications, the personal computer ("PC") and PC peripheral industry
and automotive electronics.
Flash memory growth. The Flash memory customer segment is experiencing some of
the most impressive growth of all programmable devices. As cell phones, PDAs,
games consoles, set top boxes and other consumer devices become more capable,
powerful and compact, the demand for Flash units and megabytes continues to
grow.
Microcontroller growth. As the demand for smarter electronic devices increases,
demand for greater numbers of microcontroller devices increases. Many household
appliances today contain a microcontroller to control the critical functions of
the product and provide new features. Examples of these appliances include
toasters, refrigerators, garage door openers and even thermostats. This growth
creates new market opportunities for us and we have added support for these
devices in our FlashCORE architecture. In addition, the number of
microcontrollers in automotive electronic applications is growing rapidly, with
some cars having as many as 80 or more microcontrollers that control functions
from airbag and ABS systems to air conditioning, information centers and
entertainment and communication systems. We are also targeting the automotive
segment as a critical and growing target segment for our solutions.
Geographic Markets and Distribution
Data I/O markets and sells our products through a combination of direct sales,
internal telesales, and indirect sales representatives and distributors. We
continually evaluate our sales channels against our evolving markets and
customers.
U.S. Sales
We market our products throughout the U.S. using a variety of sales channels,
including our own field sales management personnel, independent sales
representatives, and a direct telesales organization. Our U.S. independent sales
representatives obtain orders on an agency basis, with shipments made directly
to the customer by Data I/O. Sales of our semiconductor programming equipment
products requiring installation by us that is other than perfunctory are
recorded when installation is complete, or at the later of customer acceptance
or installation, if an acceptance clause is specified in the sales terms. We
recognize revenue from other product sales at the time of shipment. We record
revenue from the sale of service and update contracts as deferred revenue and we
recognize it on a straight-line basis over the contractual period. Net Sales in
the United States for 2003, 2002 and 2001 were $7,263,000, $8,347,000 and
$9,526,000, respectively.
Foreign Sales
Foreign sales represented approximately 70%, 63% and 64% of net sales of our
programming systems in 2003, 2002 and 2001, respectively (see Note 16 of "Notes
to Consolidated Financial Statements"). We make foreign sales through our
wholly-owned subsidiaries in Germany, China and Canada, as well as through
independent distributors and sales representatives located in 35 other
countries. We record sales made through foreign subsidiaries requiring
installation by Data I/O that is other than perfunctory when installation is
complete, or at the later of customer acceptance or installation, if an
acceptance clause is specified in the sales terms. We recognize revenue from
other product sales at the time of shipment. We record revenue from the sale of
service and update contracts as deferred revenue and recognize it on a
straight-line basis over the contractual period. Our independent foreign
distributors purchase Data I/O products in U.S. Dollars for resale and we
recognize the sale at the time of shipment to the distributor. 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 us. We recognize
sales, denominated in U.S. Dollars, upon shipment, if installation is
perfunctory or does not need to be performed by us, or when the equipment is
installed at the end-user's site, if installation is more than perfunctory and
is to be performed by us, or in the case where acceptance is required, upon
acceptance.
Net foreign sales for 2003, 2002 and 2001 were $17,424,000, $14,491,000 and
$17,300,000, respectively. We determine total foreign sales by the international
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 our
foreign distributors and to our representatives' customers. Foreign sales do not
include transfers between Data I/O and our foreign subsidiaries. Export sales
are subject to U.S. Department of Commerce regulations. We have not, however,
experienced any difficulties to date as a result of these requirements.
Fluctuating exchange rates and other factors beyond our 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. We cannot predict the effect of such factors on our business.
Competition
The competition in the programming systems market is highly fragmented with a
large number of smaller organizations offering inexpensive solutions. We
estimate that prior to the past couple years the total number of programming
systems sold each year has been less than $150 million, with Data I/O capturing
an estimated 20 to 25% of the global market. Over the last three years, we
believe the amount has declined by about 50% and that Data I/O has gained market
share versus our significant competitors.
Competitive factors often include prices, features, device support and
programming speed, as the programming process impacts more on the major
manufacturers' total production process. However, competitive factors are
changing. The added value for customers is becoming the whole product solution
that fits the customer's required process. As an example, ProLINE-RoadRunner
offers a unique solution, which best addresses the customer's process needs in
high volume Flash applications. To this extent, the value proposition of this
specific programming solution is very different from traditional solutions.
Therefore, addressing customers' process needs is critical to increasing the
opportunity for programming solutions beyond the current amount in this market
niche. We estimate that customers are spending between $1 to $2 billion a year
on programming memory, microcontroller and logic devices and much of this
programming is achieved through the use of the customers' test equipment offered
by companies like Agilent and Teradyne or homegrown solutions for specific
markets like automotive. The main competitive solution in the programmable
market is, therefore, the in-house solution, and the opportunity exists to
substitute customers' solutions with more economical and more easily
maintainable solutions to solve the problems, which traditional programmers do
not address. Boundary scan tools also fall into this category, although still a
very small market with a number of small companies participating who principally
focus on test solutions. A number of companies are part of a trend towards using
in-system programming, which Data I/O does not currently address but continues
to evaluate.
Manufacturing, Raw Materials, and Backlog
Data I/O performs primarily assembly and testing of our products at our
principal facility in Redmond, Washington and we outsource our circuit board
manufacturing and fabrication. We use a combination of standard components,
proprietary custom ICs and fabricated parts manufactured to Data I/O
specifications. An outside supplier located in Germany manufactures our Sprint
non-automated programming systems. 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. We believe that additional
sources can be developed for present single-source components without
significant difficulties in obtaining supplies. We cannot be sure that
single-source components will always continue to be readily available. If we
cannot develop alternative sources for these components, or if we experience
deterioration in relationships with these suppliers, there may be delays or
reductions in product introductions or shipments, which may materially adversely
affect our operating results.
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 our sales volume. To meet customers' delivery requirements, we manufacture
certain products based upon a combination of backlog and anticipated orders.
Most orders are scheduled for delivery within 1 to 60 days after receipt of the
order. Our backlog of pending orders was approximately $1.5 million, $1.3
million and $1.9 million as of December 31, 2003, 2002 and 2001, respectively.
The size of backlog at any particular date is not necessarily a meaningful
indicator of the trend of our business.
Research and Development
Data I/O believes that continued investment in research and development is
critical to our future success. We continue to develop new technologies and
products and enhance existing products. Future growth is to a large extent
dependent upon the timely development and introduction of new products, as well
as the development of algorithms to support the latest programmable devices. We
are currently focusing our research and development efforts on strategic growth
markets, namely new programming technology and automated handling systems for
the manufacturing environment, including support for NAND FLASH and for
M-Systems DiskOnChip(R) technology, microcontroller support for FlashCORE and
additional platforms and improvements for ProLINE-RoadRunner. We continue to
also focus on increasing our capacity and responsiveness for new device support
requests from customers and programmable IC manufacturers by revising and
enhancing our internal processes and tools. During this past year, our research
and development resulted in these new products: PS300, PS288, and the TF-30 Tray
Feeder and extensions of ProLINE-RoadRunner.
During 2003, 2002 and 2001, we made expenditures for research and development of
$4,639,000, $5,331,000 and $6,740,000, respectively, representing 18.8%, 23.3%
and 25.1% of net sales, respectively. Research and development costs are
expensed as incurred.
Patents, Copyrights, Trademarks, and Licenses
Intellectual property rights applicable to various Data I/O products include
patents, copyrights, trade secrets and trademarks. Data I/O also relies on
patents, copyrights, trade secrets and trademarks to protect our intellectual
property, as well as product development and marketing skill to establish and
protect our market position. We also grew our patent portfolio over the past few
years as we developed strategic technologies like the ProLINE-RoadRunner and
FlashCORE that are critical to our connected strategy.
We attempt to protect our rights in proprietary software products, including
TaskLink and other software products, by retaining the title to and copyright of
the software and documentation, by including appropriate contractual
restrictions on use and disclosure in our licenses, and by requiring our
employees to execute non-disclosure agreements. Our software products are not
normally sold separately from sales of programming systems. However, on those
occasions where software is sold separately, revenue is recognized when a sales
agreement exists, when delivery has occurred, when the fee is fixed or
determinable, and when collectibility is probable.
Because of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, portions of our products might possibly
infringe upon existing patents or copyrights, and we may, therefore, be required
to obtain licenses or discontinue the use of the infringing technology. We
believe that any exposure we may have regarding possible infringement claims is
a reasonable business risk similar to that 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 our
reputation, preclude us from offering certain products, and subject us to
substantial liability.
Employees
As of December 31, 2003, we had 127 employees, of which 31 were located outside
the U.S. We also utilize independent contractors for specialty work, primarily
in research and development, and utilize temporary workers to adjust capacity to
fluctuating demand. Many of our employees are highly skilled and our continued
success will depend in part upon our ability to attract and retain employees who
can be in great demand within the industry. None of our employees are
represented by a collective bargaining unit and we believe relations with our
employees are favorable.
Environmental Compliance
Our 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
our capital expenditures, financial position, results of operations or
competitive position.
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of Data
I/O as of March 22, 2004:
Name Age Position
Frederick R. Hume 61 President and Chief Executive Officer
Joel S. Hatlen 45 Vice President
Chief Financial Officer
Secretary and Treasurer
Frederick R. Hume joined Data I/O as President and Chief Executive Officer in
February 1999. He was appointed to the Board of Directors of Data I/O in January
1999. From 1988 until his retirement in 1998, Mr. Hume served as 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.
Joel S. Hatlen joined Data I/O 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 became 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 Data I/O, Mr. Hatlen was employed by Ernst & Young LLP, where
his most recent position was Senior Manager.
Cautionary Factors That May Affect Future Results
Data I/O's disclosure and analysis in this Annual Report contains some
forward-looking statements. Forward-looking statements include 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, establishing foreign operations, future
performance or results of current and anticipated products, sales efforts,
expenses, outsourcing of functions, outcome of contingencies, and financial
results.
Any or all of the forward-looking statements in this Annual 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 known or unknown risks and
uncertainties can affect these forward-looking statements. Many factors -- for
example, product competition and product development -- will be important in
determining future results. Moreover, neither Data I/O nor anyone else assumes
responsibility for the accuracy and completeness of these forward-looking
statements. Actual future results may materially vary.
We undertake no obligation to publicly update any forward-looking statements
after the date of this Annual Report, whether as a result of new information,
future events or otherwise. The reader should not place undue reliance on such
forward-looking statements. The reader is advised, however, to consult any
future disclosures Data I/O makes on related subjects in our 10-Q, 8-K and 10-K
reports to the SEC and press releases. Also, note that Data I/O provides the
following cautionary discussion of risks, uncertainties and possible inaccurate
assumptions relevant to our business. These are factors that we think could
cause Data I/O's actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect Data I/O. This discussion is permitted by the Private Securities
Litigation Reform Act of 1995.
RISK FACTORS
Development, Introduction and Shipment of New Products
Data I/O 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
Delays in the development, completion and shipment of new products, or failure
of customers to accept new products, may result in a decline in sales in 2004.
Variability in Quarterly Operating Results
Data I/O's operating results tend to vary from quarter to quarter. Our revenue
in each quarter substantially depends 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 labor or material shortages
o the timing of significant orders
o war or terrorism
o customers' budgets
o adverse movements in exchange rates, interest rates or tax rates
o cyclical nature of demand for our customers' products
o general economic conditions in the countries where we sell products
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 Data I/O's industry evolves rapidly, making timely product
innovation essential to success in the marketplace. Introducing 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 device package types, densities, and technologies 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 that give rise to product liability claims against us or cause our
products to fail to gain market acceptance. Our future success depends on our
ability to successfully compete with other technology firms in attracting and
retaining key technical personnel.
Economic and Market Conditions
Our business is highly 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. As we experienced in 2003 and the past few years, our
operations may in the future reflect substantial fluctuations from
period-to-period as a consequence of these 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.
History of Losses
We have incurred net losses in two of our last three fiscal years. We will
continue to examine our level of operating expense based upon our projected
revenues. Any planned increases in operating expenses may result in larger
losses in future periods if projected revenues are not achieved. As a result, we
may need to generate greater revenues than we have recently to achieve and
maintain profitability. However, we cannot provide assurance that our revenues
will increase and our strategy may not be successful resulting in future losses.
Affects of Restructuring Activities
Our previously implemented restructuring plans may yield unanticipated
consequences, such as increased burden on our administrative, operational, and
financial resources and increased responsibilities for our management personnel.
As a result, our ability to respond to unexpected challenges may be impaired and
we may be unable to take advantage of new opportunities.
In addition, many of the employees that were terminated possessed specific
knowledge or expertise, and that knowledge or expertise may prove to have been
important to our operations. In that case, their absence may create significant
difficulties, particularly if our business experiences significant growth. Any
failure by us to properly manage this rapid change in workforce could impair our
ability to efficiently manage our business, to maintain and develop important
relationships with third-parties, and to attract and retain customers. It could
also cause us to incur higher operating costs and delays in the execution of our
business plan or in the reporting or tracking of our financial results.
Need for Additional Funding
Our past revenues have been and our future revenues may continue to be
insufficient to support the expense of our operations and any expansion of our
business. We may therefore need additional equity or debt capital to finance our
operations. If we are unable to generate sufficient cash flows from operations
or to obtain funds through additional debt or equity financing, we may have to
reduce some or all of our development and sales and marketing efforts and limit
the expansion of our business.
We believe our existing cash and cash equivalents will be sufficient to meet our
working capital requirements for at least the next twelve months. Thereafter,
depending on the development of our business, we may need to raise additional
cash for working capital or other expenses. We may also encounter opportunities
for acquisitions or other business initiatives that require significant cash
commitments, or unanticipated problems or expenses that could result in a
requirement for additional cash before that time.
Therefore, we may seek additional funding through public or private debt or
equity financing or from other sources. We have no commitments for additional
financing, and we may experience difficulty in obtaining funding on favorable
terms, if at all. Any financing we obtain may contain covenants that restrict
our freedom to operate our business or may require us to issue securities that
have rights, preferences or privileges senior to Data I/O's Common Stock
("Common Stock") and may dilute your ownership interest.
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. 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 systems 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 device 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 develop alternative
sources of these components, if sales of parts are discontinued by the supplier
or we experience 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 under estimate 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.
Over estimation of demand will lead to excess inventories that may become
obsolete.
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 foreign 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.
Reliance on Third-Party Distribution Channels
Data I/O has an internal sales force and also utilizes third-party
representatives, and distributors. Therefore, the financial stability of these
distributors is important. 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 70% of our net revenue for the fiscal year ended
December 31, 2003. We expect that international sales will continue to be a
significant portion of our net revenue. International sales and operations may
fluctuate due to various factors, including:
o migration of manufacturing to low cost geographies
o regulatory requirements and any changes to these 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 impact of the Euro
o compliance with applicable export licensing requirements
o product safety and other certification requirements
o difficulties in integrating foreign and outsourced operations
o political and economic instability
The European Community and European Free Trade Association have established
certain electronic emission and product safety requirements ("CE"). Although our
products currently meet 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, China and Canada. Our business and financial
condition is sensitive to currency exchange rates or any other restrictions
imposed on their currencies. Currency exchange fluctuations in Canada, China and
Germany may adversely affect our investment in our subsidiaries.
Protection of Intellectual Property
Refer to the section "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 failing 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 Data I/O's financial position. For example,
we may use significant cash or incur additional debt, which would weaken our
balance sheet. We may also capitalize goodwill and intangible assets acquired,
the impairment of which would reduce our profitability. We cannot guarantee that
future acquisitions will improve our business or operating results.
Dependence on Key Personnel
Refer to the section "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 Data
I/O's 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 Data
I/O's Common Stock.
Item 2. Properties
In May 1997, Data I/O completed the sale of the land and building comprising our
Redmond, Washington corporate headquarters and it is currently leasing the
96,000 square foot building on a 10-year leaseback agreement with an option to
renew the lease for an additional 10 years. This lease required base annual
rental payments in 2003 of approximately $1,138,000. See Note 7 of "Notes to
Consolidated Financial Statements." As part of our 1999 restructuring plan
implementation, we vacated one floor of the leased Redmond facility
(approximately 25,000 square feet) and 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 through April 2002. The sublease terminated in June 2002. We
have not been successful in subleasing this space and believe the market for
this space is currently quite limited.
In addition to the Redmond facility, approximately 9,000 square feet is leased
at five foreign locations, including our Canadian sales and service office
located in Mississauga, Ontario, German sales, service and engineering
operations located in Munich, Germany, and three sales and service offices in
China.
Item 3. Legal Proceedings
As of the date of this Annual Report, Data I/O is not a party to any legal
proceedings, the adverse outcome of which in management's opinion, individually
or in the aggregate, would have a material adverse effect on our results of
operations or financial position. From time to time, we may be involved in
litigation relating to claims arising out of our operations in the normal course
of business.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted for a vote of shareholders of Data I/O during the
fourth quarter of the fiscal year ended December 31, 2003.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The following table shows, for the periods indicated, the high and low bid
information for Data I/O's Common Stock as reported by the NASDAQ National and
SmallCap Market tier of The NASDAQ Stock Market (NASDAQ symbol is DAIO).
Effective December 31, 2002 Data I/O transferred to the NASDAQ SmallCap Market.
Period High Low
2003 Fourth Quarter $3.89 $2.78
Third Quarter 4.18 2.00
Second Quarter 2.30 0.94
First Quarter 1.27 0.75
2002 Fourth Quarter $1.45 $0.60
Third Quarter 1.55 0.41
Second Quarter 1.75 0.86
First Quarter 2.00 1.20
The approximate number of shareholders of record as of March 22, 2004 was 738.
Except for a special cash dividend of $4.15 per share paid on March 8, 1989,
Data I/O has not paid cash dividends on our Common Stock and does not anticipate
paying regular cash dividends in the foreseeable future.
No sales of unregistered securities were made by Data I/O during the period
ended December 31, 2003.
Equity Compensation Plan Information
The following table gives information about our Common Stock that may be issued
upon the exercise of options and rights under all of our existing equity
compensation plans as of December 31, 2003. See Notes 12 and 13 of "Notes to
Consolidated Financial Statements."
(a) Number of securities (b) Weighted-average (c) Number of securities remaining
to be issued upon the exercise price of available for future issuance under
exercise of outstanding outstanding options, equity compensation plans (excluding
options, warrants and rights warrants and rights securities reflected in column (a))
---------------------------- --------------------- ------------------------------------
Equity compensation plans
approved by the security holders (1)(3) 1,347,413 $2.24 665,118
Equity compensation plans not
approved by the security holders (2) 10,000 $5.19 0
(1) Represents shares of Data I/O's Common Stock issuable pursuant to our 2000
Stock Incentive Compensation Plan, 1986 Stock Option Plan, 1992 Employee
Stock Purchase Plan, and Director Fee Plan.
(2) Director option grant represents a one-time option grant to Directors in
May 1998 prior to shareholder approval of an option plan covering
Directors.
(3) Stock Appreciation Rights Plan ("SAR") provides that directors, executive
officers or holders of 10% or more of Data I/O's Common Stock have an
accompanying SAR with respect to each exercisable option. While the plan
has been approved by the security holders, no amounts are included in
columns a, b or c relating to the SAR.
Item 6. Selected Financial Data
During 2004, Data I/O identified elimination calculation omission errors that
had resulted in the understatement of inter-company expense eliminations on
foreign subsidiary demonstration inventory equipment depreciation, with a
corresponding overstatement of demonstration inventory equipment accumulated
depreciation at December 31, 2004. The errors, which had occurred over a period
of more than five years, overstated depreciation (international selling) expense
associated with demonstration inventory equipment in service in the Company's
foreign subsidiaries. Because the cumulative impact of this error as of December
31, 2003 resulted in a $112,000 error, the Company's previously issued
consolidated financial statement for the year ended December 31, 2003, 2002, and
2001 have been restated.
The following selected consolidated financial data has been restated and 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." See Note 3 to
the consolidated financial statement for further discussion of this matter.
Data I/O adopted SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101) in the fourth quarter of fiscal year 2000,
effective beginning of the first quarter of fiscal year 2000. The pro forma
information in the table below reflects the adoption of SAB 101. Historical
results are not necessarily indicative of future results.
Year Ended
-------------------------------------------------------------------------------------------------------------------------------
Restated Restated Restated Restated Restated
Dec. 31, Dec. 31, Dec. 31, Dec. 28, Dec. 30,
(in thousands, except employee and per share data) 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
For The Year:
Net sales $24,687 $22,838 $26,826 $42,909 $34,113
Cost of goods sold 11,008 11,556 15,078 22,760 17,948
------------------------------------------------------------------
Gross margin 13,679 11,282 11,748 20,149 16,165
Research and development 4,639 5,331 6,740 8,716 8,403
Selling, general and administrative(4) 7,715 8,254 9,707 10,600 11,008
Net provision for business restructuring (2) (39) 632 1,211 (255) (215)
------------------------------------------------------------------
Operating income (loss) (4) 1,364 (2,935) (5,910) 1,088 (3,031)
Non-operating income (loss) (25) (232) 124 876 1,920
------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes and cumulative effect of accounting change(4) 1,339 (3,167) (5,786) 1,964 (1,111)
Income tax (expense) benefit (33) 61 (224) (36) (55)
------------------------------------------------------------------
Income (loss) from continuing operations, before
cumulative effect of accounting change(4) 1,306 (3,106) (6,010) 1,928 (1,166)
Income from discontinued operations (1) - - - 90 831
Cumulative effect of accounting change (3) - - - (2,531) -
------------------------------------------------------------------
Net income (loss) (4) $1,306 ($3,106) ($6,010) ($513) ($335)
Pro forma net income (loss) - - - - ($2,866)
--------------------------------------------------------------------------------------------------------------------------
At Year-end:
Working capital $11,032 $9,125 $12,010 $16,792 $16,179
Total assets(4) $18,100 $16,414 $20,387 $28,793 $30,081
Total debt - - - - -
Stockholders' equity(4) $11,200 $9,332 $12,201 $18,086 $18,089
Number of employees from continuing operations 127 125 155 224 199
-------------------------------------------------------------------------------------------------------------------------------
Common Stock Data (3):
Basic earnings per share:
From continuing operations, after taxes, before
cumulative effect of accounting change(4) $0.17 ($0.40) ($0.79) $0.26 ($0.16)
Net income (loss) (4) $0.17 ($0.40) ($0.79) ($0.07) ($0.05)
Pro forma net income (loss) - - - - ($0.40)
Diluted earnings per share:
From continuing operations, after taxes, before
cumulative effect of accounting change(4) $0.16 ($0.40) ($0.79) $0.26 ($0.16)
Net income (loss) (4) $0.16 ($0.40) ($0.79) ($0.07) ($0.05)
Pro forma net income (loss) - - - - ($0.40)
Book value per share at year-end(4) $1.40 $1.20 $1.60 $2.41 $2.48
Shares outstanding at year-end 7,976 7,768 7,614 7,495 7,290
Weighted-average basic shares outstanding 7,910 7,704 7,572 7,405 7,254
Weighted-average diluted shares outstanding 8,117 7,704 7,572 7,405 7,254
-------------------------------------------------------------------------------------------------------------------------------
Key Ratios:
Current ratio 2.9 2.6 2.9 2.9 2.7
Gross margin to sales 55.4% 49.4% 43.8% 47.0% 47.4%
Operating income (loss) to sales(4) 5.5% (12.9%) (22.0%) 2.5% (8.9%)
Income (loss) from continuing operations to sales(4) 5.3% (13.6%) (22.4%) 4.5% (3.4%)
Return on average stockholders' equity(4) 12.7% (28.8%) (39.7%) (2.8%) (1.8%)
-------------------------------------------------------------------------------------------------------------------------------
Footnotes:
(1) Discontinued operations are amounts that relate to the divestitures of the
Synario and Reel Tech Divisions that took place in 1997.
(2) For further discussion, see Note 2 of "Notes to Consolidated Financial
Statements."
(3) For further discussion, see Note 1 of "Notes to Consolidated Financial
Statements."
(4) For further discussion, see Note 3 of "Notes to Consolidated Financial
Statements."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Conditions and Results of
Operations presented below reflect certain restatements to our previously
reported operating results for the year ended December 31, 2003.
During 2004, the Company identified certain errors related to the inter-company
profit eliminations associated with demonstration inventory equipment amounts.
Because the errors resulted in a cumulative overstatement of demonstration
inventory equipment accumulated depreciation and a corresponding overstatement
of depreciation (international selling) expense, the Company's previously issued
consolidated financial statements for the year ended December 31, 2003 have been
restated. The Selling, General and Administrative expenses discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been adjusted to reflect the restated numbers. See Note 3 to the
consolidated financial statement for further discussion of this mater.
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 and trends; future results of
operations or financial position; integration of acquired products and
operations; market acceptance of our newly introduced or upgraded products;
development, introduction and shipment of new products; establishing foreign
operations; and any other guidance on future periods are forward-looking
statements. Forward-looking statements reflect management's current expectations
and are inherently uncertain. Although Data I/O believes that the expectations
reflected in these forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance, achievements, or
other future events. Moreover, neither Data I/O nor anyone else assumes
responsibility for the accuracy and completeness of these forward-looking
statements. Data I/O is under no duty to update any of these forward-looking
statements after the date of this Annual Report. The Reader should not place
undue reliance on these forward-looking statements. 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.
OVERVIEW
In 2003, our primary goal was to manage the business to achieve profitable
operations, while developing and enhancing products to drive revenue and
earnings growth. Our challenge continued to be the weak and uncertain economic
environment with its limited capacity related demand and weak capital spending.
We expect that demand for capacity should improve, based on forecasted increased
unit sales for the semiconductor industry, which should provide improved
business opportunities for Data I/O.
The restructuring actions that were initiated in 2001 and continued in 2002 were
completed in 2003. This brought our quarterly breakeven point down below the
level of net sales that we were experiencing in 2003, resulting in our
turnaround and profitability. We are continuing our efforts to balance
increasing costs and strategic investments in our business with the level of
demand and mix of business we expect.
We are focusing our research and development efforts in our strategic growth
markets, namely new programming technology and automated programming systems for
the manufacturing environment, particularly extending the capabilities and
support for our FlashCORE architecture and the ProLINE-RoadRunner and PS
families. To better support our customers in their geographic areas and time
zones, we have expanded device support operations in Germany and India and are
in the process of setting up a new device support center in Shanghai, China.
Our customer focus has been on strategic high volume manufacturers and
programming centers and the combination of our newer products with the NAND
Flash and microcontroller support to gain new accounts and break into new
markets, such as microcontrollers for the automotive market. We are in the
process of setting up a new subsidiary in China, expanding our China operations
to take advantage of the growth of manufacturing in China. We also increased our
efforts in 2003 to partner with the semiconductor manufacturers to better serve
our mutual customers.
BUSINESS RESTRUCTURING PROGRESS
During 2003, we completed the restructuring that began during 2001, which
included actions taken to reduce our breakeven point and realign Data I/O with
our market opportunities. We required this operational repositioning because of
the impact of the economic slowdown and the decline in capital spending across a
high number of customer groups on general demand for programming equipment over
the past few years. At the end of 2003, our quarterly breakeven point was
approximately $6.2 million in net sales with 127 employees worldwide. Our
breakeven point increased in 2003, primarily due to cost increases resulting
from the impact of the weaker dollar on foreign currency based costs and from
personnel costs due to salary increases, incentive compensation and selective
hiring of individuals with critical skills to help position us as the continuing
technology leader in our market.
During 2002, we recorded restructuring charges of $632,000 in connection with
our actions to reduce our quarterly breakeven point from approximately $7
million of net sales at the beginning of 2002 to approximately $5.7 million at
the end of 2002. We achieved most of these reductions by reducing our personnel
from 155 at the beginning of 2002 to 125 at the end of 2002.
During 2001, we recorded restructuring charges of $1,211,000 in connection with
a number of strategic restructuring actions to reduce our breakeven point. This
restructuring included the following: a reduction in our global workforce from
224 at the start of the year to 155 at the end of 2001; discontinuance or
reallocation of numerous projects and activities not essential to our long-term
goals; streamlining activities to decrease discretionary marketing, distribution
and promotional expenses, consolidation of numerous functions across the
organization to create a team, which was more productive and able to respond
faster to global customer needs; and closure of a facility in Germany and moving
our operations to other locations within Data I/O.
At December 31, 2003 all restructuring expenses associated with the activities
detailed above had been paid and the excess expense accrual of $39,000 was
reversed during 2003.
CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that we make
estimates and judgments, which affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, Data I/O evaluates our estimates,
including those related to sales returns, bad debts, inventories, investments,
intangible assets, income taxes, warranty obligations, restructuring charges,
contingencies such as litigation, and contract terms that have multiple elements
and other complexities typical in the telecommunications equipment industry. We
base our estimates on historical experience and other assumptions that we
believe are reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
Data I/O believes the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue Recognition: Sales of our semiconductor programming equipment products
requiring installation by us that is other than perfunctory are recorded when
installation is complete, or at the later of customer acceptance or
installation, if an acceptance clause is specified in the sales terms. We
recognize revenue from other product sales at the time of shipment. We record
revenue from the sale of service and update contracts as deferred revenue and we
recognize it on a straight-line basis over the contractual period, which is
typically one year. We establish a reserve for sales returns based on historical
trends in product returns and estimates for new items. If the actual future
returns differ from historical levels, our revenue could be adversely affected.
Allowance for Doubtful Accounts: We base the allowance for doubtful accounts
receivable on our assessment of the collectibility of specific customer accounts
and the aging of accounts receivable. If there is a deterioration of a major
customer's credit worthiness or actual defaults are higher than historical
experience, our estimates of the recoverability of amounts due us could be
adversely affected.
Inventory Provisions: We base inventory purchases and commitments upon future
demand forecasts and historic usage. If there is a significant decrease in
demand for our products or there is a higher risk of inventory obsolescence
because of rapidly changing technology and customer requirements, Data I/O may
be required to increase our inventory provision adjustments and our gross margin
could be adversely affected.
Warranty Accruals: Data I/O accrues for warranty costs based on the expected
material and labor costs to fulfill our warranty obligations. If we experience
an increase in warranty claims, which are higher than our historical experience,
our gross margin could be adversely affected.
Results of Continuing Operations
NET SALES
(in thousands)
Net sales by product line: 2003 Change 2002 Change 2001
-----------------------------------------------------------------------------------------------------------------------------
Non-automated programming systems $10,767 (6.6%) $11,532 (2.4%) $11,821
Automated programming systems 13,920 23.1% 11,306 (24.7%) 15,005
------------------ ----------------- ---------------
Totals $24,687 8.1% $22,838 (14.9%) $26,826
================== ================= ===============
Net sales by location:
United States $ 7,263 (13.0%) $8,347 (12.4%) $ 9,526
% of total 29.4% 36.5% 35.5%
International $17,424 20.2% $14,491 (16.2%) $17,300
% of total 70.6% 63.5% 64.5%
-----------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002
Data I/O experienced a turnaround in sales during 2003, with a resurgence in
sales of automated system products. In particular, automated systems aftermarket
products and PS300 FlashCORE and related upgrades, which were new in 2003,
drove the sales growth. Our non-automated systems continued a trend of declining
sales in older products; however, FlashPAK, which was new in 2002, grew 292% in
2003, partially offsetting the decline. Also contributing to the non-automated
system decline was the loss of a low cost programmer line. ICE Technology, our
former supplier of the line, ceased business. In 2003, sales related to the Ice
Technology products were approximately $50,000, compared to $250,000 in 2002.
International sales grew, particularly in Europe, while sales in the U.S. market
continued to decline. The U.S. dollar continued to weaken in 2003, which we
believe assisted our export sales, due to increased buying power of foreign
currencies and the favorable effect of currency translation for sales
denominated in foreign currency, and in particular the Euro. We see a continuing
trend in migration of customers moving manufacturing operations to low-cost
geographies, thereby increasing international sales opportunities. The weakened
U.S. dollar, especially compared to the Euro, is expected to continue to assist
our export sales.
We are continuing the transition to a common programming architecture for all of
our products. This allows us to consolidate device support on a single platform
and provides substantial cost benefits to Data I/O. The recently introduced
PS288 FlashCORE automated programming system incorporates this common
architecture. In 2003, we also introduced NAND and microcontroller support
FlashCORE architecture, the TF-30 Tray Feeder System, and a version of our
ProLINE-RoadRunner designed for Panasonic machines. We expect these products to
increase our revenues; however, partially offsetting this increase is the trend
of declining sales of our older product lines.
2002 vs. 2001
Data I/O sales declined for the year 2002 compared to 2001. However, for the
third and fourth quarters of 2002, sales increased over the same quarters in
2001. We attribute the overall decline to the continued economic downturn,
especially in capital spending. Sales declined in all product categories, but
the declines were offset in part by increased sales from our ProLINE-RoadRunner
and new FlashPAK product lines. Sales declined in both in the US and
international markets with the Americas and Europe declining the most.
GROSS MARGIN
(in thousands) 2003 Change 2002 Change 2001
-----------------------------------------------------------------------------------------------------------------------------
Gross margin $13,679 21.2% $11,282 (4.0%) $11,748
Percentage of net sales 55.4% 49.4% 43.8%
-----------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002
Gross margins increased in both dollars and as a percentage of sales for 2003
compared to 2002. The increase in gross margin dollars was due to both the
increase in revenue dollars as well as the savings related to our restructuring
actions. The restructuring efforts lowered our annual breakeven point by
implementing cost reductions as well as lowering inventory reserve charges
compared to 2002. The continued product mix shift towards higher margin
automated systems aftermarket continued to be a favorable factor in 2003.
2002 vs. 2001
Gross margin decreased in dollars due primarily to the decline in sales volume.
Gross margin increased as a percentage of sales primarily due to the savings
from the restructuring and implementation of cost reductions, as well as lower
inventory reserve and warranty charges. The product mix towards additional
ProLINE-RoadRunner and related aftermarket products also improved the gross
margin as a percentage of sales. The restructuring efforts lowered our breakeven
point by bringing cost and operation expenditures, primarily personnel
reductions, in line with the revenue levels we experienced at the end of 2002.
RESEARCH AND DEVELOPMENT
(in thousands) 2003 Change 2002 Change 2001
-----------------------------------------------------------------------------------------------------------------------------
Research and development $4,639 (13.0%) $5,331 (20.9%) $6,740
Percentage of net sales 18.8% 23.3% 25.1%
-----------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002
Research and development ("R&D") spending for 2003 as compared to 2002 declined
both in dollars and as a percentage of sales. This was again due to the
restructuring actions, primarily personnel reductions and cost control efforts
taken over the past two years. During 2003, Data I/O's R&D focused on the
FlashCORE architecture, expanding its capability to address newer technologies
like NAND Flash support for M-Systems DiskOnChip technology as well as
microcontroller device support. New products in the PS family of automated
systems included the PS300 FlashCORE, the TF-30 Tray Feeder system and,
introduced in early 2004, the PS288 FlashCORE. Also, we released a
ProLINE-RoadRunner version for Panasonic machines.
2002 vs. 2001
R&D spending for 2002 as compared to 2001 declined both in dollars and as a
percentage of sales. This was due primarily to the lower headcount related to
our restructuring actions during 2001 and 2002. During 2002, Data I/O's R&D
focused on the new FlashPAK gang programming system and PS300 FlashCORE
automated programming system, which integrated the programming architecture
first introduced in the ProLINE-RoadRunner. We also released the following new
products: ProLINE Infinity, a ProLINE-RoadRunner utilizing an automated handler;
ProLINE-RoadRunner Variable Capacity Options; TF-20 Tray Feeder System; and High
Insertion Socket Adapters.
We believe it is essential to invest in R&D to significantly enhance our
existing products and to create new products as markets develop and technologies
change. We are focusing our R&D efforts in our strategic growth markets, namely
new programming technology and automated programming systems for the
manufacturing environment, particularly extending the capabilities and support
for our FlashCORE architecture and the ProLINE-RoadRunner. In 2004, we expect to
add personnel and project related costs, so R&D spending is expected to increase
in 2004.
SELLING, GENERAL AND ADMINISTRATIVE
(in thousands) Restated
2003 Change 2002 Change 2001
----------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative $7,715 (6.5%) $8,254 (15.0%) $9,707
Percentage of net sales 31.3% 36.1% 36.2%
----------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002
Selling, General and Administrative ("SG&A") expenses decreased by $539,000 in
2003 versus the prior year due primarily to the restructuring actions and
reduced marketing expenses. Partially offsetting this decrease was our increased
facility costs due to increased rent and loss of a sub-tenant; profit-based
bonuses; and increased selling costs due to currency translation with the weaker
US dollar and commissions.
2002 vs. 2001
SG&A spending decreased by $1.5 million in 2002 versus the prior year due
primarily to the restructuring actions. We reduced our expense by lowering our
bad debts reserve due to collection of accounts receivable, incurring less
retirement plan costs and lower commissions, partially offsetting these
reductions were higher rent and insurance costs.
INTEREST
(in thousands) 2003 Change 2002 Change 2001
----------------------------------------------------------------------------------------------------------------------------
Interest income $112 28.7% $87 (63.6%) $239
Interest expense ($23) 27.8% ($18) 12.5% ($16)
----------------------------------------------------------------------------------------------------------------------------
2003 vs. 2001
Interest income for 2003 increased as compared to 2002 primarily due to the
increase in cash, cash equivalents and marketable securities.
2002 vs. 2001
Interest income for 2002 decreased as compared to 2001 primarily due to the
reduction in interest rates that occurred during 2002 and 2001.
INCOME TAXES
(in thousands) 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $33 ($61) $224
----------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002 and 2002 vs. 2001
Income tax expense in all years relates to foreign income taxes. For financial
reporting purposes, Data I/O established tax valuation reserves against our
deferred tax assets because of the uncertainty relating to the realization of
such asset values. We had valuation allowances of $9.7 million, $10.1 million
and $9.0 million at December 31, 2003, 2002 and 2001, respectively.
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. We recognized foreign currency transaction
losses of $81,000, $150,000 and $222,000 in 2003, 2002 and 2001, respectively.
The transaction losses resulted primarily from sales by our German subsidiary to
our main customers, which were invoiced in US dollars. We hedge our foreign
currency exposure on sales of inventory and certain loans to our foreign
subsidiaries through the use of foreign exchange contracts. See Note 1 of "Notes
to Consolidated Financial Statements."
Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
(in thousands) 2003 Change 2002 Change 2001
----------------------------------------------------------------------------------------------------------------------------
Working capital $11,032 $1,907 $9,125 ($2,885) $12,010
----------------------------------------------------------------------------------------------------------------------------
In 2003, cash and marketable securities increased by $1,275,000, primarily
resulting from funds generated by operations. Key elements of working capital
changes reflected the increase in business: inventories increased by $131,000;
accounts receivable increased by $726,000; and accounts payable and accrued
expenses together increased $274,000. The increase in accounts receivable also
reflects the longer collection period typically associated with international
sales.
We estimate that capital expenditures for property, plant and equipment during
2004 are planned to be approximately $700,000. Although we expect to make such
expenditures, we had no significant outstanding purchase commitments at December
31, 2003. Such expenditures are expected to be funded by existing and internally
generated funds or lease financing.
As a result of our significant product development, customer support, and
selling and marketing efforts, Data I/O has required substantial working capital
to fund our operations. Over the last few years, we restructured our operations
to lower our costs and operating expenditures to lower our breakeven point,
preserve our cash position and return to profitable operations, as reflected in
our 2003 results. We believe that we have sufficient working capital available
under our operating plan to fund our operations and capital requirements through
at least December 31, 2004. Any substantial inability to achieve our current
business plan could have a material adverse impact on our financial position,
liquidity, or results of operations and may require us to reduce expenditures
and/or seek additional financing.
Aggregate Contractual Obligations and Commitments
Data I/O has purchase obligations for inventory and production costs as well as
other obligations such as capital expenditures, service contracts, marketing,
and development agreements. Arrangements are considered purchase obligations if
a contract specifies all significant terms, including fixed or minimum
quantities to be purchased, a pricing structure and approximate timing of the
transaction. Most arrangements are cancelable without a significant penalty, and
with short notice, typically less than 90 days. Any amounts reflected on the
balance sheet as accounts payable and accrued liabilities are excluded from the
table below. Data I/O has no long-term debt. Data I/O has commitments under
non-cancelable operating leases and other agreements, primarily for factory and
office space, with initial or remaining terms of one year or more as follows:
For the years ending December 31, (in thousands):
Purchase Operating
obligations leases
----------------- --------------
2004 $1,386 $1,440
2005 54 1,413
2006 - 1,257
2007 - 1
2008 and thereafter - -
----------------- --------------
Total $1,440 $4,111
================= ==============
SHARE REPURCHASE PROGRAM
Under a previously announced share repurchase program, Data I/O is authorized to
repurchase up to 1,123,800 shares of our outstanding Common Stock. We may
execute these purchases through open market purchases at prevailing market
prices, through block purchases or in privately negotiated transactions, and we
may commence or discontinue at any time. As of December 31, 2003, Data I/O has
repurchased 1,016,200 shares under this repurchase program at a total cost of
approximately $7.1 million. Data I/O has not repurchased shares under this plan
since the second quarter of 1997, although it still has the authority to do so.
NEW ACCOUNTING PRONOUNCEMENTS
During 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset Retirement
Obligations" and, during 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit and Disposal Activities". The adoption of SFAS Nos.
143 and 146 during fiscal 2003 did not have a material impact on our
consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) released Issue No.
02-16, "Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor", applicable to Data I/O for arrangements
entered into beginning in fiscal 2003. Data I/O records vendor allowances and
discounts in the income statement when the purpose for which those monies were
designated is fulfilled. As such, the adoption of EITF No. 02-16 during fiscal
2003 did not have a material impact on our consolidated financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, Accounting
Changes. Data I/O has adopted the provisions of the statement, which has had no
material impact.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 interprets ARB No. 51, "Consolidated
Financial Statements," as amended by FASB Statement No. 94, "Consolidation of
All Majority-Owned Subsidiaries," which requires the preparation of consolidated
financial statements when one entity has a controlling financial interest in a
second entity. FIN 46 specifies disclosures that are required for financial
statements issued after January 31, 2003 but prior to the effective date of the
Interpretation for entities created before February 1, 2003 and interests in
those entities acquired before that date, as well as disclosures that will be
required for financial statements of primary beneficiaries and others with
variable interests in variable interest entities issued after the effective
date. The FASB has published a revision to Interpretation 46 to clarify some of
the provisions of FIN 46 and to exempt certain entities from its provisions. The
adoption of this interpretation did not have a material impact on our results of
operations or financial position, as we do not have variable interest entities.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. Data I/O has adopted the provisions of the statement, which has
had no material impact.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." The
statement requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as liabilities.
This statement is effective for all financial instruments entered into or
modified after May 31, 2003." The adoption of SFAS No 150 during fiscal 2003 did
not have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
With respect to our foreign currency exchange rate risk, we currently use only
foreign currency hedge derivative instruments, which, at a given date, are not
material. However, Data I/O is exposed to interest rate risks. We generally
invest in high-grade commercial paper with original maturity dates of twelve
months or less and conservative money market funds to minimize our exposure to
interest rate risk on our marketable securities, which are classified as
available-for-sale as of December 31, 2003 and December 31, 2002. We believe
that the market risk arising from holdings of these financial instruments is not
material.
The table below provides information about our marketable securities, including
principal cash flows and the related weighted average interest rates (in
thousands):
Estimated Fair Estimated Fair
Principal Value at Principal Value at
Cash Flows December 31, Cash Flows December 31,
For 2004 2003 For 2003 2002
--------------- ----------------- --------------- -----------------
Corporate bonds $ 754 $ 754 $ 734 $ 734
1.315% 2.936%
Euro-dollar bonds - - 342 342
2.100%
Taxable Auction Securities 500 500 - -
1.136%
Tax Advantaged Auction Security 1,100 1,100 - -
1.286%
--------------- ----------------- --------------- -----------------
Total portfolio value $ 2,354 $ 2,354 $ 1,076 $ 1,076
Item 8. Financial Statements and Supplementary Data
See pages 23 through 41.
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
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 31, 2003, and 2002 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 financial position of Data I/O Corporation as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 3, the Company's consolidated financial statements as of
and for the year ended December 31, 2003 have been restated.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule as
Schedule II is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
//S//GRANT THORNTON LLP
Seattle, Washington
February 6, 2004
(March 5, 2005 as to the effects of the restatement described in Note 3)
--------------------------------------------------------------------------------
REPORT OF MANAGEMENT
--------------------------------------------------------------------------------
The Management of Data I/O Corporation is responsible for the preparation and
integrity of Data I/O's consolidated financial statements and related
information that appears in this Annual Report on Form 10-K/A. Management
believes that the financial statements fairly reflect the form and substance of
transactions and reasonably present Data I/O's financial condition and results
of its operations, in conformity with accounting principles generally accepted
in the United States of America. Management has included in Data I/O's financial
statements, amounts that are based on estimates and judgments, which it believes
are reasonable under the circumstances.
Data I/O maintains a system of internal control, which is designed to safeguard
Data I/O's assets and ensure that transactions are recorded in accordance with
Company policies.
The Board of Directors of Data I/O 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//Frederick R. Hume //S//Joel S. Hatlen
FREDERICK R. HUME JOEL S. HATLEN
President and Chief Executive Officer Vice President
Chief Financial Officer
Secretary and Treasurer
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------------------------------------------------------------------------------------------
Restated Restated
2003 2002
----------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,380 $ 4,383
Marketable securities 2,354 1,076
Trade accounts receivable, net of allowance for
doubtful accounts of $202 and $187 5,054 4,328
Inventories 4,607 4,476
Other current assets 431 509
------------- -------------
TOTAL CURRENT ASSETS 16,826 14,772
Property, plant and equipment - net 1,263 1,555
Other assets 11 87
------------- -------------
TOTAL ASSETS $18,100 $16,414
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,285 $1,200
Accrued compensation 1,186 826
Deferred revenue 1,430 1,613
Other accrued liabilities 1,543 1,510
Accrued costs of business restructuring - 204
Income taxes payable 350 294
------------- -------------
TOTAL CURRENT LIABILITIES 5,794 5,647
Deferred gain on sale of property 1,106 1,435
------------- -------------
6,900 7,082
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, 7,976,296
and 7,767,630 shares 18,797 18,638
Retained deficit (7,926) (9,232)
Accumulated other comprehensive income (loss) 329 (74)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 11,200 9,332
-------------
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,100 $16,414
============= =============
See notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, Restated
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $24,687 $22,838 $26,826
Cost of goods sold 11,008 11,556 15,078
----------- ------------ ------------
Gross margin 13,679 11,282 11,748
----------- ------------ ------------
Operating expenses:
Research and development 4,639 5,331 6,740
Selling, general and administrative 7,715 8,254 9,707
Net provision (reversal) for business restructuring (39) 632 1,211
----------- ------------ ------------
Total operating expenses 12,315 14,217 17,658
----------- ------------ ------------
Operating income (loss) 1,364 (2,935) (5,910)
Non-operating income (expense):
Interest income 112 87 239
Interest expense (23) (18) (16)
Foreign currency exchange (114) (301) (99)
----------- ------------ ------------
Total non-operating income (loss) (25) (232) 124
----------- ------------ ------------
Income (loss) before income taxes 1,339 (3,167) (5,786)
Income tax (expense) benefit (33) 61 (224)
----------- ------------ ------------
Net income (loss) $1,306 ($3,106) ($6,010)
=========== ============ ============
Basic earnings (loss) per share $0.17 ($0.40) ($0.79)
Diluted earnings (loss) per share $0.16 ($0.40) ($0.79)
Weighted-average basic shares 7,910 7,704 7,572
Weighted-average diluted shares 8,117 7,704 7,572
See notes to consolidated financial statements
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, Restated
2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $1,306 $(3,106) ($6,010)
Adjustments to reconcile income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 684 1,018 2,206
Write-off of assets 172 11 18
Amortization of deferred gain on sale (330) (330) (329)
Net change in:
Trade accounts receivable (806) 1,395 4,961
Inventories (129) 1,902 2,778
Recoverable income taxes - 1 91
Other current assets 94 (19) (48)
Accrued cost of business restructuring (204) 114 (29)
Accounts payable and accrued liabilities 587 (859) (1,212)
Deferred revenue (178) (70) (951)
---------------- --------------- --------------
Net cash provided by (used in) operating activities 1,196 57 1,475
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (486) (726) (785)
Purchases of available-for-sale securities (4,815) (630) (4,335)
Proceeds from maturities of available-for-sale securities 3,536 2,789 3,041
---------------- --------------- --------------
Cash provided by (used in) investing activities (1,765) 1,433 (2,079)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 119 130 209
Proceeds from exercise of stock options 40 8 -
---------------- --------------- --------------
Cash provided by financing activities 159 138 209
---------------- --------------- --------------
Increase (decrease) in cash and cash equivalents (410) 1,628 (395)
Effects of exchange rate changes on cash 407 99 (82)
Cash and cash equivalents at beginning of year 4,383 2,656 3,133
---------------- --------------- --------------
Cash and cash equivalents at end of year $4,380 $4,383 $ 2,656
================ =============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 23 $ 18 $ 16
Income taxes $ 33 $(61) $ 172
See notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (AS RESTATED)
Accumulated
Common Stock Retained Other Total
------------------------ Earnings Comprehensive Stockholders'
Shares Amount (Deficit) Income (Loss) Equity
----------- --------- ---------- ----------------- --------------------
(in thousands, except share data)
Balance at December 28, 2000:
As previously reported 7,494,542 $18,292 ($163) ($90) $18,039
Prior period adjustment (see Note 3) 47 47
----------- --------- ---------- ----------------- --------------------
Balance at December 28, 2000, as restated 7,494,542 $18,292 ($116) ($90) $18,086
Issuance of stock through
Employee Stock Purchase Plan 119,212 208 - 208
-
Comprehensive loss:
Net loss - - (6,010) - (6,010)
Translation adjustment - - (82) (82)
-
Unrealized gain on
Marketable securities - - - (1) (1)
--------------------
Total comprehensive loss (6,093)
----------- --------- ---------- ----------------- --------------------
Balance at December 31, 2001, as restated 7,613,754 18,500 (6,126) (173) 12,201
Stock options exercised 5,000 8 - - 8
Issuance of stock through
Employee Stock Purchase Plan 148,876 130 - - 130
Comprehensive loss:
Net loss - - (3,106) - (3,106)
Translation adjustment - - - 99 99
--------------------
Total comprehensive loss (3,007)
----------- --------- ---------- ----------------- --------------------
Balance at December 31, 2002, as restated 7,767,630 18,638 (9,232) (74) 9,332
Stock options exercised 14,189 40 - - 40
Issuance of stock through
Employee Stock Purchase Plan 194,477 119 - - 119
Comprehensive loss:
Net income, as restated - - 1,306 - 1,306
Translation adjustment - - - 405 405
Unrealized gain on
Marketable securities - - - (2) (2)
--------------------
Total comprehensive loss 1,709
----------- --------- ---------- ----------------- --------------------
Balance at December 31, 2003, as restated 7,976,296 $18,797 ($7,926) $329 $11,200
=========== ========= ========== ================= ====================
See notes to consolidated financial statements.
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Data I/O Corporation ("Data I/O") designs, manufactures, and sells programming
systems used by designers and manufacturers of electronic products. Our
programming system products are used to program integrated circuits ("ICs" or
"devices" or "semiconductors") with the specific unique data necessary for the
ICs contained in various products, and are an important tool for the electronics
industry experiencing growing use of programmable ICs. Customers for our
programming system products are located around the world, primarily in the
United States, Europe and the Far East. Our manufacturing operations are
currently located in the United States. An outside supplier located in Germany
currently manufactures our Sprint non-automated programming system.
As a result of our significant product development, customer support, and
selling and marketing efforts in a period of weak capital spending, Data I/O has
required substantial working capital to fund our operations. We believe that we
have sufficient working capital available under our operating plan to fund our
operations and capital requirements through at least December 31, 2004. Any
substantial inability to achieve the current business plan could have a material
adverse impact on our financial position, liquidity, or result of operations and
may require us to reduce expenditures and/or seek additional financing.
Principles of Consolidation
The consolidated financial statements include the accounts of Data I/O
Corporation and our wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reporting Period
In 2001, Data I/O converted to reporting on a calendar year-end basis. The first
quarter of 2001 covered the period December 29, 2000 to March 31, 2001.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America 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
Data I/O has stock-based employee compensation plans that are described more
fully in Note 13. Data I/O applies APB Opinion 25, Accounting for Stock Issued
to Employees, and related Interpretations in accounting for our plans. Stock
expense in 2003, 2002, and 2001 would have been the result of options issued
with an exercise price below the underlying stock's market price. The following
table illustrates the effect on net income (loss) and earnings (loss) per share
if Data I/O had applied the fair value recognition provisions of FASB Statement
123, Accounting for Stock-Based Compensation, using the assumptions described in
Note 13, to our stock-based employee plans.
Data I/O's pro forma information follows (in thousands, except per share data):
Year Ended December
-------------------------------------------------
Restated
2003 2002 2001
--------------- -------------- ----------------
Net income (loss) - as reported $1,306 ($3,106) ($6,010)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for awards granted, modified, or settled, net of
related tax effects (338) (392) (440)
Net income (loss) - pro forma $968 ($3,498) ($6,450)
=============== ============== ================
Basic earnings (loss) per share - as reported $0.17 ($0.40) ($0.79)
Diluted earnings (loss) per share - as reported $0.16 ($0.40) ($0.79)
Basic earnings (loss) per share - pro forma $0.12 ($0.45) ($0.85)
Diluted earnings (loss) per share - pro forma $0.12 ($0.45) ($0.85)
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the exchange
rate on the balance sheet date. Revenues, costs and expenses of foreign
subsidiaries 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 resulting from the effects of changes in exchange rates on assets and
liabilities denominated in foreign currencies are included in non-operating
expense as foreign currency transaction gains and losses.
In an effort to minimize the effect of exchange rate fluctuations on the results
of our operations, Data I/O hedges portions of our foreign currency exposure
through the use of forward exchange contracts, none of which are speculative. At
December 31, 2003, we had a notional value of approximately $623,000 in five
foreign exchange contracts outstanding, the fair value of which was a liability
of $31,000. The contract terms are 43-90 days. The hedges are perfectly
effective, as currency, settlement date and amount of the underlying receivables
and of the forward contracts coincide, and as spot rates are the same for both
the hedge and the hedged item.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with maturities of three
months or less at date of purchase.
Marketable Securities
Data I/O generally invests in debt securities with original maturities of twelve
months or less and money market funds, all of which are classified as
available-for-sale securities and recorded at fair value, as defined below. We
record unrealized holding gains and losses, net of any tax effect, as a
component of accumulated other comprehensive income (loss) within stockholders'
equity. We report interest earned in non-operating income as interest income.
Marketable securities are classified in the balance sheet as current and
noncurrent based on maturity dates and our expectation of sales and redemptions
in the following year.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, marketable securities and forward
exchange contracts approximates fair value. The fair value of Data I/O's
marketable securities is based upon the quoted market price on the last business
day of the fiscal year plus accrued interest, if any.
Accounts Receivable
The majority of Data I/O's accounts receivable are due from companies in the
electronics manufacturing industries. Credit is extended based on an evaluation
of a customer's financial condition and, generally, collateral is not required.
Accounts receivable are typically due within 30 to 60 days and are stated at
amounts due from customers net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past due.
Data I/O determines our allowance by considering a number of factors, including
the length of time trade accounts receivable are past due, Data I/O's previous
loss history, the customer's current ability to pay our obligation to Data I/O,
and the condition of the general economy and the industry as a whole. Data I/O
writes off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Interest is allowed to accrue, according to our standard
sales terms, beginning on the day after the due date of the receivable. However,
interest income is subsequently recognized on these accounts only to the extent
cash is received, or when the future collection of interest and the receivable
balance is considered probable by management.
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. We depreciate
substantially all manufacturing and office equipment over periods of three to
seven years. We depreciate leasehold improvements over the remaining portion of
the lease, or over the expected life of the asset if less than the remaining
term of the lease.
Long-lived and other assets are evaluated on an annual basis for impairment. In
this connection, we reviewed the expected cash flows to be generated by the
Sprint product line to determine that they are adequate compared to the
remaining net book value of long-lived assets from the SMS acquisition.
Revenue Recognition
Sales of Data I/O's semiconductor programming equipment products requiring
installation by us that is other than perfunctory are recorded when installation
is complete, or at the later of customer acceptance or installation, if an
acceptance clause is specified in the sales terms. We recognize revenue from
other product sales at the time of shipment. We record revenue from the sale of
service and update contracts as deferred revenue and we recognize it on a
straight-line basis over the contractual period. Sales were recorded net of
associated sales return reserves, which were $300,000 and $450,000 at December
31, 2003 and 2002, respectively.
Data I/O previously recognized revenue from product sales at the time of
shipment, or at customer acceptance, if an acceptance clause was specified in
the sales terms. Effective December 31, 1999, we changed our method of
accounting for product sales requiring Company installation, when installation
is other than perfunctory, to recognize such revenues when installation is
complete, or at the later of customer acceptance or installation, if an
acceptance clause is specified in the sales terms. We believe the change in
accounting principle is preferable based on guidance provided in SEC Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. This change in accounting principle did not impact taxes, as all
affected jurisdictions had net operating loss carryforwards.
Data I/O's software products are not normally sold separately from sales of
programming systems. However, on those occasions where we sell software
separately, we recognize revenue when a sales agreement exists, when delivery
has occurred, when the fee is fixed or determinable, and when collectibility is
probable.
Research and Development
Research and development costs are expensed as incurred.
Advertising Expense
Data I/O expenses advertising costs as incurred. Total advertising expenses
related to continuing operations were $248,000, $468,000, and $487,000 in 2003,
2002, and 2001, respectively.
Warranty Expense
Data I/O records a liability for an estimate of costs that it expects to incur
under our basic limited warranty when product revenue is recognized. Factors
affecting our warranty liability include the number of units sold and historical
and anticipated rates of claims and costs per claim. We periodically assess the
adequacy of our warranty liability based on changes in these factors. Data I/O
normally warrants our products against defects for periods ranging from ninety
days to one year. The FlashPAK, which we recently introduced, carries a
three-year warranty on some components. We provide currently for the estimated
cost that may be incurred under our product warranties. Data I/O records
revenues on extended warranties on a straight-line basis over the term of the
related warranty contracts. Service costs are expensed as incurred.
Earnings (Loss) Per Share
Basic earnings (loss) per share exclude any dilutive effects of stock options.
Basic earnings (loss) per share are computed using the weighted-average number
of common shares outstanding during the period. Diluted earnings (loss) per
share are 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.
Earnings per share as presented on the statement of operations exclude employee
stock options that were antidilutive of 1,141,412 and 1,115,508 in 2002, and
2001, respectively.
Diversification of Credit Risk
Financial instruments, which potentially subject Data I/O to concentrations of
credit risk, consist primarily of trade receivables. Our cash, cash equivalents
and marketable securities consist of high quality financial instruments. Data
I/O maintains cash balances in financial institutions, which at times may exceed
federally insured limits. We have not experienced any losses in such accounts
and believe we are not exposed to any significant credit risk on cash and cash
equivalents. Our trade receivables are geographically dispersed and include
customers in many different industries. We believe that any risk of loss is
significantly reduced due to the diversity of our end-customers and geographic
sales areas. We perform on-going credit evaluations of our customers' financial
condition and require collateral, such as letters of credit and bank guarantees,
whenever deemed necessary.
Derivatives
Data I/O accounts for our derivatives using SFAS No. 133, "Accounting for
Derivatives and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value.
Data I/O utilizes forward foreign exchange contracts to reduce the impact of
foreign currency exchange rate risks where natural hedging strategies cannot be
effectively employed. All of our hedging instruments are fair value hedges.
Generally, these contracts have maturities less than one year and require us to
exchange foreign currencies for U.S. dollars at maturity. The fair value of the
open hedge contracts as of December 31, 2003 is a liability of $31,000 and is
included in accounts payable on the balance sheet.
Data I/O does not hold or issue derivative financial instruments for trading
purposes. The purpose of our hedging activities is to reduce the risk that the
valuation of the underlying assets, liabilities and firm commitments will be
adversely affected by changes in exchange rates. Our derivative activities do
not create foreign currency exchange rate risk because fluctuations in the value
of the instruments used for hedging purposes are offset by fluctuations in the
value of the underlying exposures being hedged. We are exposed to credit-related
losses in the event of nonperformance by counterparties to forward exchange
contracts. However, we have entered into these instruments with creditworthy
financial institutions and consider the risk of nonperformance remote.
New Accounting Pronouncements
During 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset Retirement
Obligations" and, during 2002, the FASB issued SFAS No.146, "Accounting for
Costs Associated with Exit and Disposal Activities". The adoption of SFAS Nos.
143 and 146 during fiscal 2003 did not have a material impact on our
consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) released Issue No.
02-16, "Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor", applicable to Data I/O for arrangements
entered into beginning in fiscal 2003. Data I/O records vendor allowances and
discounts in the income statement when the purpose for which those monies were
designated is fulfilled. As such, the adoption of EITF No. 02-16 during fiscal
2003 did not have a material impact on our consolidated financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, Accounting
Changes. Data I/O has adopted the provisions of the statement, which has had no
material impact.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 interprets ARB No. 51, "Consolidated
Financial Statements," as amended by FASB Statement No. 94, "Consolidation of
All Majority-Owned Subsidiaries," which requires the preparation of consolidated
financial statements when one entity has a controlling financial interest in a
second entity. FIN 46 specifies disclosures that are required for financial
statements issued after January 31, 2003 but prior to the effective date of the
Interpretation for entities created before February 1, 2003 and interests in
those entities acquired before that date, as well as disclosures that will be
required for financial statements of primary beneficiaries and others with
variable interests in variable interest entities issued after the effective
date. The FASB has published a revision to Interpretation 46 to clarify some of
the provisions of FIN 46 and to exempt certain entities from its provisions. The
adoption of this interpretation did not have a material impact on our results of
operations or financial position, as we do not have variable interest entities.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. Data I/O has adopted the provisions of the statement, which has
had no material impact.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." The
statement requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as liabilities.
This statement is effective for all financial instruments entered into or
modified after May 31, 2003." The adoption of SFAS No 150 during fiscal 2003 did
not have a material impact on our consolidated financial statements.
NOTE 2 - PROVISION FOR BUSINESS RESTRUCTURING
During 2003, we completed the restructuring that began during 2001, which
included actions taken to reduce our breakeven point and realign Data I/O with
our market opportunities. We required this operational repositioning because of
the impact of the economic slowdown and the decline in capital spending across a
high number of customer groups on general demand for programming equipment over
the past few years. At the end of 2003 our breakeven point was approximately
$6.2 million in net sales with 127 employees worldwide. Our breakeven point
increased in 2003, primarily due to cost increases resulting from the impact of
the weaker dollar on foreign currency based costs and from personnel costs due
to salary increases, incentive compensation and selective hiring of individuals
with critical skills to help position us as the continuing technology leader in
our market.
During 2002, we recorded restructuring charges of $632,000 in connection with
our actions to reduce our quarterly breakeven point from approximately $7
million of net sales at the beginning of 2002 to approximately $5.7 million at
the end of 2002. We achieved most of these reductions by reducing our personnel
from 155 at the beginning of 2002 to 125 at the end of 2002.
During 2001, we recorded restructuring charges of $1,211,000 in connection with
a number of strategic restructuring actions to reduce our breakeven point. This
restructuring included the following: a reduction in our global workforce from
224 at the start of the year to 155 at the end of 2001; discontinuance or
reallocation of numerous projects and activities not essential to our long-term
goals; streamlining activities to decrease discretionary marketing, distribution
and promotional expenses; consolidation of numerous functions across the
organization to create a team, which was more productive and able to respond
faster to global customer needs; and closure of a facility in Germany and moving
our operations to other locations within Data I/O.
At December 31, 2003 all restructuring expenses associated with the activities
detailed above had been paid and the excess expense accrual of $39,000 was
reversed during 2003.
An analysis of the restructuring is as follows (in thousands):
2002 Reserve 2003 2003 Reserve
2002 Payments/ Balance at Expenses Payments/ Balance at
Description Expenses Write-offs Dec. 31, 2002 (Reversals) Write-offs Dec. 31, 2003
---------------------------------------------------------------------------------------- ----------------- ---------------
Downsizing U.S.
Operations:
Employee severance $556 $391 $169 $(21) $148 $-
Redmond facility 10 46 10 - 10 -
consolidation
Consulting and legal 58 52 25 (18) 7 -
expenses
Downsizing foreign 8 27 - - - -
operations
---------------- ------------- ---------------- --------------- ----------------- ---------------
Total $632 $516 $204 ($39) $165 $ -
================ ============= ================ =============== ================= ===============
NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS
During the preparation of our 2004 year-end financial statements and more
specifically the inter-company profit elimination associated with demonstration
inventory equipment amounts, the Company identified elimination calculation
omission errors that had resulted in the understatement of inter-company expense
elimination on foreign subsidiary demonstration inventory equipment
depreciation, with a corresponding overstatement of demonstration inventory
equipment accumulated depreciation (international selling) expense associated
with the Company's foreign subsidiaries.
The cumulative impact of this error as of December 31, 2003, including the
related income tax effect, resulted in a $112,000 overstatement of demonstration
inventory equipment accumulated deprecation reserve and a $112,000 overstatement
of depreciation (international selling) expense. The income tax effects from the
cumulative effect of this error had no impact on income tax expense and only
impacted the related disclosure of net operating losses in carry forward and the
related valuation allowances.
The Company has evaluated that the adjustments to the quarters other than the
fourth quarter are immaterial and that the entire 2003 adjustment will be
reflected as a correction to the fourth quarter of 2003 in the amount of $65,000
and that accordingly no restatement is necessary for the interim quarterly Form
10-Q filings. The Company has determined that there were no material impacts on
the 2002 and 2001 Consolidated Statement of Operations.
The impacts of this restatement on the financial statements for the year ended
December 31, 2003 are summarized below (in thousands, except per share
information):
Consolidated Balance Sheet: Previously As
Reported Adjustment Restated
------------- ------------ ------------
For the year ended December 28, 2000
Property, plant and equipment -net $2,190 $47 $2,237
Total Assets 28,746 47 28,793
Total Stockholder's Equity 18,039 47 18,086
Consolidated Balance Sheet: Previously As
Reported Adjustment Restated
------------- ------------ -------------
For the year ended December 31, 2001
Property, plant and equipment -net $1,741 $47 $1,788
Total Assets 20,340 47 20,387
Total Stockholder's Equity 12,154 47 12,201
Consolidated Balance Sheet: Previously As
Reported Adjustment Restated
------------- ------------ -------------
For the year ended December 31, 2002
Property, plant and equipment -net $1,508 $47 $1,555
Total Assets 16,367 47 16,414
Total Stockholder's Equity 9,285 47 9,332
Consolidated Balance Sheet: Previously As
Reported Adjustment Restated
------------- ------------- -------------
For the year ended December 31, 2003
Property, plant and equipment -net $1,151 $112 $1,263
Total Assets 17,988 112 18,100
Total Stockholder's Equity 11,088 112 11,200
Consolidated Statement of Operations: Previously As
Reported Adjustment Restated
------------- ------------- -------------
For the year ended December 31, 2003
Selling, general and administrative $7,780 ($65) $7,715
Total operating expenses 12,380 (65) 12,315
Operating income (loss) 1,299 65 1,364
Income (loss) before income taxes 1,274 65 1,339
Net Income (loss) 1,241 65 1,306
Basic earnings (loss) per share 0.16 .01 0.17
Diluted earnings (loss) per share 0.15 .01 0.16
Consolidated Statement of Cash Flows: Previously As
Reported Adjustment Restated
------------- ------------- -------------
For the year ended December 31, 2003
Income (loss) from continuing operations $1,241 $65 $1,306
Depreciation and amortization 749 (65) 684
NOTE 4 - MARKETABLE SECURITIES
The estimated fair value of marketable securities consisted of the following (in
thousands):
Dec. 31, Dec. 31,
2003 2002
------------- -------------
Corporate bonds $754 $734
Euro-dollar bonds - 342
Taxable auction securities 500 -
Tax advantaged auction securities 1,100 -
------------- -------------
$2,354 $1,076
============= =============
At December 31, 2003, cost approximated market value for Data I/O's portfolio of
marketable securities and there were no significant unrealized gains or losses.
The marketable securities are all classified as current assets due to their
maturity date or because of the available for sale holding intent, as in the
case of corporate bonds having a maturity date in the second quarter of 2005.
The cost of securities sold is determined by the specific identification method.
NOTE 5 - ACCOUNTS RECEIVABLE
Receivables consist of the following (in thousands):
Dec. 31, Dec. 31,
2003 2002
------------- -------------
Trade receivables $5,249 $4,436
Other 7 79
------------- -------------
Total 5,256 4,515
Less allowance for doubtful receivables 202 187
------------- -------------
Net receivables $5,054 $4,328
============= =============
Trade receivables relate to sales of parts, for which credit is extended based
on the customer's credit history. Other receivables represent amounts due for
subcontracting work performed for others.
Changes in Data I/O's allowance for doubtful accounts are as follows (in
thousands):
Dec. 31, Dec. 31,
2003 2002
------------- -------------
Beginning balance $187 $372
Bad debt expense (reversal) 43 (162)
Accounts written-off (28) (37)
Recoveries - 14
------------- -------------
Ending balance $202 $187
============= =============
NOTE 6 - INVENTORIES
Net inventories consisted of the following components (in thousands):
Dec. 31, Dec. 31,
2003 2002
------------- -------------
Raw material $2,100 $2,308
Work-in-process 1,411 875
Finished goods 1,096 1,293
------------- --------------
$4,607 $4,476
============= ==============
Reserves for excess and obsolete inventory were $2,296,000 and $3,267,000 at
December 31, 2003 and December 31, 2002, respectively. The $971,000 decline in
the reserve related primarily to scrapping and disposal of the related inventory
and reversal of $96,000 in cost of goods sold. Freight expense for incoming raw
materials and freight out for product shipments is charged to cost of goods
sold.
Certain parts used in Data I/O's products are currently available from either a
single supplier or from a limited number of suppliers. If we cannot develop
alternative sources for these components, or if we experience 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 Data I/O relies 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 purchased 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 when needed, which may result in lost sales.
NOTE 7 - SALE - LEASEBACK
In May 1997, Data I/O completed the sale of the land and building comprising our
Redmond, Washington, corporate headquarters. The sale includes a 10-year
leaseback of the building to Data I/O. The sale represented an overall pre-tax
gain to Data I/O of $5.6 million. Of this amount, we recognized $2.3 million in
1997, with the remainder being amortized over the life of the lease.
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Dec. 31, Dec. 31,
2003 2002
Restated Restated
------------- -------------
Leasehold improvements $ 259 $ 239
Equipment 12,016 12,132
------------- -------------
12,275 12,371
Less accumulated depreciation 11,012 10,816
------------- -------------
Property, plant and equipment - net $ 1,263 $ 1,555
============= =============
Total depreciation recorded for 2003, 2002, and 2001 was $602,000, $670,000, and
$940,000, respectively.
NOTE 9 - OTHER ASSETS
Other assets consisted of the following components (in thousands):
Dec. 31, Dec. 31,
2003 2002
------------- -------------
Long-term lease deposits $ 11 $ 66
Investment in product lines: SMS 3,272 3,272
------------- -------------
3,283 3,338
Less accumulated amortization 3,272 3,251
------------- -------------
Other assets - net $ 11 $ 87
============== ==============
Total amortization recorded for 2003, 2002, and 2001 was $59,000, $81,000, and
$969,000, respectively.
Investment In Product Lines: SMS
In November 1998, Data I/O acquired SMS Holding GmbH. In related transactions,
we acquired a license to the technology, manufacturing and worldwide
distribution rights to Unmanned Solutions' AH 400 robotic handler, which is used
in the fine pitch automated programming system, now the PS product family. 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 $0 and $59,000 at December 31, 2003 and 2002, respectively.
NOTE 10 - WARRANTY
The changes in Data I/O's product warranty liability are as follows (in
thousands):
December 31, December 31,
2003 2002
------------------ -----------------
Liability, beginning of year $519 $578
Net expense, accrual revisions and warranty claims 44 (59)
------------------ -----------------
Liability, end of year $563 $519
================== =================
NOTE 11 - AGGREGATE CONTRACTUAL OBLIGATIONS AND COMMITTMENTS
Data I/O has purchase obligations for inventory and production costs as well as
other obligations such as capital expenditures, service contracts, marketing,
and development agreements. Arrangements are considered purchase obligations if
a contract specifies all significant terms, including fixed or minimum
quantities to be purchased, a pricing structure and approximate timing of the
transaction. Most arrangements are cancelable without a significant penalty, and
with short notice, typically less than 90 days. Any amounts reflected on the
balance sheet as accounts payable and accrued liabilities are excluded from the
below table. Data I/O has no long-term debt. Data I/O has commitments under
non-cancelable operating leases and other agreements, primarily for factory and
office space, with initial or remaining terms of one year or more as follows:
For the years ending December 31, (in thousands):
Purchase Operating
obligations leases
---------------- ----------------
2004 $1,386 $1,440
2005 54 1,413
2006 - 1,257
2007 - 1
2008 and thereafter - -
---------------- ----------------
Total $1,440 $4,111
================ ================
Lease and rental expense was $1,476,000, $1,387,000 and $1,342,000 in 2003, 2002
and 2001, respectively. Data I/O has renewal options on substantially all of our
major leases. The initial lease on the Redmond facility expires on December 31,
2006. So long as we are not in material default of the terms of the lease and
there has not been a material adverse change in the financial condition of Data
I/O, we have the option to extend the lease for an additional five years on the
same terms as the balance of the lease, except the rent shall be at the
then-prevailing fair market rental rate. We will also have the right for a
second five-year extension by giving written notice at least six months prior to
the end of the first extension.
As part of our restructuring plan implementation, Data I/O vacated one floor of
our leased Redmond facility (approximately 25,000 square feet) and sublet the
majority of this space for a period of 28 months beginning January 1, 2000. This
sublease ended in June 2002. We have not been successful in subleasing this
space since June 2002 and believe the market for this space is currently quite
limited.
NOTE 12 - STOCK AND RETIREMENT PLANS
Stock Option Plans
At December 31, 2003, there were 1,595,215 shares of Common Stock reserved for
issuance of which 268,410 shares are available for future grant under Data I/O's
employee stock option plans. Pursuant to these plans, options are granted to our
officers and key employees 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, which have a
maximum term of ten years. On May 15, 2002, Data I/O's shareholders approved an
amendment to the Data I/O Corporation 2000 Stock Incentive Compensation Plan
increasing the number of shares reserved for issuance under the 2000 Plan by an
additional 200,000 shares of Common Stock.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, eligible employees may purchase shares
of Data I/O'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 2003, 2002 and 2001, a total of
194,477, 148,876, and 119,212 shares, respectively, were purchased under the
plan at average prices of $0.61, $0.87, and $1.66 per share, respectively. At
December 31, 2003, a total of 274,638 shares were reserved for future issuance.
Stock Appreciation Rights Plan
Data I/O has a Stock Appreciation Rights Plan ("SAR") under which each director,
executive officer or holder of 10% or more of Data I/O's Common Stock has a SAR
with respect to each exercisable stock option. The SAR entitles the SAR holder
to receive cash from Data I/O 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
Data I/O's stock, or following approval by shareholders of Data I/O 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, and no such event is
deemed probable, no compensation expense has been recorded under this plan.
Director Fee Plan
Data I/O has a Director Fee Plan, not currently in use, which had provided for
payment to directors who are not employees of Data I/O Corporation by delivery
of shares of Data I/O's Common Stock. No shares were issued from the plan for
2003, 2002 or 2001 board service and 151,332 shares remain available in the
plan.
Retirement Savings Plan
Data I/O 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 their pre-tax salary, subject to IRS
limitations. In fiscal years 2003, 2002 and 2001, Data I/O contributed one
dollar for each dollar contributed by a participant, with a maximum contribution
of 4% of a participant's earnings. Data I/O's matching contribution expense for
the savings plan was approximately $161,000, $173,000 and $271,000 in 2003, 2002
and 2001, respectively.
Share Repurchase Program
Under a previously announced share repurchase program, Data I/O is authorized to
repurchase up to 1,123,800 shares of our 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. In years, prior to 2003, we have
repurchased 1,016,200 shares under this repurchase program at a total cost of
approximately $7.1 million. We have not repurchased shares under this plan since
the second quarter of 1997, although we still have the authority to do so.
NOTE 13- STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if Data I/O had accounted for our 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:
Employee Stock Employee Stock Director
Options Purchase Plan Fee Plan
------------------------------- -------------------------------- -------------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
--------- --------- --------- --------- --------- ---------- --------- --------- ---------
Risk-free interest rates 2.21% 3.80% 4.81% 1.14% 1.66% 4.86% N/A N/A N/A
Volatility factors 1.03 .94 .70 .97 .94 .70 N/A N/A N/A
Expected life of the option 4.31 4.31 4.31 .50 .50 .50 N/A N/A N/A
in years
Expected dividend yield None None None None None None None None None
For purposes of pro forma disclosures, the estimated fair value of the options
granted, which is estimated to be $1.01, $0.92 and $1.36 per share for 2003,
2002 and 2001, respectively, is amortized to expense over the options' vesting
period.
A summary of Data I/O's stock option activity, and related information follows:
December 31, 2003 December 31, 2002 December 31, 2001
---------------------------- -------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------- -------------- ------------- ------------ --------------- ---------------
Outstanding at beginning of year 1,141,412 $2.56 1,115,508 $2.89 1,128,750 $2.98
Granted 299,500 1.39 328,000 1.33 117,500 2.35
Exercised (14,408) 2.40 (5,000) 1.33 - -
Expired or forfeited (99,699) 3.10 (297,096) 2.48 (130,742) 3.19
--------------- ------------- ---------------
Outstanding - end of year 1,326,805 2.25 1,141,412 2.56 1,115,508 2.89
=============== ============= ===============
Exercisable at end of year 829,572 $2.52 705,477 $2.80 675,050 $2.86
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
------------------------------------------------------ ---------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
----------------- ----------------- ------------------ --------------- ------------------
$1.00 - $1.25 252,188 5.15 $1.04 45,758 $1.11
$1.33 - $1.61 226,561 4.19 1.35 89,356 1.36
$1.75 - $2.41 398,000 2.53 1.99 347,625 1.99
$2.45 - $3.47 206,556 2.94 2.96 153,770 2.87
$3.48 - $5.19 243,500 1.45 4.16 193,063 4.05
----------------- ---------------
$1.00 - $5.19 1,326,805 3.18 $2.25 829,572 $2.52
================= ===============
NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Ending accumulated balances for each item in accumulated other comprehensive
loss are as follows:
(in thousands) December 31, December 31,
2003 2002
------------------- ----------------
Unrealized currency gain (loss) $331 ($74)
Unrealized gain (loss) on marketable securities (2) -
------------------- ----------------
Total accumulated other comprehensive income (loss) $329 ($74)
=================== ================
NOTE 15- INCOME TAXES
Data I/O accounts for income taxes using the liability method as prescribed by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Components of income (loss) before taxes:
Year Ended December
---------------------------------------------------
(in thousands) Restated 2003 2002 2001
--------------- --------------- ----------------
U.S. operations $698 ($3,506) ($6,122)
Foreign operations 641 339 336
--------------- --------------- ----------------
$1,339 ($3,167) ($5,786)
=============== =============== ================
Income tax expense (benefit) consists of:
Current tax expense (benefit):
U.S. federal $ - ($198) ($11)
State - 4 6
Foreign 33 (61) 223
--------------- --------------- ----------------
33 (255) 218
Deferred tax expense (benefit) - U.S. federal - 194 6
--------------- --------------- ----------------
Total income tax expense (benefit) $33 ($61) $224
=============== =============== ================
For federal income tax purposes, a deduction is received for stock option
compensation gains.
A reconciliation of Data I/O's effective income tax rate and the U.S. federal
tax rate is as follows:
Year Ended December
-----------------------------------------------------
Restated 2003 2002 2001
--------------- --------------- ---------------
Statutory rate 34.0% 34.0% 34.0%
State and foreign income tax, net of
federal income tax benefit (13.7) 1.3 (8.5)
Valuation allowance for deferred tax assets (17.9) (33.6) (28.8)
Other - 0.2 (0.6)
--------------- --------------- ---------------
2.4% 1.9% 3.9%
=============== =============== ===============
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets are presented below (in thousands):
Dec. 31 Dec. 31
Restated 2003 Restated 2002
--------------- ----------------
Deferred income tax assets:
Allowance for doubtful accounts $ 58 $ 49
Inventory and product return reserves 1,448 2,135
Compensation accruals 133 111
Accrued liabilities 675 1,037
Book-over-tax depreciation and amortization 735 802
Foreign net operating loss carryforwards 30 5
U.S. net operating loss and credit carryforwards 6,605 5,969
Other, net 16 16
--------------- ----------------
9,700 10,124
Valuation allowance (9,700) (10,124)
--------------- ----------------
Total deferred income tax assets $ - $ -
=============== ================
The valuation allowance for deferred tax assets decreased $424,000 during the
year ended December 31, 2003, due primarily to the 2003 net income that allowed
the utilization of tax deferred assets reducing the valuation allowance. The
valuation allowance for deferred tax assets increased $1,173,000 during the year
ended December 31, 2002, due primarily to taxable losses and to credit
carryforwards generated in 2002. The net deferred tax assets have a full
valuation allowance provided due to uncertainty regarding Data I/O's ability to
utilize such assets in future years. Credit carryforwards consist primarily of
research and experimental and alternative minimum tax credits. Net operating
loss carryforwards expire in 2019 to 2023. Utilization of net operating loss and
credit carryforwards is subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986, as amended.
NOTE 16 - SEGMENT AND GEOGRAPHIC INFORMATION
In 2003, one customer accounted for 18% of Data I/O's consolidated revenues and
no other customer accounted for more than 10%. No customer accounted for more
than 10% of consolidated revenues in 2002 and 2001. Major operations outside the
U.S. include sales and service support subsidiaries in Germany, Canada and
China.
We present geographic information of the continuing operations for the three
years ended December 31, 2003 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. Export sales are subject to U.S. Department of Commerce
regulations, and to the market conditions in the countries in which the products
are sold. 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. All Company
financial instruments, consisting of cash and marketable securities, are
included in U.S. operations.
Year Ended December
------------------------------------------------------------------
(in thousands) Restated Restated Restated
2003 2002 2001
--------------- -------------- ----------------
Net sales:
U.S. $7,263 $8,347 $9,526
Europe 10,678 7,662 8,730
Rest of World 6,746 6,829 8,570
--------------- -------------- ----------------
$24,687 $22,838 $26,826
=============== ============== ================
Operating income (loss):
U.S. ($709) ($2,754) ($4,710)
Europe 2,848 772 (1,437)
Rest of World (775) (953) 237
--------------- -------------- ----------------
$1,364 ($2,935) ($5,910)
=============== ============== ================
Identifiable assets:
U.S. $11,128 $10,273 $13,248
Europe 3,949 3,244 4,068
Rest of World 3,023 2,897 3,071
--------------- -------------- ----------------
$18,100 $16,414 $20,387
=============== ============== ================
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth unaudited selected quarterly financial data for
Data I/O for 2003 and 2002. Although our 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 our business or profitability.
(in thousands except per share data) Year Ended December 2003
-----------------------------------------------------------------
For the quarters ended Restated
Mar 31 June 30 Sept 30 Dec 31
------------- ------------- ------------- -------------
Net sales $6,155 $5,578 $6,360 $6,594
Gross margin 3,437 3,299 3,328 3,615
Net income 317 332 319 338
Basic and diluted earnings per share (1) $0.04 $0.04 $0.04 $0.04
Year Ended December 2002
(in thousands except per share data)
-----------------------------------------------------------------
For the quarters ended: Mar 31 June 30 Sept 30 Dec 31
------------- ------------- ------------- -------------
Net sales $5,389 $4,797 $6,443 $6,209
Gross margin 2,502 2,005 3,271 3,504
Net income (loss) (1,154) (1,368) (833) 251
Basic and diluted earnings (loss) per share (1) ($0.15) ($0.18) ($0.11) $0.03
(1) 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.
NOTE 18 - LONG-TERM DEBT
As of December 31, 2003 and December 31, 2002, Data I/O had no long-term debt
outstanding. Data I/O established a foreign line of credit for 50,000 Euros in
February 2002 that was renewed in 2003, but we did not renew it in January 2004.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not Applicable
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, Data I/O evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report (the "Evaluation Date").
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to Data I/O (or our consolidated subsidiaries) required to be included
in our periodic SEC filings and Form 8-K reports.
(b) Changes in internal controls.
There were no significant changes made in our internal controls or, to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
During the preparation of our 2004 year-end financial statements, Data I/O
identified a calculation error that had resulted in the understatement of
inter-company expense eliminations on foreign subsidiary demonstration inventory
equipment depreciation, with a corresponding overstatement of demonstration
inventory equipment accumulated depreciation. While Data I/O believes the
impacts of this calculation error are not material to any previously issued
financial statement, Data I/O determined that this calculation error was most
appropriately corrected through restatement of previously issued financial
statements.
Process changes have since been instituted to appropriately eliminate the
inter-company foreign subsidiary demonstration inventory equipment depreciation
amounts.
See Note 3 to the Consolidated Financial Statements for the impact of this
restatement on previously issued financial statements.
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 Data I/O's Proxy Statement relating to Data I/O's annual meeting
of shareholders to be held on May 20, 2004 and is incorporated herein by
reference. Such Proxy Statement will be filed within 120 days of Data I/O'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." Information regarding the Registrant's Equity Compensation Plan
Information is set forth in Item 5 of Part II herein under the caption "Equity
Compensation Plan Information."
Code of Ethics
We have adopted an updated Code of Ethics that applies to all directors,
officers and employees of Data I/O, including the Chief Executive Officer and
Chief Financial Officer. The key principles of the Code of Ethics are to act
legally and with integrity in all work for Data I/O. The Code of Ethics is
posted on the corporate governance page of our website at
http://www.dataio.com/corporate/governance.asp. We will post any amendments to
our Code of Ethics at that location. In the unlikely event that the Board of
Directors approves any sort of waiver to the Code of Ethics for our executive
officers or directors, information concerning such waiver will also be posted at
that location. In addition to posting information regarding amendments and
waivers on our website, the same information will be included in a Current
Report on Form 8-K within five business days following the date of the amendment
or waiver, unless website posting of such amendments or waivers is permitted by
the rules of The Nasdaq Stock Market, Inc.
Item 11. Executive Compensation
Information called for by Part III, Item 11, is included in Data I/O's Proxy
Statement relating to Data I/O's annual meeting of shareholders to be held on
May 20, 2004 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 Data I/O's year-end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information called for by Part III, Item 12, is included in Data I/O's Proxy
Statement relating to Data I/O's annual meeting of shareholders to be held on
May 20, 2004 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 Data I/O's year-end.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Accounting Fees
The information required by this Item with respect to principal accountant fees
and services is incorporated by reference to the section captioned "Principal
Accountant's Fees and Services" in the proxy statement for our annual meeting of
shareholders to be held on May 20, 2004.
PART IV
Item 15. 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 Data I/O 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,
10.22, and 10.24.
(2) Amended and Restated Retirement Plan and Trust Agreement. See Exhibit 10.2,
10.3, 10.4, 10.11, 10.14, 10.15, and 10.16.
(3) Summary of Amended and Restated Management Incentive Compensation Plan. See
Exhibit 10.12.
(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.
(6) Form of Change in Control Agreements. See Exhibit 10.5.
(7) 1996 Director Fee Plan. See Exhibit 10.6 and 10.17.
(8) Letter Agreement with Frederick R. Hume. See Exhibit 10.20.
(9) Amended and Restated 2000 Stock Compensation Incentive Plan.
See Exhibit 10.21 and 10.23.
(a) List of Documents Filed as a Part of This Report: Page
1) Index to Financial Statements:
Report of Independent Registered Public Accounting Firm 23
Report of Management 23
Consolidated Balance Sheets as of December 31, 2003 and 2002 24
Consolidated Statements of Operations for each of the three
years ended December 31, 2003 25
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2003 26
Consolidated Statement of Stockholders' Equity for each of
the three years ended December 31, 2003 27
Notes to Consolidated Financial Statements 28
(2) Index to Financial Statement Schedules:
Schedule II - Consolidated Valuation and Qualifying Accounts 48
All other schedules not listed above have been omitted because
the required information is included in the consolidated
financial statements or the notes thereto, or is not applicable
or required.
(3) Index to Exhibits:
3 Articles of Incorporation:
3.1 Data I/O's restated Articles of Incorporation filed November 2,
1987 (Incorporated by reference to Exhibit 3.1 of Data I/O's 1987
Annual Report on Form 10-K (File No. 0-10394)).
3.2 Data I/O's Bylaws as amended and restated as of October 2003
(Incorporated by reference to Exhibit 3.2 of Data I/O's 2003
Annual Report on Form 10-K filed March 31, 2003 (File No.
0-10394)).
3.3 Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock (Incorporated by reference
to Exhibit 1 of Data I/O's Registration Statement on Form 8-A
filed March 13, 1998 (File No. 0-10394)).
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 Data I/O's Current Report on Form
8-K filed on March 13, 1998).
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 Data I/O's Report on Form 8-K filed on March 13,
1998).
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 Data
I/O's Form 8-A/A dated February 10, 1999).
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
Data I/O's 1992 Annual Report on Form 10-K (File No. 0-10394)).
10.2 Amended and Restated Retirement Plan and Trust Agreement.
(Incorporated by reference to Exhibit 10.26 of Data I/O's 1993
Annual Report on Form 10-K (File No. 0-10394)).
10.3 First Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.21 of Data I/O's 1994
Annual Report on Form 10-K (File No. 0-10394)).
10.4 Second Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.26 of Data I/O's 1995
Annual Report on Form 10-K (File No. 0-10394)).
10.5 Form of Change in Control Agreements (Incorporated by reference
to Exhibit 10.20 of Data I/O's 1994 Annual Report on Form 10-K
(File No. 0-10394)).
10.6 Data I/O Corporation 1996 Director Fee Plan (Incorporated by
reference to Exhibit 10.27 of Data I/O's 1995 Annual Report on
Form 10K (File No. 0-10394)).
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 Data I/O's Registration Statement of Form S-8
(File No. 333-20657, filed January 29, 1997)).
10.8 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 Data I/O's 1996 Annual Report on
Form 10-K (File No. 0-10394)).
10.9 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 Data I/O's 1996 Annual Report on Form 10-K
(File No. 0-10394)).
10.10 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 Data I/O's 1996 Annual Report on Form 10-K
(File No. 0-10394)).
10.11 Third Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.35 of Data I/O's 1996
Annual Report on Form 10-K (File No. 0-10394)).
10.12 Amended and Restated Management Incentive Compensation Plan
dated January 1, 1997 (Incorporated by reference to Exhibit 10.25
of Data I/O's 1997 Annual Report on Form 10-K (File No.
0-10394)).
10.13 Amended and Restated Performance Bonus Plan dated January 1,
1997 (Incorporated by reference to Exhibit 10.26 of Data I/O's
1997 Annual Report on Form 10-K (File No. 0-10394)).
10.14 Fourth Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.27 of Data I/O's 1997
Annual Report on Form 10-K (File No. 0-10394)).
10.15 Fifth Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.28 of Data I/O's 1997
Annual Report on Form 10-K (File No. 0-10394)).
10.16 Sixth Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.29 of Data I/O's 1997
Annual Report on Form 10-K (File No. 0-10394)).
10.17 Amended and Restated Data I/O Corporation 1996 Director Fee Plan
(Incorporated by reference to Exhibit 10.32 of Data I/O's 1997
Annual Report on Form 10-K (File No. 0-10394)).
10.18 Amended and Restated 1986 Stock Option Plan dated May 12, 1998
(Incorporated by reference to Exhibit 10.37 of Data I/O's 1998
Annual Report on Form 10-K (File No. 0-10394)).
10.19 Sublease dated December 22, 1999 between Data I/O Corporation
and Imandi.com, Inc.
10.20 Letter Agreement with Fred R. Hume dated January 29, 1999.
10.21 Amended and Restated 2000 Stock Compensation Incentive Plan
dated May 19, 2000. (Incorporated by reference to Data I/O's 2000
Proxy Statement dated March 27, 2000.)
10.22 Amended and Restated 1982 Employee Stock Purchase Plan dated May
16, 2001 (Incorporated by reference to Data I/O's 2001 Proxy
Statement dated March 28, 2001.)
10.23 Amended and Restated 2000 Stock Compensation Incentive Plan
dated May 19, 2000. (Incorporated by reference to Data I/O's 2002
Proxy Statement dated April 19, 2002.)
10.24 Amended and Restated 1982 Employee Stock Purchase Plan dated May
16, 2003 (Incorporated by reference to Data I/O's 2003 Proxy
Statement dated March 31, 2003.)
21.1 Subsidiaries of the Registrant 49
23.1 Consent of Independent Registered Public Accounting Firm 50
31 Certification - Section 302:
31.1 Chief Executive Officer Certification 51
31.2 Chief Financial Officer Certification 52
32 Certification - Section 906:
32.1 Chief Executive Officer Certification 53
32.2 Chief Financial Officer Certification 54
(b) Form 8-K:
On November 4, 2003, Data I/O furnished a copy of a press release announcing
Data I/O's third quarter results on a Form 8-K under Item 12. The information
furnished in the Form 8-K pursuant to Item 12 shall not be deemed filed under
the Securities Exchange Act of 1934, as amended.
On November 4, 2003, Data I/O furnished a copy of a press release announcing the
appointment of William Walker to the Board of Directors on a Form 8-K under Item
5.
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 24, 2005 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 by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME & DATE 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
Joel S. Hatlen Vice President of Finance
Secretary, Treasurer
Principal Financial and Accounting Officer)
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
By: //S//Daniel A. DiLeo Director
Daniel A. DiLeo
By: //S//Steven M. Quist Director
Steven M. Quist
By: //S//William R. Walker Director
William R. Walker
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 31, 2001:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $350 $64 ($42) (1) $372
Inventory reserves $2,587 $1,122 ($1,240) (2) $2,469
Year Ended December 31, 2002 :
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $372 $ (162) ($23) (1) $187
Inventory reserves $2,469 $ 871 ($73) (2) $3,267
Year Ended December 31, 2003:
Reserves and allowances
deducted from asset accounts:
Allowance for bad debts $187 $71 ($56) (1) $202
Inventory reserves $3,267 ($96) ($875) (2) $2,296
(1) Uncollectable accounts written off, net of recoveries. (2) Obsolete
inventories disposed of.
EXHIBIT 21.1
DATA I/O CORPORATION
SUBSIDIARIES OF THE REGISTRANT
The following table indicates the name, jurisdiction of incorporation and basis
of ownership of each of Data I/O'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 China, Ltd China 100%
Data I/O GmbH Germany 100%
RTD, Inc. (formerly Reel-Tech, Inc.) Washington 100%
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated February 6, 2004 (March 5, 2005 as to the
effects of the restatement described in Note 3), accompanying the consolidated
financial statements and schedule included in the Annual Report of Data I/O
Corporation on Form 10-K for the year ended December 31, 2003. We hereby consent
to the incorporation by reference of said report in the Registration Statements
of Data I/O Corporation on Form S-8 (File Nos. 33-95608, 33-54422, 333-55911,
33-02254, 33-03958, 333-48595 and 333-121861) and on Form S-3 (File No.
333-121566).
//s//GRANT THORNTON LLP
Seattle, Washington
March 24, 2005
Exhibit 31.1
Certification by Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Frederick R. Hume, certify that:
1) I have reviewed this annual report on Form 10-K/A of Data I/O Corporation;
2) Based upon my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this annual report based on such
evaluation; and
c) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: March 24, 2005
/s/ Frederick R. Hume
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification by Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Joel S. Hatlen, certify that:
1) I have reviewed this annual report on Form 10-K/A of Data I/O Corporation;
2) Based upon my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this annual report based on such
evaluation; and
c) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: March 24, 2005
/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
Certification by Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Data I/O Corporation (the "Company") on
Form 10-K/A for the period ended December 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Frederick R. Hume,
Chief Executive Officer of the Company, certify, that pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Frederick R. Hume
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)
March 24, 2005
Exhibit 32.2
Certification by Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Data I/O Corporation (the "Company") on
Form 10-K/A for the period ended December 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Joel S. Hatlen,
Chief Financial Officer of the Company, certify, that pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
March 24, 2005