Letter to Shareholders
2016 Annual Report on Form 10-K
Notice of 2017 Annual Meeting &
Proxy Statement
Programming the Connected Car
Selected by 8 out of the top 9 global automotive electronics manufacturers
April 4, 2017
Dear Data I/O Shareholder:
2016 was a strong year for Data I/O. It was our fourth consecutive year of revenue growth and third
consecutive year of profitability. The turnaround plan we introduced upon joining the company has
resulted in great new products, a lower cost structure, increased global competitiveness, and major wins
in target markets. New products continue to drive market share gains and growth. In 2016, 78% of our
systems sales were from products we introduced in the past 3½ years. We enhanced our award winning
PSV family of automated programming systems, and shipped the 100th unit in the third quarter.
We continue to see strong secular growth in Automotive Electronics markets driven by new applications,
significant code growth in existing applications, and the transition from manual to automated
programming globally. Automotive Electronics was our largest end market in 2016, with orders growing
55% over 2015 and now representing 47% of sales. In 2016, we benefited from robust growth in
infotainment systems, Advanced Driver Assist Systems (ADAS) and general electronic subsystems in
support of autonomous vehicles and connected car initiatives from leading automotive and technology
companies. We are very pleased to have been selected by Bosch to be their supplier of device
programming for car multimedia over the next 5 years. 8 of the top 9 automotive electronics original
equipment manufacturers and the top 5 automotive programming centers use Data I/O programming
equipment.
Data I/O’s growth strategy also is centered on the burgeoning Internet-of-Things (“IoT”) market. IoT is a
broad term that addresses the interconnectivity of devices and other electronic or smart products. Growth
is being driven by new applications and the ‘digitization’ of existing products and applications. It is clear to
us that security of IoT devices is of paramount concern, and simple, effective solutions to secure the
supply chain and maintain firmware integrity over the product lifecycle are needed in today’s market. Data
I/O recently demonstrated our SentriX™ managed and secure programming platform, and major
partnerships with leading semiconductor companies and security industry experts. We see 2017 as a
market development year for our security initiatives and we intend to invest to fully capitalize on this
global opportunity.
In our mission to deliver long term value to shareholders, we are pleased that the Company’s success
has resulted in total shareholder return of 153% over the past 4 years. We remain focused on the
continued execution of our strategic growth plan. Please carefully review the enclosed proxy materials,
and vote your shares on the important measures requiring your approval.
We appreciate your continued support of Data I/O.
Sincerely,
Anthony Ambrose, CEO
Alan Howe, Chairman
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation)
91-0864123
(I.R.S. Employer Identification No.)
6645 185th Ave NE, Suite 100, 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
Title of each class
Common Stock (No Par Value)
Name of each exchange on which registered
Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No X
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. _X_
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer __ Accelerated filer __ Non-accelerated filer __ Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X
Aggregate market value of voting and non-voting common equity held
by non-affiliates on the registrant as of June 30, 2016:
$17,867,842
Shares of Common Stock, no par value, outstanding as of March 17, 2017:
8,048,516
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to its May 18, 2017 Annual Meeting of Shareholders are incorporated
into Part III of this Annual Report on Form 10-K.
1
DATA I/O CORPORATION
FORM 10-K
For the Fiscal Year Ended December 31, 2016
INDEX
Part I
Part II
Item 1.
Business
Item 1A.
Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accounting Fees and Services
Part IV
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
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Page
3
10
17
17
18
18
18
18
19
26
26
45
45
45
46
46
46
47
47
48
52
53
Item 1. Business
PART I
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 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”, “We”, “Our”, “Us”) is a global market leader for advanced programming and associated
intellectual property management solutions used in the manufacturing of flash memory, microcontrollers, and flash-
memory-based intelligent devices. Data I/O® designs, manufactures and sells programming systems for electronic device
manufacturers, specifically targeting high growth areas such as high-volume users of flash memory and microcontrollers.
Most electronic products today incorporate one or more programmable semiconductor devices that contain data and
operating instructions essential for the proper operation of the product.
Our mission is to deliver high-value systems, software and services to the expanding programmable semiconductor market
by providing a software-rich programming platform for secure content delivery. Programmable devices are used in
products such as automobile electronics, smartphones, HDTV, tablets and gaming systems. Our solutions, some of which
include intellectual property management, secure content management and process control capabilities, enable us to
address the demanding requirements of the electronic device market, where applications and intellectual property
protection are essential to our customer’s success. Our largest customers are heavy users of programmable semiconductor
devices and include original equipment manufacturers (“OEMs”) in automotive electronics, consumer electronics and
Internet of Things (“IoT”) and their programming center partners, wireless and electronic manufacturing service (“EMS”)
contract manufacturers.
Data I/O was incorporated in the State of Washington in 1969 and its business was founded in 1972.
Industry Background
We enable companies to improve productivity, increase supply chain security and reduce costs by providing device
programming solutions that allow our customers to take intellectual property (large design and data files) and protect and
program it into memory, microcontroller and logic devices quickly and cost-effectively. We also provide services related to
hardware support, system installation and repair, and device programming. Companies that design and manufacture
products utilizing programmable electronic devices, ranging from automobiles to cell phones, purchase programming
solutions from us. Trends of increasing device densities, shrinking device packages, increased demands for security, and
customers increasing their software content file sizes, combined with the increasing numbers of intelligent devices such as
automotive electronics and IoT applications, are driving demand for our solutions.
Traditionally, our programming market opportunity focused on the number of semiconductor devices to be programmed,
but because of the rapid increase in the density of devices, and increasing demands for supply chain security, the focus has
shifted in many cases from the number and type of devices to the number and type of bits per device to be programmed.
With expected growth in IoT applications, the business opportunity for this market differentiates on quality, security and
automation.
Some of our automated programming systems integrate both data programming, and automated handling functions into a
single product solution. Moving forward, we anticipate integrating security provisioning as well. Quality conscious
customers, particularly those in high-volume manufacturing and programming, continue to drive this portion of our
business.
Products
In order to accommodate the expanding variety and quantities of programmable devices being manufactured today, we
offer multiple solutions for the numerous types of device mix and volume usage by our customers in the various market
3
segments and applications. We work closely with leading manufacturers of programmable devices to develop our products
to meet the requirements of a particular device. Our newer products are positioned and recognized as some of the most
advanced programming equipment and associated intellectual property management solutions.
Our PSV7000 Automated Programming System has continued to be adopted in the marketplace, in particular for
automotive electronics customers, and has previously won the Global Technology Award at Productronica, the Circuits
Assembly NPI Award and the EM Asia Innovation Award. Our PSV3000 Automated Programming System, developed for the
local Asian automation market, was introduced in July 2014 and has previously won the Global Technology Award for
Device Programming at SMTA International, the EM Asia Innovation Award and the SMT China Vision Award. Our PSV5000
automated programming system, which replaces our PS388 system with a more integrated solution at a lower cost, was
introduced in April 2015. Our Lumen™X programmer won the Global Technology Award at Productronica in November
2015 and the Circuits Assembly NPI award in March 2016. In 2016, approximately 78% of our capital equipment sales came
from PSV family and LumenX which were introduced over the last 3 years.
Our programming solutions include a broad range of products, systems, modules and accessories, grouped into two general
categories: automated programming systems and manual programming systems. We provide two categories of automated
programming systems: off-line and in-line. Our automated systems have list selling prices ranging from $62,000 to
$456,000 and our manual systems have list selling prices ranging from $9,500 to $23,000. Our common programming
platform, FlashCORE™, and our universal job setup tool, Tasklink™ for Windows®, are available in each family of our
automated programming systems and in FlashPAK™, our manual programming system. Our newest programming
technology, LumenX, is available on our PSV7000, PSV5000 and as a standalone manual programmer. 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 software algorithms for devices and developing socket adapters to hold and connect to the device for programming.
Our products have both an upfront solution sale and recurring revenue elements. Adapters are a consumable item and
software and maintenance are typically recurring under annual subscription contracts.
Sales Percentage of Total Sales Breakdown by Type
Sales Type
Equipment Sales
Adapter Sales
Software and Maintenance Sales
Total
2016
66%
25%
9%
100%
2015
65%
25%
10%
100%
Drivers
Capacity, Process improvement, Technology
Capacity utilization, New customer products
Installed base, Added capabilities
The table below presents our main products and the key features that benefit our customers:
Products
PSV Handlers: Off-line
(Automated)
RoadRunner &
RoadRunner3 Series
Handlers:
In-line,
(Automated)
Key Features
Fast program and verify speeds
Up to 112 programming sites
Up to 2000 devices per hour throughput
Supports LumenX and FlashCORE III
programmers
Supports multiple media types
Supports quality options – fiber laser marking,
3D coplanarity
ConneX Factory Integration Software & other
Software
Just-in-time in-line programming
Direct integration with placement machine
supporting SIPLACE, Fuji NXT, Panasonic,
Universal/Genesis and Assembleon
Factory Integration Software
Supports FlashCORE III programmers
Customer Benefits
Managed and secure
programming
High throughput for high
density Flash programming
High flexibility with respect to
I/O options (tray, tape, tube),
marking/labeling and vision
for coplanarity inspection
Dramatic reduction in
inventory carrying and rework
costs
“Zero” footprint
Rapid return on investment
(“ROI”) typically realized in a
matter of months
Integration with factory
systems
4
Key Features
Extensible architecture for fast program, verify
and download speeds
Large file size support
Secure Job creation
8 sockets with tool-less changeover with single
socket adapters
Scalability
Network control via Ethernet
Stand-alone operation or PC compatible
Parallel programming
Customer Benefits
Managed and secure
programming
Fast setup and job changeover
Highest yield and low total
cost of programming
High performance
Validate designs before
moving down the firmware
supply chain
Unmatched ease of use in
manual production systems
Breadth of device coverage
Universal programmer
Products
LumenX Programmer
FlashPAK III programmer:
(Non-Automated)
Sprint/Unifamily
programmers: Off-line, Low
Volume and Engineering
(Non-Automated)
(Legacy Equipment)
Customers/Markets
We sell our solutions to customers worldwide, many of whom are world-class manufacturers of electronic devices
used in a broad range of industries, as described in the following table:
Notable end
customers
Business
drivers
Programming
equipment
drivers
Customer Types
Automotive
Electronics
Delphi, Bosch,
Alpine, Visteon,
Kostal, Harman
Becker, Denso,
Continental,
Panasonic, Magna,
Magnetti Marelli
Safety, navigation
and infotainment
devices, increased
electronic content
to support
autonomous
driving, security
Process
improvement and
simplification, new
product rollouts,
growing file sizes,
quality control and
traceability,
security
OEMs
IoT, Industrial,
Consumer
Electronics
Square D, Siemens,
Danfoss, Philips,
Schneider,
Endress+Hauser,
Pilz, Insta, Carrier,
Microsoft, Sony,
Amazon, UTC
Higher functionality
driven by increasing
electronic content.
Shift from analog to
connected
intelligent devices,
security
Process
improvement and
simplification as
well as new product
rollouts, security
Wireless
LG, TCL,
Blackberry, Sony,
HTC, ZTE
EMS
Contract
Manufacturers
Pegatron,
Flextronics, Jabil,
Wistron, Sanmina
SCI, Foxconn,
Leesys, Calcomp
Programming
Centers
Arrow, Avnet,
BTV, HTV, CPS,
EPS, Elmitech,
Noa(Toshiba)
Applications,
features &
functionality of
converged devices,
large memories,
security
Rollout of new
products that
incorporate higher
functionality, more
memory and new
technology
Acquisition of OEM
factories,
production contract
wins
Value-added
services,
logistics,
security
New contracts from
OEMs,
programming
solutions specified
by OEMs
Capacity
utilization of
their installed
base of
equipment,
small parts
handling,
security
5
Buying criteria
Quality, reliability,
configuration
control, traceability,
security
Quality, reliability,
configuration
control,
traceability, global
support,
intellectual
property
protection
Throughput,
technical capability
to support evolving
technology, global
support,
intellectual
property
protection, robust
algorithms, low
cost
Lowest equipment
procurement cost,
global support
Flexibility,
lowest life-
cycle cost-per
programmed-
part, low
changeover
time; use of
multiple
vendors
provides
negotiating
leverage,
device support
availability
Our solutions address the programming of devices. Semiconductor devices are a large, growing market, both in terms of
devices and bits programmed. We believe that our sales are driven by many of the same forces that propel the
semiconductor industry. We sell to the same firms that buy the semiconductors. When their business grows, they buy
more semiconductors which, in turn, require additional programming equipment to maintain production speeds or program
new device technologies, driving demand for our products or alternative programming methods.
Our device programming solutions currently target two high growth, high volume markets: automotive electronics and IoT
systems including Industrial and Consumer devices.
We have derived estimates of the size of the pre-programming served available market that our programming systems
address. In 2015, we believed this market was expected to double during the period from 2015-2020 based on BI
Intelligence estimates of IoT Unit Growth and key automotive electronics forecasts. These forecasts include: Global
Automotive Infotainment Operating System Sales Forecast by IHS Automotive, showing unit growth doubling over four
years, as well as OEM Light Vehicle ADAS (Advanced Driver Assist Systems) Spend by Strategy Analytics for spending growth
projected by year through 2021. While we have not updated our market model this year, the continued strong order
demand in 2016, particularly in Automotive Electronics, is consistent with the 2015 model. Based on these market forecasts
and assuming sustained capital spending in our other pre-programming market sectors, we believe we are well-positioned
for growth.
Growth drivers for automotive electronics
Consumers desire advanced car features requiring higher levels of sophistication including infotainment products
(audio, radio, dashboard displays, navigation and wireless connectivity) as well as increased safety features and
optimized engine functionality
Increasing numbers and size of microcontrollers per vehicle
Proliferation of programmable microcontrollers to support the next-generation electronic car systems
Increasing use of high-density flash to provide memory for advanced applications that require programming
Increasing complexity to support autonomous vehicles
Increasing need for security solutions for a secure supply chain and lifecycle firmware integrity
Securely controlling groups of connected devices through a secure supply chain and lifecycle firmware integrity
Growth drivers for IoT: including industrial and consumer devices
Adding intelligence and processing into devices
Connecting previously unconnected devices to networks and the internet (such as intelligent thermostats and lighting)
Emergence of new devices and applications (such as wearables)
During 2016, we sold products to over 300 customers throughout the world. The following customers represented greater
than 10% of sales in the applicable year:
2016
2015
Four customers, Data Copy Limited, our distributor in China, Arrow, Bosch and BTV, accounted for
approximately 16%, 13%, 11% and 10% of net sales respectively. Arrow and BTV are Programming
Centers and Bosch is an Automotive Electronics OEM.
One customer, Data Copy Limited, our distributor in China, accounted for approximately 15% of net sales.
6
2014
One customer, Data Copy Limited, our distributor in China, accounted for approximately 12% of net sales.
The following customers represented greater than 10% of our consolidated accounts receivable balance as of December 31
of the applicable year:
2016
2015
2014
Three customers accounted for greater than 10% of our consolidated accounts receivable balance at
December 31, 2016: Bosch and Arrow our direct customers, and Data Copy Limited, our distributor in
China, represented 30%, 16% and 14% of that balance, respectively.
Four customers accounted for greater than 10% of our consolidated accounts receivable balance at
December 31, 2015: Data Copy Limited, our distributor in China, LeChamp, our distributor in south-east
Asia, and Flextronics and Arrow, our direct customers, represented 24%, 13%, 12% and 11% of that
balance, respectively.
No customers represented greater than 10% of our consolidated accounts receivable.
Geographic Markets and Distribution
We market and sell 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 and realign them
as necessary to ensure that we reach our existing and potential customers in the most effective and efficient manner
possible.
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 direct telesales. Our U.S. independent sales representatives obtain
orders on an agency basis, with shipments made directly to the customer by us. Net sales in the United States for 2016,
2015 and 2014 were (in millions) $2.9, $2.2 and $2.1, respectively. Some of our customer’s orders delivered internationally
are heavily influenced by U.S. sales based efforts.
International Sales
International sales represented approximately 88%, 90% and 90% of net sales in 2016, 2015, and 2014, respectively. We
make foreign sales through our wholly-owned subsidiaries in Germany and China, as well as through independent
distributors and sales representatives located in 47 other countries. Our independent foreign distributors purchase our
products for resale and we generally 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 sales made directly to the
customer by us.
Net international sales for 2016, 2015, and 2014 were (in millions) $20.5, $19.8 and $19.8, respectively. We determine
international 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. International 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 difficulties to date as a result of
these requirements. We have not made sales to Iran or any Iranian governmental entities or any other blacklisted
companies or countries.
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, may affect the level and profitability of international sales. We
cannot predict the effect of such factors on our business, but we try to consider and respond to changes in these factors,
particularly as the majority of our costs are U.S. based while the vast majority of our sales are international.
Competition
The competition in the programming systems market is highly fragmented with a small number of organizations selling
directly competitive solutions and a large number of smaller organizations offering less expensive solutions. In particular,
low cost automated solutions have gained market share in recent years, where the competition is primarily based on price.
Typically, their equipment meets a “good enough” standard, but with reduced quality, traceability, security and other
software features such as factory integration software. Many of these competitors compete on a regional basis, with local
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language and support.
In addition, we compete with multiple substitute forms of device programming including “home grown” solutions.
Programming after device placement may be done with In System Programming (“ISP”). Some automotive products may
also be programmed over the air (“OTA”). IoT devices may also be programmed with ISP or OTA. In addition, new security
devices may be required to be programmed using device-specific programmers developed by the semiconductor
manufacturer.
While we are not aware of any published industry market information covering the programming systems market,
according to our internal analysis of competitors’ revenues, we believe we continue to be the largest competitor in the
programming systems equipment market and have been gaining market share especially with our new products.
Manufacturing, Raw Materials and Backlog
We strive to manufacture and provide the best solutions for advanced programming. We primarily assemble and test our
products at our principal facilities in Redmond, Washington and Shanghai, China. We outsource our circuit board
manufacturing and fabrication. We use a combination of standard components, proprietary custom integrated circuits
(“ICs”) and fabricated parts manufactured to our specifications. Most components used are available from a number of
different suppliers and subcontractors but certain items, such as some handler and programmer subassemblies, custom
integrated circuits, 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 price increases,
minimum order quantities, costs associated with integrating alternatively sourced parts, and 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 90 days after receipt of the order. Our
backlog of pending orders was approximately $3,200,000, $700,000, and $1,900,000 as of December 31, 2016, 2015, and
2014, respectively. The size of backlog at any particular date is not necessarily a meaningful indicator of the trend of our
business.
Research and Development
We believe 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. Where possible, we may pursue partnerships and other strategic relationships to add new
products, capabilities and services. We are currently focusing our research and development efforts on strategic growth
markets, including automotive electronics and the IoT. We are developing technology to securely program new categories
of semiconductors, including Secure Elements, Authentication Chips, and Secure Microcontrollers. We plan to deliver new
programming technology and automated handling systems for managed and secure programming in the manufacturing
environment. We also continue to focus on increasing our capacity and responsiveness for new device support requests
from customers and programmable integrated circuit manufacturers by revising and enhancing our internal processes and
tools. Our research and development efforts have resulted in the release of significant new products and product
enhancements over the past several years.
During 2016, 2015, and 2014, we made expenditures for research and development of (in millions) $5.1, $4.7, and $4.7,
respectively, representing 21.6%, 21.4%, and 21.5% of net sales, respectively. Research and development costs are
generally expensed as incurred.
Patents, Copyrights, Trademarks and Licenses
We rely on a combination of 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 continue to apply for and
add new patents to our patent portfolio as we develop strategic new technologies.
8
We attempt to protect our rights in proprietary software, including LumenX software, Flashcore software, TaskLink
software, ConneX™ smart programming software, Factory Integration software 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 typically sold separately from sales of programming systems. However, on those occasions where software is sold
separately, revenue is recognized when a sales agreement exists, delivery has occurred, the fee is fixed or determinable,
and collectability is reasonably assured.
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 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. As of December 31, 2016, there were no pending actions regarding
infringement claims.
Employees
As of December 31, 2016, we had a total of 91 employees, of which 43 were located outside the U.S. and 8 of which were
part time. We also utilize independent contractors for specialty work, primarily in research and development, and utilize
temporary workers to adjust capacity to fluctuating demand and for special projects. 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. In foreign countries we have employment agreements or, in China, the
Shanghai Foreign Services Co., Ltd. (“FSCO”) labor agreement.
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 17, 2017:
Name
Age
Position
Anthony Ambrose
55
President and Chief Executive Officer
Joel S. Hatlen
58
Vice President and Chief Financial Officer
Secretary and Treasurer
Rajeev Gulati
53
Chief Technology Officer, Vice President of Engineering
Anthony Ambrose joined Data I/O in October 2012 and is our President and Chief Executive Officer. He was appointed to
the Board of Directors of Data I/O in October 2012. Prior to Data I/O, Anthony was Owner and Principal of Cedar Mill
Partners, LLC, a strategy consulting firm. Until 2011, he was Vice President and General Manager at RadiSys Corporation, a
leading provider of embedded wireless infrastructure solutions, where he led three product divisions and worldwide
engineering. Until 2007, he was general manager and held several other progressively responsible positions at Intel
Corporation, where he led development and marketing of standards based telecommunications platforms, and grew the
industry standard server business to over $1B in revenues. He is a member of the EvergreenHealth Foundation Board of
Trustees. Mr. Ambrose has a Bachelors of Science in Engineering from Princeton University.
Joel S. Hatlen joined Data I/O in September 1991 and has been our Vice President, Chief Financial Officer, Secretary and
Treasurer since January 1998. He served as Chief Accounting Officer since February 1997 and served as Corporate
Controller from December 1993 to December 1997. Previously, he was Tax Manager and Senior Tax Accountant. From
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September 1981 until joining Data I/O, Joel was employed by Ernst & Young LLP as a Certified Public Accountant, where his
most recent position was Senior Manager. Joel holds a Masters in Taxation from Golden Gate University and a Bachelors in
Business Administration in Accounting from Pacific Lutheran University.
Rajeev Gulati joined Data I/O in July 2013 and is our Chief Technology Officer and Vice President of Engineering. Prior to
Data I/O, Rajeev served as Director of Software Engineering for AMD responsible for tools, compiler strategy and execution
from 2006 to 2013. He has an extensive background in software, systems and applying technology to develop new
markets. Previously, he served as Director of Strategy and Planning at Freescale from 2004 to 2006; as Director of
Embedded Products at Metrowerks (acquired by Motorola) from 2000 to 2004 and Director of Compilers, Libraries &
Performance Tools from 1997 to 2000; and engineering and programmer positions at Apple Computer, IBM and Pacific-
Sierra Research. Rajeev holds a Master of Science in Electrical & Computer Engineering from the University of Texas, Austin
and a BE in Electrical Engineering from Delhi College of Engineering, New Delhi.
Item 1A. Risk Factors
Cautionary Factors That May Affect Future Results
Our 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, expected market growth, new technologies, foreign operations, future performance or results of
current and anticipated products, sales efforts, expenses, outcome of contingencies, impact of regulatory requirements 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 unduly rely on our forward-
looking statements. The reader is advised, however, to consult any future disclosures we make on related subjects in our 10-
Q, 8-K and 10-K reports to the SEC and press releases. Also, note that we provide the following cautionary discussion of
risks, uncertainties and possible inaccurate assumptions relevant to our business. These are factors that we think could
cause our actual results to differ materially from expected and historical results. Other factors besides those listed here
could also adversely affect us. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.
RISK FACTORS:
NEW PRODUCTS OR SERVICES
We may pursue new product or service initiatives that develop more slowly and/or to a lesser extent than expected
In order to lead in new and potentially lucrative market opportunities, for example in securing programmable devices,
circuit boards and electronic systems, we must invest ahead of others while the market is developing and uncertain. If
these markets develop more slowly than planned, then we may not achieve our expected return on investment in new
technologies and this may affect the results of our existing business.
We may pursue business acquisitions that could impair our financial position and profitability.
We may pursue acquisitions of complementary technologies, product lines or businesses. Future acquisitions may include
risks, such as:
burdening management and our operating teams during the integration of the acquisition
diverting management’s attention from other business concerns
10
failing to successfully integrate or monetize the acquired products or technologies
lack of acceptance of the acquired products by our sales channels or customers
entering markets where we have no or limited prior experience
potential loss of key employees of the acquired company
additional burden of support for an acquired programmer architecture
Future acquisitions may also impact our financial position. For example, we may use significant cash or incur debt, which
would weaken our balance sheet, or issue additional shares, potentially diluting existing shareholders. We may also
capitalize goodwill and intangible assets acquired, the amortization or impairment of which would reduce our profitability.
We cannot guarantee that future acquisitions will improve our business or operating results.
Delays in development, introduction and shipment of new products or services may result in a decline in sales or increased
costs.
We develop new engineering and automated programming systems and services. Significant technological, supplier,
manufacturing or other problems may delay the development, introduction or production of these products or services.
For example, we may encounter these problems:
technical problems in the development of a new programming system platform or the robotics for new automated
handing systems
inability to hire qualified personnel or turnover in existing personnel
delays or failures to perform by us or third parties involved in our development projects
development of new products or services that are not accepted by the market
These problems may result in a delay or decline in sales or increased costs.
Failure to adapt to technology trends in our industry may impact our competitiveness and financial results.
Product and service technology in our industry evolves rapidly, making timely product innovation essential to success in the
marketplace. Introducing products and services with improved technologies or features may render our existing products
obsolete and unmarketable. Technological advances and trends that may negatively impact our business include:
new device package types, densities, chip interfaces and technologies requiring hardware and software changes in
order to be programmed by our products, particularly certain segments of the high density flash memory markets
where after placement programming is recommended by the semiconductor manufacturers
reduction in semiconductor process geometries for certain Multi Level Cell (MLC) and Triple Level Cell (TLC) NAND and
eMMC FLASH memories impact the product data retention through Surface Mount Technology (SMT) reflow or X-ray
inspection. Improper SMT process control can negatively impact the end customer’s ability to successfully program
devices prior to placement in manufacturing. This can cause them to change their programing methods away from pre-
programming to post placement programming techniques, including ISP. Data I/O is working with semiconductor
manufacturers to develop best practices to minimize the impact of reflow and potential concerns about X-ray induced
data loss.
electronics equipment manufacturing practices, such as widespread use of in-circuit programming or downloading
adoption of proprietary security and programming protocols and additional security capabilities and requirements
customer software platform preferences different from those on which our products operate
customer adoption of newer semiconductor device technologies such as UFS memory or device interface methods such
as PCI, particularly if these technologies are adopted by automotive electronics, IoT or wireless customers
more rigid industry standards, which would decrease the value-added element of our products and support services
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If we cannot develop products or services in a timely manner in response to industry changes, or if our products or services
do not perform well, our business and financial condition may be adversely affected. Also, our new products or services
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.
Failure to adapt to increasing automotive electronics customer requirements
Quality standards and business requirements by our automotive electronics customers, driven in turn by their automotive
manufacturer customers, may demand processes, and certifications at a higher level than we currently are structured to
provide. For example, we may be required to meet the ISO 9001 standard with certified audits or other quality standards.
In addition, contractual provisions may expose us to greater potential liability and costs and we may be required to provide
higher service levels than we currently provide. If we cannot adapt to these industry requirements or manage these
contractual provisions, our business may be adversely affected.
If we are unable to protect our intellectual property, we may not be able to compete effectively or operate profitably.
We rely 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 attempt to protect our rights in
proprietary software products, including our user interface, product firmware, software module options 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.
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 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.
We may face increased competition and may not be able to compete successfully with current and future competitors.
Technological advances have reduced the barriers of entry into the programming systems market. 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.
THIRD PARTY RELATIONSHIPS
If we do not develop and enhance our relationships with security partners, our business may be adversely affected and we
may not be able to timely develop new and cost effective managed and secure programming solutions.
As we enter new areas in managed and secure programming, we need to complement our skills and expertise with
partners’ expertise in security. Some of these partners may be early stage companies that are operating with more limited
capital and/or management expertise than established firms. If our partners are unable to develop and deliver solutions
that we need to integrate into our managed and secure programming solutions, our product might be delayed and we
might have to locate alternate partners and suppliers or develop the technology ourselves.
If we do not develop and enhance our relationships with semiconductor manufacturers, our business may be adversely
affected.
We work closely with most semiconductor manufacturers to ensure that our programming systems comply with their
requirements. In addition, many semiconductor manufacturers recommend our managed and secure programming
systems for use by users of their programmable devices. These working relationships enable us to keep our programming
systems product lines up to date and provide end-users with broad and current programmable device support. As
technology changes occur that could limit the effectiveness of pre-placement programming, particularly for very small high
density NAND, e-MMC and UFS devices, certain semiconductor manufacturers may not recommend or may not continue
recommending our programming systems for these devices. Our business may be adversely affected if our relationships
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with semiconductor manufacturers deteriorate. Consolidation within the semiconductor industry may also impact us. As
we develop more security solutions, we will need to partner more deeply with semiconductor manufacturers.
Our reliance on a small number of suppliers may result in a shortage of key components, which may adversely affect our
business, and our suppliers may experience financial difficulties which could impact their ability to service our needs.
Certain parts used in our products are currently available from either a single supplier or from a limited number of
suppliers. Our small relative level of business means we frequently lack influence and significant purchasing power. If we
cannot develop alternative sources of these components, if sales of parts are discontinued by the supplier, if we experience
deterioration in our relationship with these suppliers, or if these suppliers require financing, which is not available, there
may be delays or reductions in product introductions or shipments, which may materially adversely affect our operating
results.
Because we rely on a small number of suppliers for certain parts, we are subject to possible price increases by these
suppliers. Also, we may be unable to accurately forecast our production schedule. If we underestimate our production
schedule, suppliers may be unable to meet our demand for components. This delay in the supply of key components may
have a materially adverse effect on our business. For suppliers who discontinue parts, we may be required to make lifetime
purchases covering future requirements. Over estimation of demand or excessive minimum order quantities will lead to
excess inventories that may become obsolete.
Certain of our sockets, parts, subassemblies and boards are currently manufactured to our specifications by third-party
foreign contract manufacturers and we are sourcing certain parts or options from foreign manufacturers. We may not be
able to obtain a sufficient quantity of these products if and when needed or the quality of these parts or options may not
meet our standards, which may result in lost sales.
If we are unable to attract and retain qualified third-party distributors and representatives, our business may be adversely
affected.
We have an internal sales force and also utilize third-party distributors and representatives. Therefore, the financial
stability of these distributors and representatives is important. Their ability to operate, timely pay us, and to acquire any
necessary financing may be affected by the current economic climate. Highly skilled professional engineers use most of our
products. To be effective, third-party distributors and representatives must possess significant technical, marketing,
customer relationships 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 and representatives. Our
business will suffer if we cannot attract and retain a sufficient number of qualified third-party distributors and
representatives to market our products.
MARKET CONDITIONS
A decline in economic and market conditions may result in delayed or decreased capital spending and delayed or defaulted
payments from our customers.
Our business is highly impacted by capital spending plans and other economic cycles that affect the users and
manufacturers of integrated circuits. These industries are highly cyclical and are characterized by rapid technological
change, short product life cycles and fluctuations in manufacturing capacity and pricing and gross margin pressures. As we
experienced in recent prior 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. In a difficult economic climate it may take us longer to receive
payments from our customers and some of our customers’ business may fail, resulting in non-payment. Our market growth
forecasts and related business decisions may be wrong. These factors could have a material adverse effect on our business
and financial condition.
13
Our international operations may expose us to additional risks that may adversely affect our business.
International sales represented approximately 88%, 90% and 90% of net sales in 2016, 2015, and 2014, respectively. We
expect that international sales will continue to be a significant portion of our net revenue. International sales may fluctuate
due to various factors, including:
fluctuations in foreign currency exchange rates because 88% of our sales are to international markets, volatile
exchange rates may also impact our competiveness and margins
economic uncertainty related to the European sovereign debt situation
migration of manufacturing to low cost geographies
unexpected changes in regulatory requirements
tariffs and taxes
Bi-lateral and Multi-lateral trade agreements
difficulties in staffing and managing foreign operations
longer average payment cycles and difficulty in collecting accounts receivable
compliance with applicable export licensing requirements and the Foreign Corrupt Practices Act
product safety and other certification requirements
difficulties in integrating foreign and outsourced operations
civil unrest, political and economic instability
Because we have customers located throughout the world, we have significant foreign receivables. We may experience
difficulties in collecting these amounts as a result of payment practices of certain foreign customers, economic uncertainty
and regulations in foreign countries, the availability and reliability of foreign credit information, and potential difficulties in
enforcing collection terms.
The European Union and European Free Trade Association (“EU”) has established certain electronic emission and product
safety requirements (“CE”). As applicable, our products currently meet these requirements; however, failure to obtain
either a CE certification or a waiver for any product may prevent us from marketing that product in Europe. The EU also has
directives concerning the Reduction of Hazardous Substances (“RoHS”) and we believe we are classified within the EU RoHS
Directive category list as Industrial Monitoring and Control Equipment (category 9), which is out of scope until the
enforcement date of July 2017. We believe all current products meet the RoHS directives. Failure to meet applicable
directives or qualifying exemptions may prevent us from marketing certain products in Europe or other territories with
similar requirements.
We have subsidiaries in Germany, China, Hong Kong, Brazil and Canada and large balances of cash are in our foreign
subsidiaries. Our business and financial condition is sensitive to currency exchange rates and any restrictions imposed on
their currencies including restrictions on repatriations of cash. Any repatriation of cash could result in tax costs and
corresponding deferred tax assets with related tax valuation allowances. Currency exchange fluctuations in these countries
may adversely affect our investment in our subsidiaries.
OPERATIONS
Quarterly fluctuations in our operating results may adversely affect our stock price.
Our 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:
14
increased competition
timing of new product announcements and timing of development expenditures
product or service releases and pricing changes by us or our competitors
market acceptance or delays in the introduction of new products or services
production constraints
quality issues
labor or material constraints
timing of significant orders
timing of installation or customer acceptance requirements
sales channel mix of direct vs. indirect distribution
civil unrest, war or terrorism
health issues (such as the outbreak of a virus impacting workers or travel)
customers’ budgets
adverse movements in exchange rates, interest rates or tax rates
cyclical and seasonal nature of demand for our customers’ products
general economic conditions in the countries where we sell products
expenses and delays obtaining authorizations in setting up new operations or locations
facilities relocations
Due to any of the foregoing factors, it is possible that in some future quarters, our operating results will be below
expectations of analysts and investors.
We have a history of operating losses and may be unable to generate enough revenue to achieve and maintain profitability.
We have incurred operating losses in two of the last five years and three of the last ten years. We operate in a cyclical
industry. We will continue to examine our level of operating expense based upon our projected revenues. Any planned
increases in operating expenses may result in losses in future periods if projected revenues are not achieved. As a result,
we may need to generate greater revenues than we have recently in order to maintain profitability. However, we cannot
provide assurance that our revenues will continue to increase and our business strategies may not be successful, resulting
in future losses.
The loss of key employees may adversely affect our operations.
We have employees located in the U.S., Germany and China. 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, though no assurance can be made that this will
be the case in the future. In China, our workers are “leased” with the arrangements made under the “FSCO” labor
agreement and we could be adversely affected if we were unable to continue that arrangement.
We may need to raise additional capital and our future access to capital is uncertain.
Our past revenues have sometimes been, and our future revenues may again 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,
lease 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.
15
We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and
capital requirements through at least the next one-year period. In the event we may require additional cash for U.S.
operations or other needs, it may cause the potential repatriation of cash from the $5.6 million held in our foreign
subsidiaries. Although we have no current repatriation plans, there may be tax, legal and other impediments to any
repatriation actions. Our working capital may be used to fund possible losses, business growth, project initiatives, share
repurchases and business development initiatives including acquisitions, which could reduce our liquidity and result in a
requirement for additional cash before that time. 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.
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 given a potential future unfavorable economic climate and our financial
results, 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 our Common Stock and may dilute your ownership interest.
Our stock price may be volatile and, as a result, you may lose some or all of your investment.
The stock prices of technology companies tend to fluctuate significantly. We believe factors such as announcements of new
products or services by us or our competitors and quarterly variations in financial results and outlook may cause the market
price of our Common Stock to fluctuate substantially. In addition, overall volatility in the stock market, particularly in the
technology company sector, is often unrelated to the operating performance of companies. If these market fluctuations
continue in the future, they may adversely affect the price of our Common Stock.
Cyber security breaches or terrorism could result in liabilities or costs as well as damage to or loss of our data or customer
access to our website and information systems. The collection, storage, transmission, use and disclosure of user data and
personal information, if accessed improperly, could give rise to liabilities or additional costs as a result of laws,
governmental regulations and evolving views of personal privacy rights.
Cyber security breaches or terrorism could result in the exposure or theft of private or confidential information as well as
interrupt our business, including denying customer access to our website and information systems. We transmit, and in
some cases store, end-user data, including personal information. In jurisdictions around the world, personal information is
becoming increasingly subject to legislation and regulations intended to protect consumers’ privacy and security. The
interpretation of privacy and data protection laws and regulations regarding the collection, storage, transmission, use and
disclosure of such information in some jurisdictions is unclear and evolving. These laws may be interpreted and applied in
conflicting ways from country to country and in a manner that is not consistent with our current data protection practices.
Complying with these varying international requirements could cause us to incur additional costs and change our business
practices. Because our services are accessible in many foreign jurisdictions, some of these jurisdictions may claim that we
are required to comply with their laws, even where we have no local entity, employees or infrastructure. We could be
forced to incur significant expenses if we were required to modify our products, our services or our existing security and
privacy procedures in order to comply with new or expanded regulations.
REGULATORY REQUIREMENTS
Failure to comply with increasing regulatory requirements may adversely affect our stock price and business.
As a public company, we are subject to numerous governmental and stock exchange requirements, with which we believe
we are in compliance. Our failure to meet regulatory requirements and exchange listing standards may result in actions
such as: the delisting of our stock, impacting our stock’s liquidity; SEC enforcement actions; and securities claims and
litigation.
The Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission (SEC) have requirements that we may fail to
meet or we may fall out of compliance with, such as the internal controls auditor attestation required under Section 404 of
the Sarbanes-Oxley Act of 2002, with which we are not currently required to comply as we are a smaller reporting
company. We assume that we will continue to have the status of a smaller reporting company based on the aggregate
market value of the voting and non-voting shares held as of June 30, 2016. If we fail to achieve and maintain the adequacy
of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able
to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in
16
accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Moreover, effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent
financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be
harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop
significantly.
While we have policies and procedures in place designed to prevent corruption and bribery, because our business is
significantly international, violations of the Foreign Corrupt Practices Act (FCPA) could have a significant adverse effect on
our business due to the disruption and distraction of an investigation, financial penalties and criminal penalties.
Government regulations regarding the use of "conflict" minerals could adversely affect our prospects and results of
operations.
Regulatory requirements regarding disclosure of our use of “conflict” minerals mined from the Democratic Republic of
Congo and adjoining countries could affect the sourcing and availability of minerals used in the manufacture of certain
products. Although we do not buy raw materials, manufacture, or produce any electronic equipment using conflict minerals
directly, some components provided by our suppliers and contained in our products contain conflict minerals. Our goal is
for our products to be conflict free. As a result, there may only be a limited pool of suppliers who provide conflict free
metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices.
Single source suppliers may not respond or respond negatively regarding conflict mineral sourcing and we may be unable to
find alternative sources to replace them. Also, because our supply chain is complex, we may face reputational challenges
with our customers and other stakeholders if we are unable to sufficiently verify the origins for all metals used in the
products that we sell. Further, if we are unable to comply with the new laws or regulations or if our efforts to comply with
new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to
ambiguities related to practice, regulatory authorities may initiate legal proceedings against us. We may need to incur
additional costs and invest additional resources, including management’s time, in order to comply with the new regulations
and anticipated additional reporting and disclosure obligations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
During the second quarter of 2015, we amended our lease agreement for the Redmond, Washington headquarters facility
effective July 8, 2015. The amended lease resulted in our headquarters relocating to a nearby building, extending the term
through April 2021, lowering the square footage to approximately 20,460, providing lease inducement incentives and
lowering the rental rate. The lease commitment of approximately $1.7 million will be paid over the term of the lease. As a
result of this lease amendment, the remaining balance of the restructure liability relating to the lease of approximately
$120,000 was incorporated into our deferred rent liability in July 2015. The lease base annual rental payments during 2016
and 2015 were approximately $200,000 and $296,000, respectively.
In addition to the Redmond facility, approximately 24,000 square feet is leased at two foreign locations, including our sales,
service, operations and engineering office located in Shanghai, China, and our German sales, service and engineering office
located in Munich, Germany.
We renewed our lease agreement for what is now our former Shanghai, China facility, effective June 15, 2015, extending
the term through December 31, 2015. Operations continued in this facility through January 31, 2016. In October 2015, we
signed a lease agreement for a new facility located in Shanghai, China which was effective November 1, 2015 and extends
through October 31, 2021. The new lease approximately doubled our space to 19,400 square feet at approximately 54% of
the prior lease rental rate. The lease base annual rental payments during 2016 and 2015 were approximately $233,000 and
$324,000, respectively.
During the fourth quarter of 2016, we signed a lease agreement for a new facility located in Munich, Germany which is
effective March 1, 2017 and extends through February 28, 2022. The new lease will slightly increase our space to 4,895
square feet at approximately the same cost per square foot as the current lease. The lease base annual rental payments
during 2016 and 2015 were both approximately $61,000.
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Item 3. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of
business. As of December 31, 2016, we were not a party to any legal proceedings or aware of any indemnification
agreement claims, 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.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table shows, for the periods indicated, the high and low price information for our Common Stock as reported
by the NASDAQ Capital Market (NASDAQ symbol is DAIO). The closing price was $4.18 on December 31, 2016.
2016
2015
Period
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$4.40
3.95
2.70
2.80
$3.20
3.62
3.80
3.75
Low
$3.39
2.39
2.07
2.03
$2.34
2.26
2.85
3.01
The approximate number of shareholders of record as of March 17, 2017 was 468.
Except for special cash dividend of $4.15 per share paid on March 8, 1989, we have not paid cash dividends on our Common
Stock and do not anticipate paying regular cash dividends in the foreseeable future.
No sales of unregistered securities were made by us during the periods ended December 31, 2016 and 2015.
See Item 12 for the Equity Compensation Plan Information.
ISSUER PURCHASES OF EQUITY SECURITIES
On February 24, 2016, our Board of Directors approved a share repurchase program with provisions to buy back up to $1
million of our stock during the period from March 2, 2016 through March 31, 2017. The program was established with a
10b5-1 plan under the Exchange Act to provide flexibility to make purchases throughout the period. For the year ended
December 31, 2016, 80,345 shares of stock have been repurchased at an average price of $2.36 for a total of $189,360 plus
$1,649 in commissions and charges. No shares were repurchased during the fourth quarter.
Item 6. Selected Financial Data
Not applicable.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements to encourage companies to
provide prospective information about themselves as long as they identify these statements as forward-looking and provide
meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected
results. All statements other than statements of historical fact made in this Annual Report on Form 10-K are forward-
looking. In particular, statements herein regarding economic outlook, industry prospects and trends; future results of
operations or financial position; future spending; breakeven revenue point; expected market growth; market acceptance of
our newly introduced or upgraded products or services; development, introduction and shipment of new products or
services; changing 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 we believe 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. We are 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 “Risk Factors – Cautionary Factors
That May Affect Future Results” describes some, but not all, of the factors that could cause these differences.
OVERVIEW
We continued our focus on managing the core programming business for growth and profitability, while developing and
enhancing products to drive future revenue and earnings growth. Our challenge continues to be operating in a cyclical and
rapidly evolving industry environment. We are continuing our efforts to balance industry changes, business geography
shifts, exchange rate volatility, increasing costs and strategic investments in our business with the level of demand and mix
of business we expect. We continue to manage our costs carefully and execute strategies for cost reduction.
We are focusing our research and development efforts in our strategic growth markets, namely automotive electronics and
IoT new programming technologies, secure supply chain solutions, automated programming systems and their
enhancements for the manufacturing environment and software. We are currently focusing our research and development
efforts on strategic growth markets, including automotive electronics and IoT. We are developing technology to securely
program new categories of semiconductors, including Secure Elements, Authentication Chips, and Secure Microcontrollers.
We plan to deliver new programming technology and automated handling systems for managed and secure programming
in the manufacturing environment. We continue to focus on extending the capabilities and support for our product lines
and supporting the latest semiconductor devices, including NAND Flash, e-MMC, UFS and microcontrollers on our newer
products.
Our customer focus has been on strategic high volume manufacturers in key market segments like automotive electronics,
IoT, industrial controls, consumer electronics and wireless as well as programming centers.
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, we evaluate our estimates,
including those related to sales returns, bad debts, inventories, 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 capital 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.
We believe the following critical accounting policies affect the more significant judgments and estimates used in the
preparation of our financial statements:
Revenue Recognition: We recognize revenue at the time the product is shipped. We have determined that our
programming equipment has reached a point of maturity and stability such that product acceptance can be assured by
19
testing at the factory prior to shipment and that the installation meets the criteria to be considered a separate element.
These systems are standard products with published product specifications and are configurable with standard options.
The evidence that these systems could be deemed as accepted was based upon having standardized factory production of
the units, results from batteries of tests of product performance to our published specifications, quality inspections and
installation standardization, as well as past product operation validation with the customer and the history provided by our
installed base of products upon which the current versions were based.
The revenue related to products requiring installation that is perfunctory is recognized at the time of shipment. Installation
that is considered perfunctory includes any installation that can be performed by other parties, such as distributors, other
vendors, or in most cases the customers themselves. This takes into account the complexity, skill and training needed as
well as customer expectations regarding installation.
We enter into multiple deliverables arrangements that arise during the sale of a system that includes an installation
component, a service and support component and a software maintenance component. We allocate the value of each
element based on relative selling prices. Relative selling price is based on the selling price of the standalone system. For
the installation and service and support components, we use what we charge to distributors who perform these
components. For software maintenance components, we use what we charge for annual software maintenance renewals
after the initial year the system is sold. Revenue is recognized on the system sale based on shipping terms, installation
revenue is recognized after the installation is performed, and hardware service and support and software maintenance
revenue is recognized ratably over the term of the agreement, typically one year.
When we sell software separately, we recognize software revenue upon shipment provided that only inconsequential
obligations remain on our part and substantive acceptance conditions, if any, have been met.
We recognize revenue when persuasive evidence of an arrangement exists, shipment has occurred, the price is fixed or
determinable, the buyer has paid or is obligated to pay, collectability is reasonably assured, substantive acceptance
conditions, if any, have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would
not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for
resale has economic substance apart from us and we do not have significant obligations for future performance to directly
bring about the resale of the product by the buyer. We establish a reserve for sales returns based on historical trends in
product returns and estimates for new items.
We transfer certain products out of service from their internal use and make them available for sale. The products
transferred are our standard products in one of the following areas: service loaners, rental or test units; engineering test
units; or sales demonstration equipment. Once transferred, the equipment is sold by our regular sales channels as used
equipment inventory. These product units often involve refurbishing and an equipment warranty, and are conducted as
sales in our normal and ordinary course of business. The transfer amount is the product unit’s net book value and the sale
transaction is accounted for as revenue and cost of goods sold.
Allowance for Doubtful Accounts: We base the allowance for doubtful accounts receivable on our assessment of the
collectability of specific customer accounts and the aging of accounts receivable. If there is deterioration of a major
customer’s credit worthiness or actual defaults are higher than historical experience, our estimates of the recoverability of
amounts due to us could be adversely affected.
Inventory: Inventories are stated at the lower of cost or market. Adjustments are made to standard cost, which
approximates actual cost on a first-in, first-out basis. We estimate reductions to inventory for obsolete, slow-moving,
excess and non-salable inventory by reviewing current transactions and forecasted product demand. We evaluate our
inventories on an item by item basis and record inventory adjustments accordingly. If there is a significant decrease in
demand for our products, uncertainty during product line transitions, or a higher risk of inventory obsolescence because of
rapidly changing technology and customer requirements, we may be required to increase our inventory adjustments and
our gross margin could be adversely affected.
Warranty Accruals: We accrue 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.
Tax Valuation Allowances: Given the uncertainty created by our loss history, as well as the ongoing uncertain economic
outlook for our industry and capital and geographic spending, we expect to continue to limit the recognition of net deferred
20
tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances. At the current time, we
expect, therefore, that reversals of the tax valuation allowance will take place only as we are able to take advantage of the
underlying tax loss or other attributes in carry forward. The transfer pricing and expense or cost sharing arrangements are
complex areas where judgments, such as the determination of arms-length arrangements, can be subject to challenges by
different tax jurisdictions.
Share-based Compensation: We account for share-based awards made to our employees and directors, including employee
stock option awards and restricted stock unit awards, using the estimated grant date fair value method of accounting. For
options, we estimate the fair value using the Black-Scholes valuation model and an estimated forfeiture rate, which
requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the
underlying stock. The expected stock price volatility assumption was determined using the historical volatility of our
common stock. Changes in the subjective assumptions required in the valuation model may significantly affect the
estimated value of the awards, the related stock-based compensation expense and, consequently, our results of operations.
Restricted stock unit awards are valued based on the average of the high and low price on the date of the grant. For both
options and restricted awards, expense is recognized as compensation expense on the straight-line basis. Employee Stock
Purchase Plan (“ESPP”) shares were issued under provisions that do not require us to record any equity compensation
expense.
21
RESULTS OF OPERATIONS:
NET SALES
Net sales by product line
(in thousands)
Automated programming systems
Non-automated programming systems
Total programming systems
Net sales by location
(in thousands)
United States
% of total
International
% of total
2016
Change
2015
$18,274
5,139
$23,413
9.5%
(3.5%)
6.3%
$16,692
5,325
$22,017
2016
Change
2015
$2,936
12.5%
$20,477
87.5%
31.7%
3.5%
$2,229
10.1%
$19,788
89.9%
Net sales for the year ended December 31, 2016 grew approximately 6.3% to $23.4 million compared to 2015. On a
regional basis, net sales increased approximately 9.0% in Asia and 13.0% in the Americas, while net sales in Europe were
approximately the same compared to 2015. Automated system sales grew approximately 9.5%, while non-automated
system sales declined approximately 3.5% compared to 2015, reflecting the continuing trend toward automation. We
expect to continue to see increases in automated system sales. On a product basis, sales increased primarily due to sales of
our PSV and Roadrunner product families, offset in part, by declines in the PS, FLX, FlashPak and legacy (Unifamily and
Sprint) product lines compared to 2015.
Order bookings were $26.9 million for 2016 up approximately 33.0% compared to $20.3 million in 2015. Backlog at
December 31, 2016 and 2015 was $3.2 million and $0.7 million, respectively. Deferred revenue was $1.9 million on
December 31, 2016 compared to $1.0 million December 31, 2015.
GROSS MARGIN
(in thousands)
Gross margin
Percentage of net sales
2016
Change
2015
$12,868
55.0%
11.5%
$11,544
52.4%
Gross margin as a percentage of sales for the year ended December 31, 2016 was 55.0%, compared to 52.4% in 2015. The
improved gross margin as a percent of sales was primarily due to a favorable product mix as well as higher order volume.
RESEARCH AND DEVELOPMENT
(in thousands)
Research and development
Percentage of net sales
2016
Change
2015
$5,065
21.6%
7.7%
$4,701
21.4%
Research and development (“R&D”) expense increased $364,000 for the year ended December 31, 2016 compared to 2015.
The increase was primarily related to higher recruiting and related compensation and benefits, intellectual property patent
filings, and depreciation costs offset in part by lower R&D material costs.
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. In addition to product development, a significant part of R&D spending is on
creating software and support for new devices introduced by the semiconductor companies. We are currently focusing our
research and development efforts on strategic growth markets, including automotive electronics and IoT. We are
developing technology to securely program new categories of semiconductors, including Secure Elements, Authentication
Chips, and Secure Microcontrollers. We plan to deliver new programming technology and automated handling systems for
22
managed and secure programming in the manufacturing environment and extending the capabilities and support for our
programmer architecture. Our R&D spending fluctuates based on the number, type, and the development stage of our
product initiatives and projects.
SELLING, GENERAL AND ADMINISTRATIVE
(in thousands)
Selling, general & administrative
Percentage of net sales
2016
Change
2015
$6,376
27.2%
9.0%
$5,850
26.6%
Selling, General and Administrative (“SG&A”) expenses increased $526,000 for the year ended December 31, 2016
compared to 2015. The increase was primarily related to higher employee related costs, commissions, accounts receivable
reserve and legal fees, offset in part by one-time expense of our Redmond headquarters move in 2015 and lower travel,
trade show events and rent.
INTEREST
(in thousands)
Interest income
2016
Change
2015
$44
(58.1%)
$105
Interest income was lower for the year ended December 31, 2016 compared to 2015, primarily due to both lower invested
cash balances and lower interest rates.
INCOME TAXES
(in thousands)
Income tax (expense) benefit
* not meaningful
2016
Change
2015
($36)
*
$5
Income tax expense increased by $42,000 for the year ended December 31, 2016 compared to 2015, primarily resulting
from U.S. alternative minimum income tax as well as foreign subsidiary income tax versus foreign subsidiary refunds in
2015.
The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as
foreign taxes. We have a valuation allowance of $11.2 million and $11.7 million as of December 31, 2016 and 2015,
respectively. Our deferred tax assets and valuation allowance have been reduced by approximately $226,000 and $210,000
associated with the requirements of accounting for uncertain tax positions as of December 31, 2016 and 2015, respectively.
Given the uncertainty created by our loss history, as well as the ongoing uncertain economic outlook for our industry as
well as capital and geographic spending, we expect to continue to limit the recognition of net deferred tax assets and
accounting for uncertain tax positions and maintain the tax valuation allowances.
GAIN ON SALE OF ASSETS
During the year, we sold non-core and excess internet domain addresses, resulting in a non-operating gain of $140,000 net
of commissions. Blocks of these were purchased for nominal amounts in the early days of the internet and were expensed
at that time. Continued similar sales are planned in 2017.
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 gains and
(losses) of $81,000 and ($176,000) in 2016 and 2015, respectively. The transaction gains or losses resulted primarily from
translation adjustments to foreign inter-company accounts and U.S. Dollar accounts held by foreign subsidiaries and sales
by our German subsidiary to certain customers, which were invoiced in U.S. Dollars. Because approximately 88.0% of our
sales are to international markets, volatile exchange rates may also impact our competiveness and margins.
23
FINANCIAL CONDITION:
LIQUIDITY AND CAPITAL RESOURCES
(in thousands)
Working capital
2016
Change
2015
$14,573
$750
$13,823
At December 31, 2016, our principal sources of liquidity consisted of existing cash and cash equivalents. Our working
capital increased by $0.7 million for the year ended December 31, 2016 to $14.6 million primarily due to the net income for
the year offset in in part by growth of accounts receivable & inventory. Our current ratio was 3.3 and 4.1 for December 31,
2016 and 2015, respectively.
For the year ended December 31, 2016, our cash position increased $303,000 primarily resulting from net income for the
year, offset in part by investing activities and repurchases of stock under the share repurchase program.
Although we have no significant external capital expenditure plans currently, we expect that we will continue to make
capital expenditures to support our business. We plan to increase our investment on internally developed equipment used
for services, rentals, sales demonstration and test equipment as we develop and release new products. Capital
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, selling and marketing efforts, we have required
substantial working capital to fund our operations. In 2016 and recent years, we have managed balancing profitable
operations, while addressing rising costs and foreign exchange rate challenges. This included geographic shifts in our
operations, optimized real estate usage strategies and differentiated product development and cost strategies.
We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and
capital requirements through at least the next one year period. We may require additional cash for U.S. operations, which
could cause potential repatriation of cash from the $5.6 million held in our foreign subsidiaries. Although we have no
current repatriation plans, there may be tax and other impediments to any repatriation actions. Our working capital may
be used to fund possible losses, business growth, project initiatives, share repurchases and business development initiatives
including acquisitions, which could reduce our liquidity and result in a requirement for additional cash before that time.
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.
OFF-BALANCE SHEET ARRANGEMENTS
Except as noted in the accompanying consolidated financial statements in Note 6, “Operating Lease Commitments” and
Note 7, “Other Commitments”, we had no off-balance sheet arrangements.
SHARE REPURCHASE PROGRAMS
On February 24, 2016, our Board of Directors approved a share repurchase program with provisions to buy back up to $1
million of our stock during the period from March 2, 2016 through March 31, 2017. The program was established with a
10b5-1 plan under the Exchange Act to provide flexibility to make purchases throughout the period. For the year ended
December 31, 2016, 80,345 shares of stock have been repurchased at an average price of $2.36 for a total of $189,360 plus
$1,649 in commissions and charges.
No stock repurchase programs were in effect during the twelve month period ending December 31, 2015.
24
The following is a summary of share repurchase activity under the plan through December 31, 2016:
Repurchases by
Month
Total
Number of
Shares
Purchased
Average Price
Paid per Share
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Repurchase
Program
Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
under the
Program
March 2016
April 2016
May 2016
June 2016
July 2016
Total
42,515
8,480
7,650
15,200
6,500
80,345
$2.26
$2.35
$2.52
$2.45
$2.61
$2.36
42,515
8,480
7,650
15,200
6,500
80,345
$903,161
$883,064
$863,602
$826,078
$808,991
NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA excluding equity
compensation (a non-cash item) are set forth below. Non-GAAP financial measures should not be considered a substitute
for, or superior to, measures of financial performance prepared in accordance with GAAP. We believe that these non-GAAP
financial measures provide meaningful supplemental information regarding our results and facilitate the comparison of
results. A reconciliation of net income to EBITDA and adjusted EBITDA follows:
(in thousands)
Net Income
Interest (income)
Taxes
Depreciation & amortization
EBITDA earnings
Equity compensation
Adjusted EBITDA earnings excluding
equity compensation
NEW ACCOUNTING PRONOUNCEMENTS
Year Ended December 31,
2016
2015
$1,656
(44)
36
602
$2,250
520
$2,770
$927
(105)
(5)
542
$1,359
435
$1,794
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (ASU 2016-09), “Improvements to
Employee Share-Based Payment Accounting”. ASU 2016-09 requires excess tax benefits to be recognized in the statement
of operations as an income tax expense and is applied prospectively by means of a cumulative-effect adjustment of excess
tax benefits from equity in the period of adoption. The standard establishes an alternative practical expedient for
estimating the expected term of an award by recognizing the effects of forfeitures in compensation cost when the
forfeitures occur. Adoption of the alternative practical expedient is applied prospectively on an entity-wide basis. The
standard requires that amounts paid to a taxing authority on the employee’s behalf as a result of directly withholding
shares for tax-withholding purposes are to be presented on a retrospective basis as a financing activity on the statement of
cash flows. The standard becomes effective beginning January 1, 2017. We are in the process of evaluating the impact of
adoption on our consolidated financial statements.
25
In February 2016, the FASB issued ASU 2016-02, “Leases” (ASU 2016-02). ASU 2016-02 requires lessees to recognize almost
all leases on the balance sheet as a right-of-use asset and a lease liability and requires leases to be classified as either an
operating or a finance type lease. The standard excludes leases of intangible assets or inventory. Early adoption of the
standard is allowed. The standard becomes effective beginning January 1, 2019. We are in the process of evaluating the
impact of adoption on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09
provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes
current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to
recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue
when the risks and rewards transfer to the customer under the existing revenue guidance. In August 2015, the FASB issued
ASU 2015-14, “Revenue from Contracts with Customers” (ASU 2015-14), deferring the effective date of the new revenue
recognition standard by one year and now takes effect for public entities in fiscal years beginning after December 15, 2017.
We currently expect to adopt the revenue standards as of January 1, 2018, utilizing the modified retrospective transition
method. The new standard may, in certain circumstances, impact the timing of when revenue is recognized for product
shipped, and the timing and classification of certain sales incentives. We have begun to evaluate the potential impact of
the adoption on our consolidated financial statements, but at this time the impact is unknown. We will expand our
evaluation to identify all our revenue streams and determine when each source of revenue meets the five requirements for
revenue recognition. We will monitor updated guidance on adopting this new standard.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
See pages 27 through 44.
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Data I/O Corporation
We have audited the accompanying consolidated balance sheets of Data I/O Corporation (a Washington corporation) and
subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations,
comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December
31, 2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the
index appearing under Item 15 (Schedule II). These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and
financial statement schedule 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. We were not engaged to perform an audit of the Company’s
internal control over financial reporting. Our audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Data I/O Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2016 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/GRANT THORNTON LLP
Seattle, Washington
March 28, 2017
27
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Trade accounts receivable, net of allowance for
doubtful accounts of $96 and $43, respectively
Inventories
Other current assets
TOTAL CURRENT ASSETS
Property, plant and equipment – net
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued compensation
Deferred revenue
Other accrued liabilities
TOTAL CURRENT LIABILITIES
Long-term other payables
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, 8,015,746 shares as of December 31,
2016 and 7,943,720 shares as of December 31, 2015
Accumulated (deficit)
Accumulated other comprehensive income
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See notes to consolidated financial statements
28
December 31,
2016
December 31,
2015
$11,571
$11,268
4,725
4,059
483
20,838
1,875
63
$22,776
$1,428
2,208
1,926
703
6,265
479
-
2,790
3,705
577
18,340
1,237
63
$19,640
$1,250
1,689
1,038
540
4,517
429
-
-
-
19,204
(3,360)
188
16,032
$22,776
19,051
(5,016)
659
14,694
$19,640
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Net Sales
Cost of goods sold
Gross margin
Operating expenses:
Research and development
Selling, general and administrative
Total operating expenses
Operating income
Non-operating income (expense):
Interest income
Gain on sale of assets
Foreign currency transaction gain (loss)
Total non-operating income (expense)
Income before income taxes
Income tax (expense) benefit
Net income
Basic earnings per share
Diluted earnings per share
Weighted-average basic shares
Weighted-average diluted shares
See notes to consolidated financial statements
For the Years Ended
December 31,
2016
2015
$23,413
10,545
12,868
5,065
6,376
11,441
1,427
44
140
81
265
1,692
(36)
$1,656
$0.21
$0.20
7,968
8,132
$22,017
10,473
11,544
4,701
5,850
10,551
993
105
-
(176)
(71)
922
5
$927
$0.12
$0.12
7,907
8,054
29
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net Income
Other comprehensive income:
Foreign currency translation (loss)
Comprehensive income
For the Years Ended
December 31,
2016
2015
$1,656
(471)
$1,185
$927
(451)
$476
30
DATA I/O CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Common Stock
Shares
Amount
Retained
Earnings
(Deficit)
Accumulated
and Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
Balance at December 31, 2014
Stock options exercised
Stock awards issued, net of tax
withholding
Issuance of stock through:
Employee Stock Purchase Plan
Share-based compensation
Net income
Other comprehensive income (loss)
Balance at December 31, 2015
Stock options exercised
Repurchased shares
Stock awards issued, net of tax
withholding
Issuance of stock through:
Employee Stock Purchase Plan
Share-based compensation
Net income
Other comprehensive income (loss)
Balance at December 31, 2016
7,861,141
1,360
$18,704
(2)
($5,943)
-
77,226
(83)
-
3,993
-
-
-
7,943,720
30,948
(80,345)
118,737
2,686
-
-
-
8,015,746
12
420
-
-
$19,051
(81)
(191)
(87)
6
506
-
-
$19,204
-
-
927
-
($5,016)
-
-
-
1,656
-
($3,360)
$1,110
-
-
-
-
-
(451)
$659
-
-
-
-
(471)
$188
$13,871
(2)
(83)
12
420
927
(451)
$14,694
(81)
(191)
(87)
6
506
1,656
(471)
$16,032
31
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization
Gain on sale of assets
Equipment transferred to cost of goods sold
Share-based compensation
Net change in:
Trade accounts receivable
Inventories
Other current assets
Accrued cost of business restructuring
Accounts payable and accrued liabilities
Deferred revenue
Other long-term liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Net proceeds from sale of assets
Cash (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of tax withholding
Repurchase of common stock
Cash provided by (used in) financing activities
For the Years Ended
December 31,
2016
2015
$1,656
$927
602
(140)
882
520
(2,051)
(452)
73
-
869
951
48
2,958
(2,122)
140
(1,982)
(163)
(191)
(354)
542
-
192
435
1,204
645
(169)
(66)
20
(652)
289
3,367
(1,045)
-
(1,045)
(73)
-
(73)
Increase/(decrease) in cash and cash equivalents
622
2,249
Effects of exchange rate changes on cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(319)
11,268
$11,571
(342)
9,361
$11,268
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income Taxes
See notes to consolidated financial statements
$7
($13)
32
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”, “We”, “Our”, “Us”) 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 Far East, Europe and the Americas.
Our manufacturing operations are currently located in Redmond, Washington, United States and Shanghai, China.
Principles of Consolidation
The consolidated financial statements include the accounts of Data I/O Corporation and our wholly-owned subsidiaries.
Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) 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.
Significant estimates include:
Revenue Recognition
Allowance for Doubtful Accounts
Warranty Accruals
Tax Valuation Allowances
Share-based Compensation
Inventory
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 recognized. 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.
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of 90 days or less are considered cash equivalents. We
maintain our cash and cash equivalents with major financial institutions in the United States of America, which are insured
by the Federal Deposit Insurance Corporation (FDIC), and foreign jurisdictions. Deposits in U.S. banks exceed the FDIC
insurance limit. We have not experienced any losses on our cash and cash equivalents. Cash and cash equivalents held in
foreign bank accounts, primarily China, Germany and Canada, totaled (in millions) $5.6 at December 31, 2016 and $6.2 at
December 31, 2015.
Fair Value of Financial Instruments
Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to
their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, and other short-term liabilities.
33
Accounts Receivable
The majority of our 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 receivable outstanding longer than the contractual payment terms are considered past due.
We determine the allowance by considering a number of factors, including the length of time trade accounts receivable are
past due, the industry and geographic payment practices involved, our previous bad debt experience, the customer’s
current ability to pay their obligation to us, and the condition of the general economy and the industry as a whole. We
write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables
are credited to the allowance for doubtful accounts. Interest may be accrued, at the discretion of management and
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 either 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. We estimate changes to inventory for obsolete, slow-moving, excess and
non-salable inventory by reviewing current transactions and forecasted product demand. We evaluate our inventories on
an item by item basis and record an adjustment (lower of cost or market) accordingly.
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.
We regularly review all of our property, plant and equipment for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. If the total of future undiscounted cash flows is less than the
carrying amount of these assets, an impairment loss, if any, based on the excess of the carrying amount over the fair value
of the assets, is recorded. Based on this evaluation, no impairment was noted for property, plant and equipment for the
years ended December 31, 2016 and 2015.
Patent Costs
We expense external costs, such as filing fees and associated attorney fees, incurred to obtain initial patents, but capitalize
acquired patents as intangible assets. We also expense costs associated with maintaining and defending patents
subsequent to their issuance.
Income Taxes
Income taxes are computed at current enacted tax rates, less tax credits using the asset and liability method. Deferred
taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax
rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are
currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the
timing of when items of income and expense are recognized for financial reporting and income tax purposes, and any
changes in the valuation allowance caused by a change in judgment about the reliability of the related deferred tax assets.
A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
Share-Based Compensation
All stock-based compensation awards are measured based on estimated fair values on the date of grant and recognized as
compensation expense on the straight-line single-option method. Our share-based compensation is reduced for estimated
forfeitures at the time of grant and revised as necessary in subsequent periods if actual forfeitures differ from those
estimates.
Revenue Recognition
34
We recognize revenue at the time the product is shipped. We have determined that our programming equipment has
reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to
shipment and that the installation meets the criteria to be considered a separate element. These systems are standard
products with published product specifications and are configurable with standard options. The evidence that these
systems could be deemed as accepted was based upon having standardized factory production of the units, results from
batteries of tests of product performance to our published specifications, quality
installation
standardization, as well as past product operation validation with the customer and the history provided by our installed
base of products upon which the current versions were based.
inspections and
The revenue related to products requiring installation that is perfunctory is recognized at the time of shipment. Installation
that is considered perfunctory includes any installation that can be performed by other parties, such as distributors, other
vendors, or in most cases the customers themselves. This takes into account the complexity, skill and training needed as
well as customer expectations regarding installation.
We enter into multiple deliverables arrangements that arise during the sale of a system that includes an installation
component, a service and support component and a software maintenance component. We allocate the value of each
element based on relative selling prices. Relative selling price is based on the selling price of the standalone system. For
the installation and service and support components, we use what we charge to distributors who perform these
components. For software maintenance components, we use what we charge for annual software maintenance renewals
after the initial year the system is sold. Revenue is recognized on the system sale based on shipping terms, installation
revenue is recognized after the installation is performed, and hardware service and support and software maintenance
revenue is recognized ratably over the term of the agreement, typically one year.
When we sell software separately, we recognize software revenue upon shipment provided that only inconsequential
obligations remain on our part and substantive acceptance conditions, if any, have been met.
We recognize revenue when persuasive evidence of an arrangement exists, shipment has occurred, the price is fixed or
determinable, the buyer has paid or is obligated to pay, collectability is reasonably assured, substantive acceptance
conditions, if any, have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would
not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for
resale has economic substance apart from us and we do not have significant obligations for future performance to directly
bring about the resale of the product by the buyer. We establish a reserve for sales returns based on historical trends in
product returns and estimates for new items.
Sales were recorded net of actual sales returns and changes to the associated sales return reserve. Sales return reserves
were $50,000 and $61,000 at December 31, 2016 and 2015, respectively.
We transfer certain products out of service from their internal use and make them available for sale. The products
transferred are our standard products in one of the following areas: service loaners, rental or test units; engineering test
units; or sales demonstration equipment. Once transferred, the equipment is sold by our regular sales channels as used
equipment inventory. These product units often involve refurbishing and an equipment warranty, and are conducted as
sales in our normal and ordinary course of business. The transfer amount is the product unit’s net book value and the sale
transaction is accounted for as revenue and cost of goods sold.
Research and Development
Research and development costs are generally expensed as incurred.
Advertising Expense
Advertising costs are expensed as incurred. Total advertising expenses were approximately $108,000 and $137,000 in 2016
and 2015, respectively.
35
Warranty Expense
We record a liability for an estimate of costs that we expect 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 normally provide a warranty for our products against defects for
periods ranging from ninety days to one year. We provide for the estimated cost that may be incurred under our product
warranties and periodically assess the adequacy of our warranty liability based on changes in the above factors. We record
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 per share are
computed using the weighted-average number of common shares and common stock equivalent shares outstanding during
the period. The common stock equivalent shares from equity awards used in calculating diluted earnings per share were
164,000 and 147,000 for the years ended December 31, 2016 and 2015, respectively. Options to purchase 117,352 and
166,720 shares of common stock were outstanding as of December 31, 2016 and 2015, respectively, but were excluded
from the computation of diluted EPS for the period then ended because the options were anti-dilutive.
Diversification of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of trade receivables.
Our trade receivables are geographically dispersed and include customers in many different industries. As of December 31,
2016, three customers accounted for greater than 10% of our consolidated accounts receivable balance: Bosch and Arrow
our direct customers, and Data Copy Limited, our distributor in China, represented 30%, 16% and 14% of that balance,
respectively. Our consolidated accounts receivable balance as of December 31, 2016 and 2015 includes foreign accounts
receivable in the functional currency of our foreign subsidiaries amounting to $2,554,000 and $569,000, respectively. We
generally do business with our foreign distributors in U.S. Dollars. We believe that 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, or prepayment whenever deemed
necessary.
New Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (ASU 2016-09), “Improvements to
Employee Share-Based Payment Accounting”. ASU 2016-09 requires excess tax benefits to be recognized in the statement
of operations as an income tax expense and is applied prospectively by means of a cumulative-effect adjustment of excess
tax benefits from equity in the period of adoption. The standard establishes an alternative practical expedient for
estimating the expected term of an award by recognizing the effects of forfeitures in compensation cost when the
forfeitures occur. Adoption of the alternative practical expedient is applied prospectively on an entity-wide basis. The
standard requires that amounts paid to a taxing authority on the employee’s behalf as a result of directly withholding
shares for tax-withholding purposes are to be presented on a retrospective basis as a financing activity on the statement of
cash flows. The standard becomes effective beginning January 1, 2017. We are in the process of evaluating the impact of
adoption on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases” (ASU 2016-02). ASU 2016-02 requires lessees to recognize almost
all leases on the balance sheet as a right-of-use asset and a lease liability and requires leases to be classified as either an
operating or a finance type lease. The standard excludes leases of intangible assets or inventory. Early adoption of the
standard is allowed. The standard becomes effective beginning January 1, 2019. We are in the process of evaluating the
impact of adoption on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09
provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes
current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to
recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue
when the risks and rewards transfer to the customer under the existing revenue guidance. In August 2015, the FASB issued
ASU 2015-14, “Revenue from Contracts with Customers” (ASU 2015-14), deferring the effective date of the new revenue
36
recognition standard by one year and now takes effect for public entities in fiscal years beginning after December 15, 2017.
We currently expect to adopt the revenue standards as of January 1, 2018, utilizing the modified retrospective transition
method. The new standard may, in certain circumstances, impact the timing of when revenue is recognized for product
shipped, and the timing and classification of certain sales incentives. We have begun to evaluate the potential impact of
the adoption on our consolidated financial statements, but at this time the impact is unknown. We will expand our
evaluation to identify all our revenue streams and determine when each source of revenue meets the five requirements for
revenue recognition. We will monitor updated guidance on adopting this new standard.
NOTE 2 – ACCOUNTS RECEIVABLE, NET
Receivables consist of the following:
(in thousands)
Trade accounts receivable
Less allowance for doubtful receivables
Trade accounts receivable, net
December 31,
2016
December 31,
2015
$4,821
96
$4,725
$2,833
43
$2,790
Changes in Data I/O’s allowance for doubtful accounts are as follow:
(in thousands)
Beginning balance
Bad debt expense (reversal)
Accounts written-off
Recoveries
Ending balance
NOTE 3– INVENTORIES
Inventories consisted of the following components:
(in thousands)
Raw material
Work-in-process
Finished goods
Inventories
December 31,
2016
December 31,
2015
$43
55
(2)
-
$96
$93
(36)
(14)
-
$43
December 31,
2016
December 31,
2015
$2,402
1,226
431
$4,059
$2,262
1,099
344
$3,705
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property and equipment consisted of the following components:
(in thousands)
Leasehold improvements
Equipment
Sales demonstration equipment
Less accumulated depreciation
Property and equipment, net
December 31,
2016
December 31,
2015
$376
4,449
1,158
5,983
4,108
$1,875
37
$77
4,482
1,257
5,816
4,579
$1,237
Total depreciation expense recorded for 2016 and 2015 was $602,000 and $542,000, respectively.
NOTE 5 – OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following components:
(in thousands)
Product warranty
Sales return reserve
Other taxes
Other
Other accrued liabilities
December 31,
2016
December 31,
2015
$371
50
149
133
$703
$368
61
92
19
$540
The changes in our product warranty liability for the year ending December 31, 2016 are follows:
(in thousands)
Liability, beginning balance
Net expenses
Warranty claims
Accrual revisions
Liability, ending balance
NOTE 6 –OPERATING LEASE COMMITMENTS
December 31,
2016
$368
755
(797)
45
$371
We have 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)
2017
2018
2019
2020
2021
Thereafter
Total
Operating
Leases
$872
878
906
893
484
11
$4,044
Lease and rental expense was $927,000 and $955,000 in 2016 and 2015, respectively. Rent expense is recorded on a
straight line basis, over the term of the lease, for leases that contain fixed escalation clauses.
During the second quarter of 2015, we amended our lease agreement for the Redmond, Washington headquarters facility
effective July 8, 2015. The amended lease resulted in our headquarters relocating to a nearby building, extending the term
through April 2021, lowering the square footage to approximately 20,460, providing lease inducement incentives and
lowering the rental rate. The lease commitment of approximately $1.7 million will be paid over the term of the lease. As a
result of this lease amendment, the remaining balance of the restructure liability relating to the lease of approximately
38
$120,000 was incorporated into our deferred rent liability in July 2015. The lease base annual rental payments during 2016
and 2015 were approximately $200,000 and $296,000, respectively.
In addition to the Redmond facility, approximately 24,000 square feet is leased at two foreign locations, including our sales,
service, operations and engineering office located in Shanghai, China, and our German sales, service and engineering office
located in Munich, Germany.
We renewed our lease agreement for what is now our former Shanghai, China facility, effective June 15, 2015, extending
the term through December 31, 2015. Operations continued in this facility through January 31, 2016. In October 2015, we
signed a lease agreement for a new facility located in Shanghai, China which was effective November 1, 2015 and extends
through October 31, 2021. The new lease approximately doubled our space to 19,400 square feet at approximately 54% of
the prior lease rental rate. The lease base annual rental payments during 2016 and 2015 were approximately $233,000 and
$324,000, respectively.
During the fourth quarter of 2016, we signed a lease agreement for a new facility located in Munich, Germany which is
effective March 1, 2017 and extends through February 28, 2022. The new lease will slightly increase our space to 4,895
square feet at approximately the same cost per square foot as the current lease. The lease base annual rental payments
during 2016 and 2015 were both approximately $61,000.
NOTE 7 –OTHER COMMITMENTS
We have 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. At December 31, 2016, the purchase commitments and other obligations totaled
$1,134,000 of which all but $33,000 are expected to be paid over the next twelve months.
NOTE 8 – CONTINGENCIES
As of December 31, 2016, we were not a party to any legal proceedings or aware of any indemnification agreement claims,
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.
NOTE 9 – STOCK AND RETIREMENT PLANS
Stock Option Plans
At December 31, 2016, there were 537,586 shares available for future grant under Data I/O Corporation 2000 Stock
Compensation Incentive Plan (“2000 Plan”). At December 31, 2016 there were 840,850 shares of Common Stock reserved
for issuance consisting of 600,850 under the 2000 plan and 240,000 under the inducement grant reserves. Pursuant to this
2000 Plan, 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. Options granted under the plans have a maximum
term of six years from the date of grant. Stock awards may also be granted under the 2000 Plan. Inducement grants were
made in 2012 and 2013. In 2012, inducement grants were made to our chief executive officer consisting of 200,000
options, of which 60,000 were exercised in 2016 and 75,000 restricted shares, of which 18,750 shares were issued in both
2016 and 2015. In 2013, an inducement grant was made to our chief technology officer consisting of 100,000 options. The
inducement grants were not made out of the 2000 Plan shares but were made under the terms of the 2000 Plan.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of our Common Stock at six-
month intervals at 95% of the fair market value on 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 2016 and 2015, a total of
2,686 and 3,993 shares, respectively, were purchased under the plan at average prices of $2.63 and $2.90 per share,
respectively. At December 31, 2016, a total of 53,687 shares were reserved for future issuance.
39
Stock Appreciation Rights Plan
We have a Stock Appreciation Rights (“SAR”) Plan under which each director, executive officer or holder of 10% or more of
our Common Stock has a SAR with respect to each exercisable stock option. The SAR entitles the SAR holder to receive cash
from us 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 our 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. At
December 31, 2016 there were 337,500 SARs outstanding.
Director Fee Plan
We have 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 our Common Stock. No shares were issued from the plan for 2016 or 2015
board service and 151,332 shares remain available in the plan as of December 31, 2016.
Retirement Savings Plan
We have 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 or post-tax salary if Roth is elected,
subject to IRS limitations. In fiscal years 2016 and 2015, we contributed one dollar for each dollar contributed by a
participant, with a maximum contribution of 4% of a participant’s eligible earnings. Our matching contribution expense, net
of forfeitures, for the savings plan was approximately $129,000 and $174,000 in 2016 and 2015, respectively. Employer
matching contributions owed to the plan were $181,000 and $178,000 at December 31, 2016 and 2015, respectively.
NOTE 10– SHARE-BASED COMPENSATION
For share-based awards granted, we have recognized compensation expense based on the estimated grant date fair value
method. For these awards we have recognized compensation expense using a straight-line amortization method and
reduced for estimated forfeitures. The impact on our results of operations of recording share-based compensation for the
year ended December 31, 2016 and 2015 was as follows:
(in thousands)
Cost of goods sold
Research and development
Selling, general and administrative
Total share-based compensation
Impact on net income per share:
Basic
Diluted
Year Ended December 31,
2016
2015
$13
106
401
$520
$13
76
346
$435
($0.07)
($0.06)
($0.05)
($0.05)
An immaterial amount of share-based compensation was capitalized into inventory as overhead for the years ended
December 31, 2016 and 2015, respectively.
The fair values of share-based awards for employee stock option awards are estimated at the date of grant using the Black-
Scholes valuation model. The volatility and expected life of the options used in calculating the fair value of share-based
awards may exclude certain periods of historical data that we considered atypical and not likely to occur in future periods.
It was note necessary to make weighted average assumptions regarding risk-free rates, volatility factors, expected life of
option in years and expected dividend yield to calculate the fair value of options as none were granted during the years
ended December 31, 2016 and 2015.
The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in
40
U.S. Treasury securities at maturity with an equivalent term. We have not recently declared or paid any dividends and do
not currently have plans to do so in the future. The expected term of options represents the period that our stock-based
awards are expected to be outstanding and has been determined based on historical weighted average holding periods and
projected holding periods for the remaining unexercised shares. Consideration was given to the contractual terms of our
stock-based awards, vesting schedules and expectations of future employee behavior. Expected volatility is based on the
annualized daily historical volatility of our stock over a representative period.
The following table summarizes stock option activity under our stock option plans for the twelve months ended December
31:
2016
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life in Years
2015
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life in Years
Options
Options
Outstanding at beginning of
year
Granted
Exercised
Cancelled, Expired or
Forfeited
574,000
-
(130,000)
$2.97
0.00
2.38
606,187
-
(20,625)
$3.02
0.00
3.03
(68,000)
4.25
(11,562)
5.39
Outstanding at end of year
376,000
$2.95
1.67
574,000
$2.97
2.40
Vested or expected to vest
at the end of the period
Exercisable at end of year
375,055
357,250
$2.96
$3.00
1.67
1.62
564,527
467,126
$2.99
$3.19
2.39
2.24
The aggregate intrinsic value of outstanding options is $618,650. This represents the total pretax intrinsic value, based on
the closing stock price of $4.18 at December 31, 2016, which would have been received by award holders had all award
holders exercised their stock options that were in-the-money as of that date. The aggregate intrinsic value of awards
exercised during the twelve month period ended December 31, 2016 was $208,148.
Restricted stock award including performance-based stock award activity under our share-based compensation plan was as
follows:
2016
2015
Awards
389,100
227,100
(148,100)
(3,250)
464,850
Weighted -
Average
Grant Date
Fair Value
$2.86
2.61
2.72
2.73
$2.78
Awards
320,900
193,800
(109,250)
(16,350)
389,100
Weighted -
Average
Grant Date
Fair Value
$2.57
3.16
2.58
2.60
$2.86
Outstanding at beginning of year
Granted
Vested
Cancelled
Outstanding at end of year
41
The remaining unamortized expected future compensation expense and remaining amortization period associated with
unvested option grants and restricted stock awards are:
December 31,
2016
December 31,
2015
Unamortized future compensation expense
$1,093,144
$1,028,961
Remaining weighted average amortization period in years
2.53
2.59
NOTE 11 – SHARE REPURCHASE PROGRAMS
On February 24, 2016, our Board of Directors approved a share repurchase program with provisions to buy back up to $1
million of our stock during the period from March 2, 2016 through March 31, 2017. The program was established with a
10b5-1 plan under the Exchange Act to provide flexibility to make purchases throughout the period. For the year ended
December 31, 2016, 80,345 shares of stock have been repurchased at an average price of $2.36 for a total of $189,360 plus
$1,649 in commissions and charges.
The following is a summary of share repurchase activity under the plan through December 31, 2016:
Repurchases by
Month
Total
Number of
Shares
Purchased
Average Price
Paid per Share
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Repurchase
Program
Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
under the
Program
March 2016
April 2016
May 2016
June 2016
July 2016
Total
42,515
8,480
7,650
15,200
6,500
80,345
$2.26
$2.35
$2.52
$2.45
$2.61
$2.36
42,515
8,480
7,650
15,200
6,500
80,345
$903,161
$883,064
$863,602
$826,078
$808,991
NOTE 12– INCOME TAXES
Components of income (loss) before taxes:
(in thousands)
U.S. operations
Foreign operations
Total income (loss) before taxes
Year Ended December 31,
2015
2016
$1,401
291
$1,692
$420
502
$922
42
Income tax expense (benefit) consists of:
(in thousands)
Current tax expense (benefit)
U.S. federal
State
Foreign
Deferred tax expense (benefit) – U.S. federal
Total income tax expense (benefit)
Year Ended December 31,
2015
2016
$25
6
5
36
-
$36
A reconciliation of our effective income tax and the U.S. federal tax rate is as follows:
(in thousands)
Statutory tax
State and foreign income tax, net of
federal income tax benefit
Valuation allowance for deferred tax assets
Total income tax expense (benefit)
Year Ended December 31,
2015
2016
$575
64
(603)
$36
$0
(1)
(4)
(5)
-
($5)
$313
(105)
(213)
($5)
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets are presented
below:
(in thousands)
Deferred income tax assets:
Allowance for doubtful accounts
Inventory and product return reserves
Compensation accruals
Accrued liabilities
Book-over-tax depreciation and amortization
Foreign net operating loss carryforwards
U.S. net operating loss carryforwards
U.S. credit carryforwards
Valuation Allowance
Total Deferred Income Tax Assets
Year Ended December 31,
2015
2016
$17
632
1,726
524
93
550
6,419
1,287
11,248
(11,248)
$ -
$11
723
1,533
311
99
809
6,919
1,264
11,669
(11,669)
$ -
The valuation allowance for deferred tax assets decreased $421,000 during the year ended December 31, 2016, and
decreased $133,000 during the year ended December 31, 2015. The net deferred tax assets have a full valuation allowance
provided due to uncertainty regarding our ability to utilize such assets in future years. This full valuation allowance
evaluation is based upon our volatile history of losses and the cyclical nature of our industry and capital spending. Credit
carryforwards consist primarily of research and experimental and alternative minimum tax credits with expiration years
from 2020 to 2036. U.S. net operating loss carryforwards are $18,878,000 at December 31, 2016 with expiration years from
2020 to 2036. 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.
43
The gross changes in uncertain tax positions resulting in unrecognized tax benefits are presented below:
(in thousands)
Unrecognized tax benefits, opening balance
Prior period tax position increases
Additions based on tax positions related to current year
Unrecognized tax benefits, ending balance
Year Ended December 31,
2015
2016
$210
-
16
$226
$197
(3)
16
$210
Historically, we have incurred minimal interest expense and no penalties associated with tax matters. We have adopted a
policy whereby amounts related to penalties associated with tax matters are classified as general and administrative
expense when incurred and amounts related to interest associated with tax matters are classified as interest income or
interest expense.
Tax years that remain open for examination include 2013, 2014, 2015 and 2016 in the United States of America. In
addition, tax years from 2000 to 2012 may be subject to examination in the event that we utilize the net operating losses
and credit carryforwards from those years in our current or future year tax returns.
NOTE 13 – SEGMENT AND GEOGRAPHIC INFORMATION
We consider our operations to be a single operating segment, focused on the design, manufacturing and sale of
programming systems used by designers and manufacturers of electronic products.
Major operations outside the U.S. include sales, engineering and service support subsidiaries in Germany as well as in
China, which also manufactures some of our products.
The following tables provide summary operating information by geographic area:
(in thousands)
Net sales:
U.S.
Europe
Rest of World
Included in Europe and Rest of World net sales are
the following significant balances:
Germany
China
Operating income (loss):
U.S.
Europe
Rest of World
Identifiable assets:
U.S.
Europe
Rest of World
Year Ended December 31,
2016
2015
$2,936
8,730
11,747
$23,413
$4,482
$3,824
$669
132
626
$1,427
$11,346
4,993
6,437
$22,776
44
$2,229
8,744
11,044
$22,017
$3,702
$4,682
$473
(356)
876
$993
$9,441
3,128
7,071
$19,640
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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, we 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 at the reasonable assurance level.
Disclosure controls are controls and procedures designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated
and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
(b) Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our
internal control systems are designed to provide reasonable assurance to the Company’s management and board of
directors regarding reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Internal control over financial reporting is defined in Rule 13a-
15(f) promulgated under the Exchange Act and includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company;
and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.
All internal controls, no matter how well designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial statements preparation and presentation.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2016. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013). Based on this assessment we
concluded that, as of December 31, 2016, our internal control over financial reporting was effective.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permanently
exempts smaller reporting companies from complying with Section 404(b) of the Sarbanes-Oxley Act of 2002.
(c) Changes in internal controls.
There were no changes made in our internal controls during the period covered by this report that has materially affected
or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B._Other Information
None.
45
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information regarding the Registrant’s directors is set forth under “Election of Directors” in our Proxy Statement relating to
our annual meeting of shareholders to be held on May 18, 2017 and is incorporated herein by reference. Such Proxy
Statement will be filed within 120 days of our 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.”
Code of Ethics
We have adopted a 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/Company/InvestorRelations/CorporateGovernance.aspx. We will post any amendments to our
Code of Ethics on our website. 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 on our website. 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 four business days following the date of the amendment or waiver, unless website
posting of such amendments or waivers is permitted by Nasdaq’s rules.
Item 11. Executive Compensation
Information called for by Part III, Item 11, is included in our Proxy Statement relating to our annual meeting of shareholders
to be held on May 18, 2017 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 our 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 our Proxy Statement relating to our annual meeting of shareholders
to be held on May 18, 2017 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 our year
end.
46
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, 2016. See Notes 10 and 11 of “Notes to
Consolidated Financial Statements.”
(a) Number of
securities to be
issued upon the
exercise of
outstanding options,
warrants and rights
(b) Weighted–
average exercise
price of outstanding
options, warrants
and rights
(c) Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
136,425
$4.71
590,848
240,000
376,425
$1.96
$2.96
-
590,848
Equity compensation plans
approved by the security
holders (1) (2)
Equity compensation plans
not approved by the security
holders (3)
Total
(1) Represents shares of our Common Stock issuable pursuant to the Data I/O Corporation 2000 Stock Incentive
Compensation Plan, 1982 Employee Stock Purchase Plan and 1996 Director Fee Plan. Table excludes unvested
restricted stock awards of 464,850 from the 2000 Plan.
(2) Stock Appreciation Rights Plan (“SAR”) provides that directors, executive officers or holders of 10% or more of our
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.
(3) Represents remaining inducement grants of 140,000 nonqualified stock options to Anthony Ambrose as part of his
hiring and inducement grants of 100,000 nonqualified stock options to Rajeev Gulati as part of his hiring.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is contained in, and incorporated by reference from, the Proxy Statement for our
2017 Annual Meeting of Shareholders under the caption “Certain Relationships and Related Transactions.”
Item 14._ Principle Accounting Fees and Services
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 relating to our annual meeting of
shareholders to be held on May 18, 2017. Such Proxy Statement will be filed within 120 days of our year-end.
47
Item 15. Exhibits, Financial Statement Schedules
Executive Compensation Plans and Arrangements
PART IV
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 10.5.
(2) Data I/O Corporation Tax Deferral Retirement Plan and Trust with Great West Financial (formerly Orchard Trust
Company). See Exhibits 10.15, 10.16, 10.17, 10.30 and 10.31.
(3)
Summary of Amended and Restated Management Incentive Compensation Plan. See Exhibit 10.2.
(4) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1.
(5) Amended and Restated Executive Agreements. See Exhibit 10.8, 10.20, and 10.23.
(6) 1996 Director Fee Plan. See Exhibit 10.4.
(7) Data I/O Corporation 2000 Stock Compensation Incentive Plan. See Exhibit 10.6, 10.11, 10.22 and 10.26.
(8)
Form of Option Agreement. See Exhibit 10.7.
(9)
Form of Indemnification Agreement. See Exhibit 10.18.
(10) Letter Agreement with Anthony Ambrose. See Exhibit 10.21.
(11) Letter Agreement with Rajeev Gulati. See Exhibit 10.24.
(12) Form of Restricted Stock Agreement. See Exhibit 10.12.
(13) Letter Agreement with Joel S. Hatlen. See Exhibit 10.28.
(14) Form of Executive Agreement. See Exhibit 10.27.
(15) Form of Restricted Stock Unit Award Agreement. See Exhibit 10.25.
(a)
List of Documents Filed as a Part of This Report:
(1)
Index to Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for each of the two years ended December 31, 2016 and
December 31, 2015
Consolidated Statements of Comprehensive Income (Loss) for each of the two years ended
December 31, 2016 and December 31, 2015
Page
27
28
29
30
Consolidated Statements of Stockholders’ Equity for each of the two years ended December 31, 2016 and
December 31, 2015
31
48
Consolidated Statements of Cash Flows for each of the two years ended December 31, 2016 and
December 31, 2015
32
Notes to Consolidated Financial Statements 33
(2)
Index to Financial Statement Schedules:
Schedule II – Consolidated Valuation and Qualifying Accounts
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
3.2
3.3
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)).
Data I/O’s Bylaws as amended and restated as of July 20, 2011 (Incorporated by
reference to Data I/O’s Current Report on Form 8-K filed July 26, 2011).
Certification 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
4.2
4.3
4.4
4.5
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).
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).
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).
Amendment No. 2 to Rights Agreement, dated as of April 3, 2008, between
Data I/O Corporation and Computershare (formerly BNY Mellon Investor
Services LLC, and ChaseMellon Shareholder Services, L.L.C.). (Incorporated
by reference to Exhibit 4.3 of Data I/O’s Form 8-K dated April 3, 2008).
Amendment No. 3 to Rights Agreement, dated as of July 13, 2016, between
Data I/O Corporation and Computershare. (Incorporated by reference to
Exhibit 4.4 of Data I/O’s Form 8-A/A dated July 14, 2016).
49
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 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)).
10.3 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)).
10.4 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)).
10.5 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).
10.6 Amended and Restated Data I/O Corporation 2000 Stock Compensation
Incentive Plan dated May 24, 2006 (Incorporated by reference to Data I/O’s
2006 Proxy Statement dated April 6, 2006).
10.7 Form of Option Agreement (Incorporated by reference to Data I/O’s 2004
Annual Report on Form 10-K (File No. 0-10394)).
10.8 Amended and Restated Executive Agreement with Joel S. Hatlen dated
December 31, 2011 (Incorporated by reference to Data I/O’s 2011 Annual
Report on Form 10K (File No. 0-10394)).
10.9
Lease, Redmond East Business Campus between Data I/O Corporation and
Carr Redmond PLCC dated February 28, 2006 (Incorporated by reference to
Data I/O’s 2005 Annual Report on Form 10K (File No. 0-10394)).
10.10 Second Amendment to Lease, (Redmond East) between Data I/O Corporation
and Arden Realty Limited Partnership, made as of January 31, 2011.
(Incorporated by reference to Data I/O’s 2010 Annual Report on Form 10-K
(File No. 0-10394)).
10.11 Amended and Restated Data I/O Corporation 2000 Stock Compensation
Incentive Plan approved May 17, 2011 (Incorporated by reference to Data
I/O’s 2011 Proxy Statement filed April 5, 2011).
10.12 Form of Restricted Stock Award Agreement (Incorporated by reference to
Exhibit 10.29 of Data I/O’s June 30, 2006 Quarterly Report on Form 10-Q (File
No. 0-10394)).
10.13 Patent Purchase Agreement (Incorporated by reference to Data I/O’s Current
Report on Form 8-K filed on March 25, 2008)).
10.14 First Amendment to the Patent Purchase Agreement (Incorporated by
reference to Data I/O’s Current Report on Form 8-K filed on March 25, 2008).
10.15 Great West Financial (formerly Orchard Trust Company) Defined
Contribution Prototype Plan and Trust (Incorporated by reference to Data
I/O’s 2007 Annual Report on Form 10-K (File No. 0-10394)).
50
10.16 Great West Financial (formerly Orchard Trust Company) Non-standardized
401(k) Plan (Incorporated by reference to Data I/O’s 2007 Annual Report on
Form 10-K (File No. 0-10394)).
10.17 Great West Financial (formerly Orchard Trust Company) Defined
Contribution Prototype Plan and Trust Amendment for Pension Protection
Act and Heart Act. (Incorporated by reference to Data I/O’s 2009 Annual
Report on Form 10-K (File No. 0-10394)).
10.18 Form of Indemnification Agreement. (Incorporated by reference to Data
I/O’s 2010 Annual Report on Form 10-K (File No. 0-10394)).
10.19 Asset Purchase Agreement dated April 29, 2011, with the Miller Trust, for
acquisition of Software Technology (Incorporated by reference to Data I/O’s
Current Report on Form 8-K filed May 3, 2011 with portions omitted
pursuant to a confidential treatment request, and by reference to Data I/O’s
Form 10-Q filed April 3, 2012, which included the redacted portions that had
been made in the original Form 8-K filing).
10.20 Executive Agreement with Anthony Ambrose dated October 25, 2012.
(Incorporated by reference to Data I/O’s 2012 Annual Report on Form 10-K
(File No. 0-10394)).
10.21 Letter Agreement with Anthony Ambrose (Incorporated by reference to Data
I/O’s Current Report on Form 8-K filed on October 29, 2012).
10.22 Amended and Restated Data I/O Corporation 2000 Stock Compensation
Incentive Plan approved May 10, 2012 (Incorporated by reference to Data
I/O’s 2012 Proxy Statement filed April 3, 2012).
10.23 Executive Agreement with Rajeev Gulati dated July 25, 2013. (Incorporated
by reference to Data I/O’s 2013 Annual Report on Form 10-K (File No. 0-
10394)).
10.24 Letter Agreement with Rajeev Gulati (Incorporated by reference to Data I/O’s
Current Report on Form 8-K filed on July 31, 2013).
10.25 Form of Restricted Stock Unit Award Agreement (Incorporated by reference
to Exhibit 10.29 of Data I/O’s March 31, 2014 Quarterly Report on Form 10-Q
(File No. 0-10394)).
10.26 Amended and Restated Data I/O Corporation 2000 Stock Compensation
Incentive Plan approved April 30, 2014 (Incorporated by reference to Exhibit
10.30 of Data I/O’s March 31, 2014 Quarterly Report on Form 10-Q (File No.
0-10394)).
10.27 Form of Executive Agreement (Incorporated by reference to Exhibit 10.31 of
Data I/O’s June 30, 2014 Quarterly Report on Form 10-Q (File No. 0-10394))
10.28 Letter Agreement with Joel S. Hatlen (Incorporated by reference to Exhibit
10.32 of Data I/O’s June 30, 2014 Quarterly Report on Form 10-Q (File No. 0-
10394)).
10.29 Third Amendment to Lease, (Redmond East) between Data I/O Corporation
and Arden Realty Limited Partnership, made as of June 1, 2015 (Incorporated
by reference to Exhibit 10.29 of Data I/O’s June 30, 2015 Quarterly Report on
Form 10-Q (File No. 0-10394)).
51
10.30 Great West Financial Adoption Agreement #005 Non-standardized 401(k) Plan
effective January 1, 2016 (Incorporated by reference to Data I/O’s 2015 Annual
Report on Form 10-K (File No. 0-10394)).
10.31 Great West Financial Adoption Agreement #005 Non-standardized 401(k) Plan
effective July 11, 2016 (Incorporated by reference to Data I/O’s 2016 Annual
Report on Form 10-K (File No. 0-10394)).
10.32 Negotiation Protocol for the Purchase of Data I/O’s PSV7000, a supply
agreement executed July 20, 2016, between Data I/O Corporation and Bosch
Car Multimedia Group (Incorporated by reference to Exhibit 10.31 of Data I/O’s
September 30, 2016 Quarterly Report on Form 10-Q (File No. 0-10394)).
10.33 Standstill and Voting Agreement, dated as of July 13, 2016, by and among Data
I/O Corporation, David Kanen and Kanen Wealth Management LLC
(Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on
July 14, 2016).
21.1 Subsidiaries of the Registrant 55
23.1 Consent of Independent Registered Public Accounting Firm
31 Certification – Section 302:
31.1
31.2
Chief Executive Officer Certification
Chief Financial Officer Certification
32 Certification – Section 906:
32.1
32.2
Chief Executive Officer Certification
Chief Financial Officer Certification
101
Interactive Date Files Pursuant to Rule 405 of Regulation S-T
Item 16. Form 10-K Summary
None.
56
57
58
59
60
52
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.
DATED: March 28, 2017
DATA I/O CORPORATION
(REGISTRANT)
By: /s/Anthony Ambrose
Anthony Ambrose
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/Anthony Ambrose________ March 28, 2017
Anthony Ambrose
President and Chief Executive Officer
(Principal Executive Officer), Director
By: /s/Joel S. Hatlen____________ March 28, 2017
Joel S. Hatlen
Chief Financial Officer
Vice President
Secretary, Treasurer
(Principal Financial and Accounting Officer)
By: /s/Douglas W. Brown_______ _ March 28, 2017
Director
Douglas W. Brown
By: /s/Brian T. Crowley_______ ___ March 28, 2017
Director
Brian T. Crowley
By: /s/Alan B. Howe____________ _ March 28, 2017
Alan B. Howe
Director
By: /s/Mark J. Gallenberger_______ March 28, 2017
Mark J. Gallenberger
Director
53
DATA I/O CORPORATION
SCHEDULE II – CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Balance
at
Beginning
of Period
Charged/
(Credited)
to Costs
and
Expenses
Deductions-
Describe
Balance
at End of
Period
$93
($36)
($14)
(1)
$43
$43
$55
($2)
(1)
$96
(in thousands)
Year Ended December 31, 2015:
Allowance for bad debts
Year Ended December 31, 2016:
Allowance for bad debts
(1) Uncollectable accounts
written off, net of recoveries
54
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:
Name of Subsidiary
Data I/O International, Inc.
RTD, Inc.
State or Jurisdiction
of Organization
Washington
Washington
Data I/O FSC International, Inc.
Territory of Guam
Data I/O Canada Corporation
Canada
Data I/O China, Ltd.
Data I/O GmbH
Hong Kong, China
Germany
Data I/O Electronics (Shanghai) Co., Ltd.
China
Brazil
Data I/O Programação de Sistemas Ltda.
Percentage of
Voting Securities
Owned
100%
100%
100%
100%
100%
100%
100%
100%
55
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 28, 2017, with respect to 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, 2016. We consent to
the incorporation by reference of said report in the Registration Statements of Data I/O Corporation on Form S-8 (File Nos.
002-76164, 002-86785, 002-98115, 002-78394, 33-95608, 33-66824, 33-42010, 33-26472, 33-54422, 333-20657, 333-
55911, 33-02254, 33-03958, 333-107543, 333-81986, 333-48595, 333-121861, 333-151006, 333-166730, and 333-175840)
and on Form S-3 (File No. 333-121566).
/s/Grant Thornton LLP
Seattle, Washington
March 28, 2017
56
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 have reviewed this annual report on Form 10-K of Data I/O Corporation;
I, Anthony Ambrose, certify that:
1)
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)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)0 for the
registrant and we 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) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) 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
d) 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 officer 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 28, 2017
/s/ Anthony Ambrose
Anthony Ambrose
Chief Executive Officer
(Principal Executive Officer)
57
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 have reviewed this annual report on Form 10-K of Data I/O Corporation;
I, Joel S. Hatlen, certify that:
1)
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)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)0 for the
registrant and we 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) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purpose in accordance with generally accepted accounting principles;
c) 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
d) 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 officer 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 28, 2017
/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
58
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 for the period ended December 31, 2016 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Anthony Ambrose, 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)
(2)
The Report fully complies with the requirements of § 13(a) or
15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Anthony Ambrose
Anthony Ambrose
Chief Executive Officer
(Principal Executive Officer)
Date: March 28, 2017
59
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 for the period ended December 31, 2016 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)
(2)
The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
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)
Date: March 28, 2017
60
DATA I/O CORPORATION
NOTICE OF 2017
ANNUAL MEETING
and
PROXY STATEMENT
DATA I/O CORPORATION
April 4, 2017
To Our Shareholders:
You are cordially invited to attend the 2017 Annual Meeting of Data I/O
Corporation, which will be held at Data I/O’s headquarters at 6645 185th Ave NE, Suite
100, Redmond, Washington 98052. The meeting will begin at 10:00 a.m. Pacific
Daylight Time on Thursday, May 18, 2017.
Officers of Data I/O will be attending and will respond to questions after the
meeting. Formal business will include the election of directors, ratification of the
continued appointment of Grant Thornton LLP as Data I/O’s independent auditors,
consideration of a proposal to amend and restate Data I/O’s 2000 Stock Compensation
Plan and an advisory vote on executive compensation.
Please read the proxy materials carefully. Your vote is important. Data I/O
appreciates you considering and acting on the proposals presented. We look forward to
seeing you on May 18, 2017.
Sincerely,
Anthony Ambrose
President and Chief Executive Officer
DATA I/O CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS - May 18, 2017
To the Shareholders of Data I/O Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Data I/O Corporation (the “Company” or “Data I/O”) will
be held at 10:00 a.m. Pacific Daylight Time, on Thursday, May 18, 2017, at Data I/O’s principal offices, 6645 185th Ave NE, Suite
100, Redmond, Washington 98052, for the following purposes:
(1)
(2)
(3)
(4)
(5)
Election of Directors:
To elect five directors, each to serve until the next annual meeting of shareholders or until his or her successor is
elected and qualified or until such director’s earlier death, resignation, or removal.
Ratification of Independent Auditors:
To ratify the continued appointment of Grant Thornton LLP as Data I/O’s independent auditors for the calendar year
ended December 31, 2017.
2000 Stock Compensation Incentive Plan:
To consider and vote on a proposal to amend and restate the Data I/O Corporation 2000 Stock Compensation
Incentive Plan (the “2000 Plan”) and to increase the number of shares reserved for issuance under the 2000 Plan by
an additional 250,000 shares of common stock.
Say on Pay – Advisory Vote on Executive Compensation:
To consider and vote on an advisory resolution on the compensation of our named executive officers.
Other Business:
To consider and vote upon such other business as may properly come before the meeting or any adjournments or
postponements thereof.
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on May 18, 2017.
The proxy statement and annual report to security holders are also available at http://www.dataio.com/company/
investorrelations/annualmeeting.aspx.
The Board of Directors has fixed the close of business on March 17, 2017, as the Record Date for the determination of shareholders
entitled to notice of, and to vote at, the 2017 Annual Meeting and any adjournment or postponement thereof.
By Order of the Board of Directors
/s/ Anthony Ambrose
Anthony Ambrose
President and Chief Executive Officer
Redmond, Washington
April 4, 2017
YOUR VOTE IS IMPORTANT
Whether or not you expect to attend the meeting in person, we urge you to sign, date and return the accompanying proxy card at your
earliest convenience, or you may vote by the internet at http://www.investorvote.com/DAIO or by telephone at 1-800-652-8683, as
provided in the instructions on the proxy card. This will ensure the presence of a quorum at the meeting. Promptly returning a
signed and dated proxy card, or voting by the internet or by telephone, will save Data I/O the extra expense of additional
solicitation. Your proxy is revocable at your request any time before it is voted. If you attend the meeting, you may vote in person if
you wish, even if you have previously returned your proxy card. If you vote by mail, an addressed, postage-paid envelope is provided
in order to make certain that your shares will be represented at the Annual Meeting.
DATA I/O CORPORATION
6645 185th Ave NE, Suite 100
Redmond, Washington 98052
____________________
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
May 18, 2017
INFORMATION REGARDING PROXY
This Proxy Statement and the accompanying form of proxy are furnished in connection with the solicitation of proxies by the Board of
Directors (“Board of Directors”) of Data I/O Corporation (the “Company” or “Data I/O”) for use at the Annual Meeting of
Shareholders to be held on Thursday, May 18, 2017, at 10:00 a.m. Pacific Daylight Time at Data I/O’s principal offices, 6645 185th
Ave NE, Suite 100, Redmond, Washington 98052, and at any adjournment of the meeting (the “Annual Meeting”). Shareholders of
record at the close of business on March 17, 2017 (the “Record Date”) are entitled to notice of, and to vote at, the Annual Meeting.
This Proxy Statement and a copy of Data I/O’s 2016 Annual Report to Shareholders are being mailed to shareholders on or about
April 13, 2017.
A proxy card is enclosed for your use. You are requested on behalf of the Board of Directors to sign, date, and return the proxy card
in the accompanying envelope, which is postage-paid if mailed in the United States or Canada, or you may vote by the internet at
http://www.investorvote.com/DAIO, or by telephone at 1-800-652-8683, as provided in the instructions on the proxy card. If you vote
by the internet or by telephone, you do not need to mail back the proxy card.
A proxy in the accompanying form, which is properly signed, dated and returned and not revoked, will be voted in accordance with its
instructions. To vote on the election of directors, check the appropriate box under Proposal 1 on your proxy card. You may (a) vote
“FOR” all of the director nominees as a group, (b) “WITHOLD” authority to vote for all director nominees as a group, or (c) vote
“FOR” all director nominees as a group except those nominees indicated to the contrary. To vote on Proposal 2 to ratify the continued
appointment of Grant Thornton LLP as Data I/O’s independent auditors for the calendar year ended December 31, 2017, check the
appropriate box under Proposal 2 on your proxy card. You may (a) vote “FOR” approval of the ratification of Grant Thornton LLP as
Data I/O’s independent auditors, (b) vote “AGAINST” approval of the ratification of Grant Thornton LLP as Data I/O’s independent
auditors, or (c) “ABSTAIN” from voting on the ratification of Grant Thornton LLP as Data I/O’s independent auditors. To vote on a
proposal to amend the Data I/O Corporation 2000 Stock Compensation Incentive Plan (the “2000 Plan”) to increase the number of
shares reserved for issuance under the 2000 Plan by an additional 250,000 shares of common stock, check the appropriate box under
Item No. 3 on your proxy card. You may (a) vote “FOR” approval of the amendment to the 2000 Plan, (b) vote “AGAINST” approval
of the amendment to the 2000 Plan, or (c) “ABSTAIN” from voting on the approval of the amendment to the 2000 Plan. To vote on
Proposal 4, Say on Pay – Advisory Vote on Executive Compensation, you may vote (a) “FOR” the advisory resolution, (b)
“AGAINST” the advisory resolution, or (c) “ABSTAIN” from voting on the advisory resolution on executive compensation.
Proxies which are returned to Data I/O without instructions will be voted as recommended by the Board of Directors. Any
shareholder who returns a proxy may revoke it at any time prior to voting on any matter (without, however, affecting any vote taken
prior to such revocation) by (i) delivering written notice of revocation to the Secretary of Data I/O at Data I/O’s principal offices, (ii)
executing and delivering to Data I/O another proxy dated as of a later date, or (iii) voting in person at the Annual Meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS
The only outstanding voting securities of Data I/O are shares of common stock (the “Common Stock”). As of the Record Date, there
were 8,048,516 shares of Common Stock issued and outstanding, and each such share is entitled to one vote at the Annual Meeting.
The presence in person or by proxy of holders of record of a majority of the outstanding shares of Common Stock is required for a
quorum for transacting business at the Annual Meeting. Shares of Common Stock underlying abstentions will be considered present
at the Annual Meeting for the purpose of calculating a quorum. Under Washington law and Data I/O’s charter documents, if a quorum
is present, the five nominees for election to the Board of Directors who receive the greatest number of affirmative votes cast at the
Annual Meeting will be elected directors. Abstentions and broker non-votes will have no effect on the election of directors because
they are not cast in favor of any particular candidate.
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Proxy
The proposals to ratify the continued appointment of Grant Thornton as Data I/O’s independent auditors and approve the amendment
and restatement of the 2000 Plan and will be approved, if a quorum is present, if the number of votes cast in favor of the proposal
exceeds the number of votes cast against the proposals. Abstentions and broker non-votes on the proposals will have no effect
because approval of the proposal is based solely on the votes cast.
Say on Pay – The advisory vote on the compensation of Data I/O’s named executive officers will be approved, if a quorum is present,
if the number of votes cast in favor of the advisory resolution exceeds the number of votes cast against the advisory resolution.
Abstentions and broker non-votes on the advisory resolution will have no effect because approval of the advisory resolution is based
solely on the votes cast.
Proxies and ballots will be received and tabulated by Computershare Shareowner Services LLC, an independent business entity not
affiliated with Data I/O.
Effect of Not Casting Your Vote
If you hold your shares in street name, it is critical that you instruct your broker or bank how to vote if you want it to count in Proposal
1, the election of directors; Proposal 3, Amendment and restatement of the 2000 Plan; and Proposal 4, Say on Pay. Regulations no
longer allow your bank or broker to vote your uninstructed shares in the election of directors on a discretionary basis. If you hold your
shares in street name and you do not instruct your bank or broker how to vote in the Proposal 1, election of directors; Proposal 3,
Amendment and restatement of the 2000 Plan; and Proposal 4, Say on Pay, votes will not be cast on your behalf for these Proposals.
Your bank or broker will, however, continue to have discretion to vote any uninstructed shares on Proposal 2, ratification of the
appointment of Data I/O’s independent auditors. If you are a shareholder of record and you do not cast your vote, votes will not be
cast on your behalf on any of the items of business at the Annual Meeting.
The Common Stock is traded on The NASDAQ Capital Market under the symbol “DAIO”. The last sale price for the Common Stock,
as reported by The NASDAQ Capital Market on March 17, 2017, was $4.98 per share.
Principal Holders of Data I/O’s Common Stock
The following table sets forth information for all shareholders known by Data I/O to be the beneficial owners of more than five
percent of its outstanding Common Stock as of March 17, 2017. Except as noted below, each person or entity has sole voting and
investment powers with for the shares shown.
Name and Address
Penbrook Management, LLC
AnKap Partners, L.P.
AnKap, LLC
Robert S. Anderson, Ralph Kaplan
Barbara Burke DiCostanzo
Ward Anderson
880 Third Avenue, 16th Floor
New York, NY 10022
David L. Kanen
Kanen Wealth Management LLC
10141 Sweet Bay Ct.,
Parkland, FL33076
Amount and Nature
of Beneficial
Ownership
Percent of Shares
Outstanding
503,090
(1)
6.25%
2,025, 738
(2)
25.17%
(1) The holding shown is as of December 31, 2016 as jointly reported by Penbrook Management, LLC; AnKap Partners, L.P.;
AnKap, LLC; Robert S. Anderson; Ralph Kaplan; Barbara Burke DiCostanzo; and Ward Anderson, on the most recent (filed
February 25, 2017) Schedule 13G filed pursuant to Rule 13d-1 under the Securities Exchange Act of 1934. The Schedule 13G
indicates that Penbrook Management has sole dispositive power of 503,090 shares and disclaims beneficial ownership of them;
AnKap Partners has sole voting power and dispositive power for 110,000 shares; AnKap, LLC has sole voting power and
dispositive power for 110,000 shares and disclaims beneficial ownership of them; Robert S. Anderson has sole voting and
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dispositive power for 48,300 shares, shared voting power for 110,000 shares and shared dispositive power for 454,790 shares,
with an aggregate amount of 503,090 shares, however disclaiming beneficial ownership of shares managed by Penbrook
Management and AnKap Partners; Ralph Kaplan has shared voting power for 110,000 shares and shared dispositive power for
454,790 shares, with an aggregate amount of 454,790 shares, however disclaiming beneficial ownership of shares managed by
Penbrook Management and AnKap Partners; and Barbara Burke DiCostanzo has shared voting power for 110,000 shares and
shared dispositive power for 454,790 shares; with an aggregate amount of 454,790 shares, however disclaiming beneficial
ownership of shares managed by Penbrook Management and AnKap Partners;.
(2) The holding reported as of March 1, 2017, as jointly reported by David L. Kanen and Kanen Wealth Management LLC
(“KWM”), on the most recent (filed March 1, 2017) Schedule 13D/A filed under the Securities Exchange Act of 1934. The
Schedule 13D/A indicates that Mr. Kanen has sole voting power and dispositive power for 335,922 shares and shared power to
vote or dispose of 1,689,816 shares and KWM has sole voting power and dispositive power for 0 shares and shared power to
vote or dispose of 1,689,816 shares. Mr. Kanen and KWM disclaim beneficial ownership of the 1,689,816 shares managed by
KWM. As described in Data I/O’s Form 8-K filed on July 14, 2016, Data I/O, David L. Kanen and KWM entered into a
Standstill and Voting Agreement on July 13, 2016.
Directors’ and Officers’ Share Ownership
The following table indicates ownership of Data I/O’s Common Stock by each director of Data I/O, each executive officer named in
the compensation tables appearing later in this Proxy Statement, and by all directors and executive officers as a group, all as of March
17, 2017. Data I/O is not aware of any family relationships between any director, director nominee or executive officer of Data I/O.
Name
Anthony Ambrose
Joel S. Hatlen
Rajeev Gulati
Douglas W. Brown
Brian T. Crowley
Alan B. Howe
Mark J. Gallenberger
All current directors and executive officers
as a group (7 persons)
Amount and Nature of
Beneficial Ownership
Percent of Shares
Outstanding
214,557
206,267
104,115
58,200
41,704
34,100
29,100
688,043
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
2.7%
2.6%
1.3%
(9)
(9)
(9)
(9)
8.6%
(1) Includes options to purchase 70,000 shares exercisable within 60 days.
(2) Includes options to purchase 25,000 shares exercisable within 60 days.
(3) Includes options to purchase 93,750 shares exercisable within 60 days.
(4) Includes options to purchase 27,500 shares exercisable within 60 days.
(5) Includes options to purchase 15,000 shares exercisable within 60 days.
(6) Includes options to purchase 15,000 shares exercisable within 60 days.
(7) Includes options to purchase 15,000 shares exercisable within 60 days.
(8) Includes options to purchase 261,250 shares exercisable within 60 days.
(9) Less than 1 percent each.
Data I/O is not aware of any arrangement the operation of which may at a subsequent date result in a change of control of Data I/O.
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Board Charters
CORPORATE GOVERNANCE
The Board of Directors has adopted Corporate Governance and Nominating Committee, Audit Committee and Compensation
Committee Charters. All our Charters are reviewed and updated periodically by our Board of Directors. All of our Charters were
reviewed during 2016 and again in early 2017 and no changes were made. The current versions of our Charters are posted on the
corporate governance page of our website at www.dataio.com/company/investorrelations/corporategovernance.aspx. All of these
Charters are consistent with the applicable requirements of United States security laws and our NASDAQ listing standards.
Code of Ethics
is posted on
Our Code of Ethics was reviewed by our Board of Directors during 2016 and again in early 2017 and no changes were made. The
current version of our Code of Ethics
the corporate governance page of our website at
www.dataio.com/company/corporategovernance.axp. Data I/O’s Code of Ethics apply to all directors, officers and employees of Data
I/O, including the named executive officers. The key principles of the Code are to act legally, and with integrity in all work for Data
I/O.
We will post any amendments to our Code of Ethics on the corporate governance page of our website at
www.dataio.com/company/investorrelations/corporategovernance.aspx. In the unlikely event that the Board of Directors approves any
waiver to the Code of Ethics for our executive officers or directors, information concerning such waiver will also be posted on our
website. 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 four 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 LLC.
Risk Oversight
Our Board of Directors consists of four independent directors, and one non-independent director, our Chief Executive Officer. Risk
oversight is generally handled by our entire Board of Directors, although certain risk oversight areas such as internal control and cyber
risk are handled by our Audit Committee, and compensation is handled by our Compensation Committee, respectively.
Director Independence
Messrs. Crowley, Gallenberger, Howe and Brown are independent directors, as defined by applicable NASDAQ listing standards.
Mr. Ambrose, our Chief Executive Officer, is not an independent director.
Leadership Structure
Our Chairman, Mr. Howe, is an independent director and Mr. Ambrose is our Chief Executive Officer, President and Director.
PROPOSAL 1: ELECTION OF DIRECTORS
At the 2016 Annual Meeting, the shareholders elected five directors to serve until the next Annual Meeting or until such director’s
successor has been qualified and elected or such director’s earlier death, resignation or removal. For the 2017 Annual Meeting, the
Board of Directors has approved the five nominees named below. All the nominees are currently members of the Board of Directors.
Each of the nominees has indicated that they are willing and able to serve as directors. However, should one or more of the nominees
not accept the nomination, or otherwise be unwilling or unable to serve, it is intended that the proxies will be voted for the election of
a substitute nominee or nominees designated by the Board of Directors.
RECOMMENDATION: The Board of Directors recommends a vote FOR each of the director nominees.
Anthony Ambrose, age 55, was appointed a director of Data I/O effective October 25, 2012. He joined Data I/O October 25, 2012
and has served as President and Chief Executive Officer (“CEO”). Prior to Data I/O, Mr. Ambrose was Owner and Principal of Cedar
Mill Partners, LLC, a strategy consulting firm since 2011. From 2007 to 2011, he was Vice President and General Manager at
RadiSys Corporation, a leading provider of embedded wireless infrastructure solutions, where he led three product divisions and
worldwide engineering. At RadiSys, he established the telecom platform business and grew it to over $125M in annual revenues.
Until 2007, he was general manager and held several other progressively responsible positions at Intel Corporation, where he led
development and marketing of standards based telecommunications platforms, and grew the industry standard server business to over
$1B in revenues. He is a member of the EvergreenHealth Foundation Board of Trustees. Mr. Ambrose has a Bachelors of Science in
Engineering from Princeton University.
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Mr. Ambrose has extensive semiconductor and mobile broadband networks industry operating experience. He has significant
executive experience in strategy development, business management, marketing, engineering, and new product development. His role
as our President and CEO gives him knowledge as well as unique insight into our challenges, opportunities and operations that the
Board of Directors believes qualifies him to serve as a director of Data I/O.
Douglas W. Brown, age 61, was appointed a director of Data I/O effective April 1, 2011. Mr. Brown is currently Executive
Chairman of All Star Directories, Inc., Seattle, Washington, a Web-based publisher of post-secondary online and career school
directories which he joined as President in 2005 and served in that capacity until 2016. From 2003 to 2005, he provided governance
and interim executive services, with engagements including Interim President and Board member, to venture-backed clients. From
1998 to 2003, he was a Board member of GoAhead Software and was appointed its President in 2001. From 1993 to 1999, he was a
President of a Seattle-area manufacturing company which became a Division of Leggett & Platt in 1996. Prior to that time, he was the
Chief Financial Officer (“CFO”) of Seattle Silicon, and Executive Vice President, Finance and Operations at Phamis. He started his
career as a Certified Public Accountant at Arthur Young & Co, now Ernst & Young, in Seattle. Mr. Brown has a Bachelors degree in
Business from University of Idaho.
Mr. Brown has extensive software, financial, CEO, CFO and board level experience that the Board of Directors believes qualifies him
to serve as a director of Data I/O.
Brian T. Crowley, age 56, was appointed a director of Data I/O effective June 5, 2012. Mr. Crowley is currently President of
Symbio, a software services company he joined in July 2015. From April 2014 to July 2015, he served as Vice President of
Engineering and Operations at Snupi Technologies, an Internet of Things startup. From July 2003 to September 2013, Mr. Crowley
served as the President and CEO for BSquare Corporation (NASDAQ: BSQR) in Bellevue, Washington, the leading provider of
embedded solutions, engineering services and production ready software products for the smart device market. Previously, he had
served as Vice President, Product Development since joining BSquare in April 2002. From April 1999 to December 2001, Mr.
Crowley was with DataChannel, a developer of enterprise portals where he held executive positions including Vice President of
Engineering and Vice President of Marketing. From December 1997 to April 1999, he was Director of Development at Sequel
Technology, a network solutions provider. From 1986 to December 1997, he held various positions at Applied Microsystems
Corporation, including Vice President and General Manager of the Motorola products and quality assurance divisions. He serves on
the Western Washington University Business School Deans Advisory Board. Mr. Crowley has a Bachelors of Science in Electrical
Engineering from Arizona State University.
Mr. Crowley has experience as a CEO and public company director, as well as prior executive management experience in industries
related to ours in product development, engineering, technology, and mergers and acquisitions that the Board of Directors believes
qualifies him to serve as a director of Data I/O.
Mark J. Gallenberger, age 53, was appointed a director of Data I/O effective January 31, 2013. He is currently the Senior Vice
President, Chief Financial Officer, Chief Operating Officer and Treasurer of Xcerra Corporation (formerly called LTX-Credence
Corporation) (NASDAQ:XCRA), a global provider of test and handling capital equipment, interface products, test fixtures, and
services to the semiconductor, industrial, and electronics manufacturing industries, which he joined in 2000. For the six years prior,
he was Vice President/Senior Manager with Ernst &Young (Cap Gemini) in their consulting practice, establishing the Deals &
Acquisitions Group. Previously, he held management and technical positions with Digital Equipment Corporation. He has a Masters
of Business Administration from Northwestern University and a Bachelors of Science – Electrical Engineering from Rochester
Institute of Technology.
Mr. Gallenberger has extensive semiconductor equipment industry, mergers & acquisition, capital markets, engineering technical,
financial, and CFO experience that the Board of Directors believes qualifies him to serve as a director of Data I/O.
Alan B. Howe, age 55, was appointed a director of Data I/O effective January 31, 2013. He has served as the Co-founder and
Managing Partner of Broadband Initiatives LLC, a boutique corporate advisory and consulting firm, since 2001. He served as Vice
President of Strategic and Wireless Business Development for Covad Communications, Inc., a national broadband
telecommunications company from May 2005 to October 2008. He served as CFO and Vice President of Corporate Development for
Teletrac, Inc. from April 1995 to April 2001. Previously, he held various executive management positions for Sprint PCS, and
Manufacturers Hanover Trust Company. He is currently a board member since 2009 and Vice Chairman of Determine, Inc.
(NASDAQ: DTRM) a board member since 2016 of Urban Communications (TSX: V) and has served on a number of private and
public boards including in the past five years former reporting companies Qualstar and Ditech Networks, Inc. He has a Masters of
Business Administration in Finance from Indiana University and a Bachelors of Science – Business Administration and Marketing
from University of Illinois.
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Mr. Howe has extensive wireless, business development, financial, CEO, CFO, board level and Chairman experience that the Board of
Directors believes qualifies him to serve as a director of Data I/O.
Communications with the Board of Directors
THE BOARD OF DIRECTORS
Shareholders may communicate with the Board of Directors by sending an email or by sending a letter to Data I/O Corporation Board
of Directors, c/o the Secretary, 6645 185th Ave NE, Suite 100, Redmond, WA 98052. The Secretary will receive the correspondence
and forward it to the Chairman of the applicable Board of Directors Committee or to any individual director or directors to whom the
communication is directed.
BOARD COMMITTEES
During the year ended December 31, 2016, there were nine meetings of the Board of Directors. Each of the incumbent directors who
was on the Board of Directors during 2016 attended 100% of the aggregate of the total number of meetings of the Board of Directors
and the total number of meetings held by all committees of the Board of Directors on which he served during his term of service on
the Board of Directors. Data I/O does not have a policy requiring members of the Board of Directors to attend the Annual Meeting,
although we typically encourage our Board of Directors to attend. Mr. Brown and Mr. Ambrose attended our 2016 Annual Meeting in
person and Mr. Crowley, Mr. Gallenberger, and Mr. Howe attended via telephone.
The Board of Directors had three standing Committees during 2016: the Corporate Governance and Nominating Committee, the
Audit Committee, and the Compensation Committee. Each committee was comprised solely of independent directors during 2016, as
defined by applicable NASDAQ listing standards including director independence generally as well as additional independence
requirements for audit and compensation committees, and the Sarbanes-Oxley Act of 2002. The following table shows the
composition of the Board Committees and Board Leadership structure during 2016 and through the date of this Proxy Statement.
Audit Committee
Director
M=member
Doug Brown
Brian Crowley
Alan Howe
M
Mark Gallenberger M
Anthony Ambrose
Chair
Compensation
Committee
M
M
Chair
Corporate Governance
and
Nominating Committee
M
Chair
M
M
Comments
Chairman of the Board
President & CEO
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee, or “CGNC”, develops, recommends to the Board of Directors, and monitors a
set of corporate governance principles applicable to Data I/O. The CGNC seeks qualified candidates to serve on the Board of
Directors, recommends them for the Board of Directors’ consideration for election as directors at the Annual Meeting of Shareholders
and proposes candidates to fill vacancies on the Board of Directors. The CGNC met three times in 2016. The CGNC continues to
seek qualified candidates and recommends the director nominees to the Board of Directors. The CGNC identifies, evaluates, and
recommends director nominees and Committee assignments which are described in greater detail below.
Audit Committee
The Audit Committee appoints, oversees, evaluates, and engages independent certified public accountants for the ensuing year and
approves the compensation and other terms of such engagement; reviews the scope of the audit; periodically reviews Data I/O’s
program of internal control and audit functions; receives and reviews the reports of the independent accountants; and reviews the
annual financial report to the directors and shareholders of Data I/O. Each member of the Audit Committee is an independent
director, as defined by applicable NASDAQ listing standards and the Sarbanes-Oxley Act of 2002. During 2016 and through the date
of this Proxy statement, all Audit Committee members are “audit committee financial experts” as defined by the applicable Securities
and Exchange (“SEC”) rules adopted pursuant to the Sarbanes-Oxley Act of 2002. The Audit Committee met five times during 2016.
See the “Report of the Audit Committee” for additional information.
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Compensation Committee
The Compensation Committee is composed entirely of independent directors, as defined by applicable NASDAQ listing standards for
compensation committees. The Compensation Committee is responsible for setting and administering the policies which govern all of
the compensation programs of Data I/O.
The Compensation Committee makes recommendations to the Board of Directors concerning the compensation of Data I/O’s
executive officers. The Compensation Committee administers Data I/O’s long-term equity incentive plans. The Compensation
Committee reviews all employee benefit programs and approves significant changes in major programs and all new programs. The
Compensation Committee met four times during 2016.
As authorized by the Compensation Committee charter, the Compensation Committee may retain consultants or other advisors to
assist in carrying out its responsibilities. No compensation consultants were engaged for 2016, however compensation surveys were
purchased.
Consideration of Director Nominees
The Corporate Governance and Nominating Committee has developed, and the Board has approved, Board Responsibilities and
Director Recruitment Objectives, which further outline our directors roles and responsibilities and desired traits, characteristics,
experience and criteria for selection. The Corporate Governance and Nominating Committee, or the independent members of the
Board of Directors, as applicable, in evaluating and determining whether to recommend a person as a candidate for election as a
director consider, in light of the Board Responsibilities and Director Recruitment Objectives, the relevant management and/or
technology industry experience of potential director candidates (such as experience as chief executive, operations or financial officer,
or similar positions); business development, mergers and acquisitions experience, public/corporate board experience, diversity,
knowledge of Data I/O; educational experience; commitment to maximizing shareholder value; certain values such as integrity,
accountability, judgment and adherence to high performance standards; independence pursuant to applicable guidelines; ability and
willingness to undertake the required time commitment to Board functions; shareholder input; and an absence of conflicts of interest
with Data I/O.
Director Diversity
The Corporate Governance and Nominating Committee also considers issues of diversity, such as diversity of gender, race and
national origin, education, professional experience and differences in viewpoints and skills. The CGNC does not have a formal policy
on Board diversity; however, the CGNC believes that it is important for Board members to represent diverse viewpoints. In
considering candidates for the Board, the CGNC considers the entirety of each candidate’s credentials in the context of these
standards. With respect to evaluating the nomination of continuing directors for re-election, the individual’s contributions to the
Board are also considered.
Identifying Director Nominees; Consideration of Nominees of the Shareholders
The Corporate Governance and Nominating Committee may employ a variety of methods for identifying and evaluating nominees for
director. The CGNC regularly assesses the size of the Board, the need for particular expertise on the Board, and whether any
vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the
CGNC considers various potential candidates for director which may come to the CGNC’s attention through current Board members,
professional search firms, shareholders, or other persons and evaluates these candidates in light of the Board Responsibilities and
Director Recruitment Objectives. These candidates are evaluated at regular or special meetings of the CGNC, and may be considered
at any point during the year.
The Corporate Governance and Nominating Committee will consider candidates recommended by shareholders, when the
nominations are properly submitted, under the criteria summarized above in “Consideration of Director Nominees” and in accordance
with the procedures described below in “Shareholder Nominations and Proposals for the 2017 Annual Meeting of Shareholders.”
Following verification of the shareholder status of persons proposing candidates, the CGNC makes an initial analysis of the
qualifications of any candidate recommended by shareholders or others pursuant to the criteria summarized above to determine if the
candidate is qualified for service on the Data I/O Board of Directors before deciding to undertake a complete evaluation of the
candidate. If any materials are provided by a shareholder or professional search firm in connection with the nomination of a director
candidate, such materials are forwarded to the CGNC as part of its review. Other than the verification of compliance with procedures
and shareholder status, and the initial analysis performed by the CGNC, a potential candidate nominated by a shareholder is treated
like any other potential candidate during the review process by the CGNC. For eligible shareholder nominees to be placed on the
ballot for the 2017 Annual Meeting of Shareholders, shareholders were required to deliver nominations for proposed director
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nominees to Data I/O by February 23, 2017. While no formal candidate nominations were made by shareholders for election at the
2017 Annual Meeting, Mr. Howe and Mr. Gallenberger were initially identified by discussions with significant shareholders and the
Board.
Certain Relationships and Related Transactions
Our Audit Committee is charged with monitoring and reviewing issues involving potential conflicts of interest, and reviewing and
approving related party transactions as set forth in the Code of Ethics, which is posted on the corporate governance page of our
website at www.dataio.com/company/investorrelations/corporategovernance.aspx. Under our Code of Ethics, our directors, officers
and employees are expected to avoid conflicts of interest with Data I/O and are required to report any such conflicts of interest to our
Chief Executive Officer or Chief Financial Officer, or to the Chair of our Audit Committee. Our Audit Committee reviews all such
transactions and relationships by our directors and executive officers that come to its attention either through the director and officer
questionnaires or otherwise, and considers whether to approve or take other appropriate action with respect to such transactions or
relationships. During 2015 and 2016, no related party transactions that were significant or material occurred.
BOARD COMPENSATION
Employee directors (Anthony Ambrose) do not receive additional compensation for serving on the Board of Directors. During 2016,
non-employee directors received a cash retainer of $7,750 for each quarter of service. Data I/O paid additional quarterly
compensation to the non-employee directors who served as Chairman of the Board of Directors or as a Committee chair: $3,750 for
Chairman of the Board of Directors; $2,500 for Chairman of the Audit Committee; $2,000 for Chairman of the Compensation
Committee; and $2,000 for Chairman of the Corporate Governance and Nominating Committee. Fees are prorated based on time
served for changes in directors and assignments.
In addition, each non-employee Board of Directors member as of May 24, 2016, was granted a restricted stock award for 5,400 shares
of Data I/O stock. New non-employee members who join the Board of Directors are granted 15,000 nonqualified stock options as an
initial grant. The stock options are granted under the provisions and terms of the Amended and Restated 2000 Stock Compensation
Incentive Plan (“2000 Plan”). Data I/O also reimburses non-employee directors for actual travel and out-of-pocket expenses incurred
in connection with service to Data I/O.
Each Data I/O non-employee member of the Board of Directors is required to achieve ownership of Data I/O stock at least equal to
three times the annual director cash retainer fee based on Data I/O’s then current share price. Non-employee directors have five years
from their initial election or appointment to meet the ownership target requirement. Amounts that count toward meeting the target
requirement include: shares owned; shared ownership (shares owned or held in trust by immediate family); and the gain amount from
in-the-money vested options. If the stock ownership target requirement has not been met by any non-employee director, until such
time as such director reaches the target requirement, he or she will be required to retain any Data I/O shares issued by Data I/O to such
director (other than those disposed of to pay for the exercise and associated taxes on those shares). As of the Record Date, all non-
employee directors have met the stock ownership target requirement.
The Chief Executive Officer (“CEO”) is required to achieve ownership of Data I/O stock of at least two times the base pay of the CEO
based on Data I/O’s then current share price. The CEO has five years from appointment to meet the ownership target requirement.
Amounts that count toward meeting the target requirement are the same as for the Board of Directors. If the stock ownership target
requirement has not been met by the CEO, until such time as the CEO reaches the requirement amount, he or she will be required to
retain any Data I/O shares issued by Data I/O (other than those disposed of to pay for the exercise and associated taxes on those
shares). As of the Record Date the CEO has met the stock ownership target requirement.
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DIRECTOR COMPENSATION
The following table shows compensation paid by Data I/O to non-employee directors during 2016.
Fees Earned
or Paid in
Cash
($)
(b)
Stock
Awards
($)
(c)
Option
Awards
($)
(d)
Non-Equity
Incentive Plan
Compensation
($)
(e)
Nonqualified
Deferred
Compensation
Earnings
($)
(f)
All Other
Compensation
($)
(g)
Total
($)
(h)
Name
(a)
Douglas W. Brown (1)(2)
$41,000 $14,013
Brian T. Crowley (1)(2)
$39,000 $14,013
Alan B. Howe (1)(2)
$46,000 $14,013
Mark J. Gallenberger (1)(2)
$39,000 $14,013
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$55,013
$0
$53,013
$0
$60,013
$0
$53,013
(1) Each outside director elected at the annual meeting in 2016 was awarded 5,400 shares of restricted stock with a fair value of
$14,013 on May 24, 2016 vesting in one year or the next annual meeting, if earlier.
(2) Each outside director had the following aggregate number of option awards outstanding at December 31, 2016: Brown,
27,500; Crowley, 15,000, Gallenberger 15,000 and Howe 15,000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Data I/O’s directors, certain officers and persons who own more than
ten percent (10%) of Data I/O’s Common Stock (“Reporting Persons”) to file with the SEC initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of Data I/O. Reporting Persons are required by SEC regulations
to furnish Data I/O with copies of all Section 16(a) reports.
To Data I/O’s knowledge, based solely on its review of copies of such reports furnished to Data I/O and representations that no other
reports were required, all Section 16(a) filing requirements applicable to its Reporting Persons were complied with during 2016.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees Data I/O’s financial reporting process on behalf of the Board of Directors. Management has the
primary responsibility for the consolidated financial statements and the reporting process, including the systems of internal controls.
Audit Committee members are not professional accountants, or auditors and their functions are not intended to duplicate or to certify
the activities of management or the independent auditors. In fulfilling its oversight responsibilities, the Committee reviewed the
audited consolidated financial statements in the Annual Report (Form 10-K) with management, including a discussion of the quality,
not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the
financial statements.
The Committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those
audited consolidated financial statements with generally accepted accounting principles in the United States, their judgments as to the
quality, not just the acceptability, of Data I/O’s accounting principles and such other matters as are required to be discussed by
PCAOB AU Section 380 with the Committee under generally accepted auditing standards. In addition, the Committee has discussed
with the independent auditors the auditors’ independence from management and Data I/O including the matters in the written
disclosures and the letter provided by the independent auditors, as required by the applicable requirements of the Public Company
Oversight Board for independent auditor communications with Audit Committees concerning independence, and considered the
compatibility of non-audit services with the auditors’ independence.
The Committee selects and engages Data I/O’s independent auditors, is involved in selecting and approving the independent auditors’
lead audit partner, and discusses the overall scope and plans for the audits. The Committee meets with the independent auditors, with
and without management present, to discuss the results of their examinations, their evaluations of Data I/O’s internal controls, and the
overall quality of Data I/O’s financial reporting. The Committee held five meetings during 2016, of which five were attended by Data
I/O’s independent auditors.
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In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors (and the Board
has approved) that the audited consolidated financial statements be included in Data I/O’s Annual Report (Form 10-K) for the year
ended December 31, 2016 for filing with the Securities and Exchange Commission. The Committee has considered the impact of
changing independent auditors and has selected Grant Thornton LLP as Data I/O’s auditors for the current year.
Respectfully submitted,
AUDIT COMMITTEE
Douglas W. Brown (Chair)
Mark Gallenberger
Alan B. Howe
April 4, 2017
PRINCIPAL ACCOUNTANT’S FEES AND SERVICES
Audit Fees: Aggregate fees billed by Grant Thornton LLP for professional services rendered for the audit of Data I/O’s financial
statements for each of the years ended December 31, 2016 and 2015 and for review of the financial statements included in each of
Data I/O’s quarterly reports on Form 10-Q during each of the years ended December 31, 2016 and 2015, were approximately
$192,171 and $181,178, respectively.
Audit Related Fees: No aggregate fees were billed for the years ended December 31, 2016 and 2015 for assurance and subsidiary
related services by Grant Thornton LLP that are reasonably related to the performance of the audit or review of Data I/O’s financial
statements that are not reported under the caption “Audit Fees” above, including accounting treatment consultations.
Tax Fees: No aggregate fees were billed for the years ended December 31, 2016 and 2015 for professional services rendered by Grant
Thornton LLP for tax compliance, tax advice, tax examination support, and tax planning.
All Other Fees: No aggregate fees were billed for the years ended December 31, 2016 and 2015 for all other products and services
provided by Grant Thornton LLP that are not otherwise disclosed above.
Policy on Pre-Approval by Audit Committee of Services Performed by Independent Auditors
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors.
These services may include audit services, non-audit services, tax services and other services. Pre-approval is detailed as to the
particular service or category of service and is subject to a specific engagement authorization.
During the year, circumstances may arise when it may become necessary to engage the independent auditors for additional services
not contemplated in the original pre-approval. In those circumstances, the Audit Committee has delegated pre-approval authority to
the Chair of the Audit Committee for those instances when pre-approval is needed prior to a scheduled Audit Committee meeting.
These additional approvals should be reported at the next scheduled Audit Committee meeting.
For 2016, all services provided by the independent auditors were pre-approved.
Shareholder Vote
EXECUTIVE COMPENSATION
At our 2016 Annual Meeting of Shareholders, our shareholders approved, in an advisory vote, the compensation of our Named
Executive Officers, as disclosed in the Executive Compensation discussion and analysis, the compensation tables and the related
disclosures in our proxy statement. The proposal was approved by our shareholders with 88.21 percent of the votes cast voting “for”
approval and 2.10 percent voting “against” approval. In light of the level of approval by our stockholders, the Compensation
Committee considered the result of the vote and did not make changes to our compensation policies or practices specifically in
response to the stockholder vote.
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Elements of Our Company’s Compensation Plan
Annual executive officer compensation consists of the following elements which are described in more detail below:
Annual base salary;
Management Incentive Compensation Plan or “MICP”;
Long-term equity incentives;
Benefits; and
Perquisites and other perceived benefits.
It is the Compensation Committee’s policy to set total executive officer compensation at competitive levels based on compensation
surveys with similar positions in similar sized company revenue ranges and at levels sufficient to attract and retain a strong motivated
leadership team. Our philosophy for compensation of executive officers is based on the following two principles:
i. Executive base compensation levels should be established by comparison of job responsibility to similar
positions in comparable companies and be adequate to retain highly-qualified personnel; and
ii Variable compensation should be a critical element of compensation and be set to be comparably competitive and to
provide strong incentives to improve performance and shareholder value.
Annual Base Salary. The Compensation Committee establishes a base salary structure for each executive officer position.
This structure defines the salary levels and the relationship of base salary to total cash compensation. The Compensation
Committee reviews the salary structure periodically.
MICP. The MICP offers each executive officer a performance-based opportunity to earn the variable component of annual
cash compensation in an amount tied to a percentage of the executive officer’s base salary. The Compensation Committee’s
philosophy in setting executive MICP percentages and the formulas for MICP payout is to pay above average total
compensation for better than average historical or expected financial performance and below average compensation for lower
than or average historical or expected financial performance. The percentages of base salary targeted for MICP payout (“the
MICP Target”) for specific executive officers for a given year are generally the same as the previous year, but can be
changed by the Compensation Committee on an annual basis. The 2015 and 2016 MICP Target percentages for our
executive officers were as follows: Mr. Ambrose 60% of base salary; Mr. Hatlen 45% of base salary; and Mr. Gulati 45% of
base salary. The MICP payout can range from 0% to 200% of each executive’s MICP Target. If the maximum target
measures in the 2017 MICP Variable Compensation Matrix were achieved under the MICP measures, the Chief Executive
Officer, Mr. Ambrose, would earn a cash bonus of 120% of his base salary; Mr. Gulati would earn 90% of his base salary;
and Mr. Hatlen would earn 90% of his base salary.
The Compensation Committee determined that for 2015, 2016 and 2017 it was and will be critical to emphasize growth,
profitability and cash preservation, as well as completion of key development and operational projects and corporate cost and
spending objectives to deliver future new revenue and profitability. They have established two measures; one for Financial
Performance (“FP”) is based on achievement of various levels of operating income as percentage of revenue. See below for
the Financial Performance Matrix. The second measure for Product and Spending Performance (“PSP”) is based on the
completion of key development and operational projects including new product deliverables, spending and cost reductions,
and new customer targets. The PSP is based upon an incentive compensation pool allocated among project development and
operational goals typically related to delivery, cost, milestones, pilot customers, and releases, as well as spending goals
related to certain product cost reduction targets and spending reduction targets. The achieved PSP result is prorated among
participants based on their “at target” percentage incentive compensation. The PSP pool for 2016 was set, such that up to
approximately 27% of target percentage incentive compensation could be achieved by this measure. For 2015, 2016 and
2017, the payout is a combination of the two (FP & PSP) measures.
The Compensation Committee believes that for 2015, 2016 and 2017, the applicable measures of key results for Data I/O
have affected or will affect near-term and long-term shareholder value. A greater or lesser percentage of MICP Target is to
be paid based on Data I/O’s actual achievement of these measures with the payout target typically based on company
financial plans as the Board determines appropriate. For 2015 the MICP payout was approximately 88% of target with
payout achieved under the combined FP and PSP measure. For 2016 the MICP payout was approximately 117% of target
with payout achieved under the combined FP and PSP measures. The Compensation Committee retains discretion to adjust
the calculation of the two measures for changes outside normal business operations such as acquisitions or asset sales.
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Data I/O Corporation 2015 & 2016 MICP Variable Compensation Matrix
Range of Payouts (actual results interpolated)
The 2015 and 2016 MICP Variable Compensation Matrix consists of two possible alternative measures. Project and
Spending Performance (PSP) and Financial Performance (FP) with the payout based upon the combination of the two
measures achieved.
Project and Spending Performance (PSP) An incentive compensation pool set to allow achievement of up to approximately
the first 27% of target payout with points allocated among project development goals related to delivery, cost, milestones,
pilot or new customers, and releases, as well as spending goals related to certain product cost reduction targets and spending
reduction targets.
Financial Performance Matrix (FP)
Operating Profit as a % of Revenue
FP matrix payout as a % of Target
0.0%
0%
2.5%
50%
Target
Payout
5.0%
100%
Target 200%
Payout
10.0%
200%
7.5%
150%
Long-Term Equity Incentives. The Compensation Committee approves grants under the Data I/O Corporation 2000 Plan
(“the 2000 Plan”). This is Data I/O’s only long-term incentive plan. The primary purpose of the 2000 Plan is to make a
significant element of executive pay a reward for taking actions which maximize shareholder value over time. Generally,
new options or stock awards are granted under the 2000 Plan, except the inducement grant of options and restricted stock to
Mr. Ambrose and the inducement grant of options to Mr. Gulati, which were awarded on their employment under the terms
of the 2000 Plan, but consisted of unregistered Data I/O shares as permitted for inducement grants.
Award Criteria
The Compensation Committee grants options or restricted stock unit awards based primarily on its perception of the
executive’s ability to affect future shareholder value and secondarily on the competitive conditions in the market for highly-
qualified executives who typically command compensation packages which include a significant equity incentive. All
restricted stock unit awards granted to our executive officers in 2015 and 2016 were based on these criteria.
Exercise Price
Historically, all options granted by Data I/O have been granted with an exercise price equal to the fair market value (an
average of the day’s high and low selling price) of Data I/O’s Common Stock on the date of grant and, accordingly, will only
have value if Data I/O’s stock price increases. Options granted to employees are non-qualified.
Vesting and Exercise
Options granted to employees vest at a rate of 6.25% per quarter and have a six year term. Options granted to non-employee
Directors are also non-qualified options and vest quarterly over a three year period. Restricted stock grants to employees vest
annually over a 4 year period. Restricted stock grants to non-employee Directors vest in one year or on the next annual
meeting date, if earlier. All grants are subject to acceleration of vesting in connection with certain events leading to a change
in control of Data I/O or in the event in a change in control or at any other time at the discretion of the Compensation
Committee. All options granted to executive officers are issued in tandem with limited stock appreciation rights (“SARs”),
which become exercisable only in the event of a change in control of Data I/O. See “Change in Control and other
Termination Arrangements.”
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Award Process
The timing of our typical grant/award is usually determined well in advance, with approval at a scheduled meeting of our
Board of Directors or its Compensation Committee with the grant date generally to be effective on the date of our next
Annual Meeting of Shareholders. The Annual Meeting of Shareholders does not coincide with any of our scheduled earning
releases. We do not anticipate option grants or restricted stock awards at other dates, except for grants/awards to new
employees based on their first date of employment or in specific circumstances approved by the Compensation Committee.
The grant/award date is established when the Compensation Committee approves the grant/award and all key terms have
been determined. If at the time of any planned grant/award date, any member of our Board of Directors or Executive Officers
is aware of material non-public information, the Company would not generally make the planned grant/award. In such an
event, as soon as practical after material information is made public, the Compensation Committee would authorize the
delayed grant/award.
Benefits. Executive Officers of Data I/O are eligible for the same benefits as other Data I/O employees. Data I/O has no
defined benefit pension programs. Data I/O has a 401(k) tax qualified retirement savings plan in which all U.S. based
employees, including U.S. Executive Officers, are able to contribute the lesser of up to 100% of their annual salary or the
limit prescribed by the IRS on a Roth or pre-tax basis. Data I/O will match up to 4% of pay contributed. Matching
contributions in any year require employment on December 31, except in the case of retirement per the plan, and vest after
three years of service credit.
Perquisites and Other Personal Benefits. We believe perquisites are not conditioned upon performance, create divisions
among employees, undermine morale, and are inconsistent with our compensation philosophy and policy of equitable
treatment of all employees based upon their contribution to our business. No executive officer received perquisites valued at
$10,000 or more in 2015 or 2016.
Individual Executive Officers’ Performance. The base salary of each executive officer is reviewed annually by the President
and Chief Executive Officer. This is done on the basis of a review by the President and Chief Executive Officer, evaluating
the executive’s prior year performance against their individual job responsibilities and attainment of corporate objectives and
Data I/O’s financial performance. In developing executive compensation packages to recommend to the Compensation
Committee, the President and Chief Executive Officer considers, in addition to each executive’s prior year performance, the
executive’s long-term value to Data I/O, the executive’s pay relative to that for comparable surveyed jobs, the executive’s
experience and ability relative to executives in similar positions, and the current year increases in executive compensation
projected in industry surveys.
The Compensation Committee then reviews the President and Chief Executive Officer’s recommendations for executive
officers’ total compensation and approves final decisions on pay for each executive officer based on the President and Chief
Executive Officer’s summary of the executive officers performance and on the other criteria and survey data described above.
In this process, the Compensation Committee consults with Data I/O’s President and Chief Executive Officer.
The base salary, total cash compensation, and long term equity incentive compensation for the President and CEO are
reviewed annually by the Compensation Committee. This review includes a written evaluation of the CEO’s performance for
the previous year. The Compensation Committee meets annually without the President and Chief Executive Officer to
evaluate his performance and to develop a recommendation for his compensation for the coming year. In addition to
reviewing Data I/O’s financial performance for the prior year, the Committee reviewed compensation surveys for chief
executive officers and the President and Chief Executive Officer’s individual performance, including development and
execution of short- and long-term strategic objectives, Data I/O revenue growth and profitability, the achievement of which is
expected to increase shareholder value.
The Compensation Committee determined the compensation package, including salary, bonus, MICP participation, stock
option grants, restricted stock awards, and other benefits for Mr. Ambrose, President and Chief Executive Officer, based on
the Committee’s perception of his qualifications for the position and his ability to affect future shareholder value, as well as
during the hiring process in 2012 based on compensation surveys, advice from Korn Ferry, and the competitive conditions in
the market. No base pay adjustment was made in 2015 or 2016 for Mr. Ambrose, although the number of shares of restricted
stock unit awards to Mr. Ambrose increased from 35,000 in 2014 to 50,000 in 2015 and 2016.
Consideration of Risk in Compensation
The Compensation Committee believes that promoting the creation of long-term value discourages behavior that leads to excessive
risk. The Compensation Committee believes that the following features of our compensation programs provide incentives for the
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creation of long-term shareholder value and encourage high achievement by our executive officers without encouraging inappropriate
or unnecessary risks:
Our long-term incentives in the form of stock options or restricted stock awards are at the discretion of the Compensation
Committee and not formulaic.
Stock options become exercisable over a four year period and remain exercisable for up to six years from the date of grant
and restricted stock awards vest over a four year period, encouraging executives to look to long-term appreciation in equity
values.
We balance short and long-term decision-making with the annual cash incentive program and stock options and restricted
stock that vest over four years.
Because of the extent of the CEO and CFO’s direct stock ownership, they could lose significant wealth if Data I/O were
exposed to inappropriate or unnecessary risks which in turn affected our stock price.
The metrics used in the MICP are measures the Committee believes drive shareholder value. Moreover, the Committee
attempts to set ranges for these measures that encourage success without encouraging excessive risk-taking to achieve short-
term results.
In addition, the overall MICP incentive compensation cannot exceed two times the MICP Target amount, no matter how
much performance exceeds the measures established for the year.
Accounting and Tax Considerations of our Compensation Program
Options granted to employees are non-qualified options because of the more favorable tax treatment for Data I/O. We are required to
value granted stock options under the fair value method and expense those amounts in the income statement over the stock option’s
remaining vesting period. Restricted stock is valued at its fair value on the award date and is expensed over its vesting period.
We have structured our compensation program to comply with Internal Revenue Code Sections 162(m) and 409A. Under Section
162(m) of the Internal Revenue Code, a limitation was placed on tax deductions of any publicly-held corporation for individual
compensation to covered employees (generally the chief executive officer and the three other most highly compensated executive
officers, other than the chief financial officer, whose compensation must be disclosed pursuant to rules and regulations under the
Securities Exchange Act of 1934) exceeding $1 million in any taxable year, unless the compensation is performance-based. The
Compensation Committee is aware of this limitation and believes that no compensation to be paid by Data I/O in 2017 will exceed the
$1 million limitation, except possibly related to a change of control example.
Change in Control and other Termination Arrangements
Change in Control Arrangements. Data I/O has entered into agreements (the “Executive Agreements”) with Messrs.
Ambrose, Gulati and Hatlen which entitle them to receive payments if they are terminated without cause or resign with good
reason within specified periods before or after the occurrence of certain events deemed to involve a change in control of Data
I/O. Effective July 30, 2014, the Executive Agreements of Messrs. Ambrose, Gulati and Hatlen were amended and restated
and the term of their Executive Agreements was extended with automatic renewal provisions. The Executive Agreements
ensure appropriate incentives are in place for Messrs. Ambrose, Gulati and Hatlen to complete any change in control related
transaction and transition, as well as comply with the provisions of Section 409A of the Internal Revenue Code. The
Executive Agreements state that the resulting additional severance will be calculated under the Executive Agreements based
on Data I/O’s severance arrangements in place immediately preceding the date of a change in control (See: ”Other
Termination Arrangements” below for current severance policy). The Executive Agreements provide for continuation and
vesting in Data I/O’s matching 401(k) contributions through the date of termination after a change in control and include a
reimbursement allowance of $20,000 for outplacement services. The Executive Agreements also have a transaction closing
incentive of one half year’s annual salary for Messrs. Ambrose, Gulati and Hatlen to encourage the consideration of all forms
of strategic alternatives.
Data I/O’s option grants and stock awards have been granted pursuant to the provisions of the 2000 Plan. The Change in
Control provision applicable to the 2000 Plan is as follows:
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2000 Plan
The 2000 Plan allows for the granting of “Awards”, which include options, restricted stock and other awards made pursuant
to the 2000 Plan. Subject to any different terms set forth in the award agreement, vesting of “qualifying” options and
restricted stock awards may be affected by a Change in Control as described out in the table below. A “Change in Control” is
defined to include (i) a merger or consolidation of the Company in which more than 50% of the voting power of the
Company’s outstanding stock after the transaction is owned by persons who are not shareholders immediately prior to such
transaction, and (ii) the sale or transfer of all or substantially all of the Company’s assets. A “Qualifying Award’ is defined
as an option or other Award that has been held for at least 180 days as of the Change of Control. “Qualifying Shares” means
common stock issued pursuant to a Qualifying Award which are subject to the right of Data I/O to repurchase some or all of
such shares at the original purchase price (if any) upon the holder’s termination of services to Data I/O.
Treatment of Awards on a Change in Control
The outstanding Awards do not remain outstanding or are
not assumed by the surviving entity or replaced with
comparable Awards.
The outstanding Awards remain outstanding after a Change
of Control or are assumed by the surviving entity or replaced
with comparable Awards.
The outstanding Awards remain outstanding after a Change
of Control or are assumed by the surviving entity or replaced
with comparable Awards, but the holder of a Qualifying
Award is terminated involuntarily within 180 days of the
Change of Control.
Acceleration of Vesting
Subject to certain limitations, the vesting of Qualifying
Awards are accelerated in full. Restricted stock will vest and
options will be exercisable in full prior to the effective date
of the Change of Control.
Subject to certain limitations, the vesting of outstanding
Qualifying Awards will be accelerated to the extent of 25%
of the unvested portion thereof. The remaining 75% of the
unvested portion will vest in accordance with the vesting
schedule set forth in the applicable Award agreement.
All Awards held by such person will be accelerated in full.
Restricted stock will vest and options will be exercisable in
full for a period of 90 days commencing on the effective date
of the involuntary termination, or if shorter, the remaining
term of the option.
In 1983, Data I/O adopted a SAR Plan which allows the Board of Directors to grant to each director, executive officer or
holder of 10% or more of the stock of Data I/O a SAR with respect to certain options granted to these parties. A SAR has
been granted in tandem with each option granted to an executive officer of Data I/O. SARs granted which have been held for
at least six months are exercisable for a period of 20 days following the occurrence of either of the following events: (i) the
close of business on the day that a tender or exchange offer by any person (with certain exceptions) is first published or sent
or given if, upon consummation thereof, such person would be the beneficial owner of 30% or more of the shares of
Common Stock then outstanding; or (ii) approval by the shareholders of Data I/O (or, if later, approval by the shareholders of
a third party) of any merger, consolidation, reorganization or other transaction providing for the conversion or exchange of
more than 50% of the outstanding shares of Data I/O’s Common Stock into securities of a third party, or cash, or property, or
a combination of any of the foregoing.
Other Termination Arrangements. Data I/O has a severance policy for U.S. employees that provides for severance payouts
for terminations without cause based upon years of service. The current formula, effective March 1, 2014, is 1 week pay for
each year of service with a limit of six months’ pay. For Mr. Hatlen, the prior standard formula applies, with pay and service
years frozen at March 1, 2014, which provided 1.5 weeks of pay for each year of service for those with 10 or more years of
service. Mr. Ambrose, Mr. Hatlen and Mr. Gulati had at March 25, 2017 approximately 4, 25 and 4 years of service,
respectively. Mr. Ambrose is entitled to a one year of base salary severance, except in the case of a change in control, as part
of his employment arrangement. Mr. Gulati is entitled to a one-half year of base salary severance, except in the case of a
change in control, as part of his employment arrangement. Data I/O does not have a formal policy regarding executive
severance but has generally provided an amount it believes is consistent with severance typically provided for executives in
similar positions and with similar periods of service.
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Change in Control and Other Termination Arrangements
Termination
without cause and
Change in Control
not applicable
Termination without cause and Change
in Control applicable
Change in Control applicable without
termination
Name
Compensation (3) Compensation (2)
Option/SAR/RSA
Vesting (1)
Compensation (4)
Option/SAR/RSA
Vesting (1)
Anthony Ambrose (5)
$310,000
$694,945
113,750
$155,000
113,750
Joel S. Hatlen (3)
$134,351
$588,972
62,500
$112,500
62,500
Rajeev Gulati (6)
$112,500
$475,234
57,500
$112,500
57,500
(1) Maximum vesting on Change in Control as of March 17, 2017.
(2) Represents the Data I/O standard employee severance, alternative Executive/Employment Agreement severance, change in
control transition/closing incentive, and outplacement expense reimbursement, as applicable as of March 17, 2017.
(3) Minimum amount per Data I/O standard employee severance plan; no formal executive severance plan is in place as of
March 17, 2017. A letter agreement provides that Mr. Hatlen’s severance shall be equal to the DIO standard severance in
effect at March 1, 2014. (See (5) below for Mr. Ambrose and (6) below for Mr. Gulati.)
(4) Represents change in control transition/closing incentive as of March 17, 2017.
(5) Mr. Ambrose entitled to a one year of base salary severance, except in the case of a change in control, as part of his
employment arrangement.
(6) Mr. Gulati is entitled to a one-half year of base salary severance, except in the case of a change in control, as part of his
employment arrangement.
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SUMMARY COMPENSATION TABLE
The following table shows compensation paid by Data I/O for services rendered during 2015 and 2016 to each of our named executive
officers.
Name1
(a)
Year
(b)
Salary2
(c)
Bonus3
(d)
Stock
Awards4
(e)
Option
Awards4,5
(f)
Non-
Equity
Incentive
Plan
Compen-
sation6
(g)
Non-
Qualified
Deferred
Compen-
sation
Earnings
7
(h)
All Other
Compen-
sation8
(i)
Total
(j)
Anthony Ambrose
Chief Executive
Officer &
President
Joel Hatlen
Vice President
Chief Financial
Officer, Secretary
Treasurer
Rajeev Gulati
Vice President
Chief Technical
Officer
2016
2015
$310,000
$310,000
$0
$0
$129,750
$158,000
$0
$0
$217,625
$163,143
$0
$0
$11,661 $669,036
$11,661 $642,804
2016
2015
$225,000
$225,000
$750
$0
$64,875
$79,000
$0
$0
$118,465
$88,808
$0
$0
$11,818 $420,908
$12,077 $404,885
2016
2015
$225,000
$225,000
$0
$5,063
$51,900
$63,200
$0
$0
$118,465
$88,808
$0
$0
$11,008 $406,373
$11,008 $393,079
(1) Data I/O currently has three named executive officers.
(2) No base pay adjustments were made for executive officers in 2016 or 2015.
(3) Part of incentive plan for development project team for Mr. Gulati. Service award paid in 2016 to Mr. Hatlen.
(4) Amount represents the fair value of restricted stock or the fair value of stock options granted during the year.
(5) All options granted to executive officers are granted in tandem with an equal number of SARs. SARs are only
exercisable upon the occurrence of certain events leading to a change in the control of Data I/O. See “Change in Control
and Other Termination Arrangements.”
(6) Amounts earned under the MICP variable compensation arrangement in place for the year.
(7) Not applicable for Data I/O.
(8) These amounts represent for Mr. Ambrose, Mr. Hatlen, and Mr. Gulati Data I/O’s matching contributions to Data I/O’s
401(k) Plan, and the value of group term life insurance in excess of premiums paid by each of the executive officers
under the standard employee benefit plans.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
Number of
Securities
Underlying
Unexe-
rcised
Options
Unexer-
cisable
(#)
(c)
Option
Exercise
Price
($)
(e)
Option
Expiration
Date
(f)
Number
of
Shares
or Units
of
Stock
Held
That
Have
Not
Vested
(#)
(#)
(g)
Market
Value of
Shares or
Units of
Stock
That
Have
Not
Vested
($)
(h)
0
0
1.87
10/25/2018
113,750 $475,475
6.02
5/17/2017
62,500 $261,250
Number of
Securities
Underlying
Unexer-
cised
Options
Exercisable
(#)
(b)
140,000
25,000
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
(i)
0
0
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
(j)
$0
$0
81,250
18,750
2.09
7/26/2019
45,000 $188,100
0
$0
Name
(a)
Anthony
Ambrose
Joel
Hatlen
Rajeev
Gulati
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EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about Data I/O’s Common Stock that may be issued upon the exercise of options and rights
under all of Data I/O’s existing equity compensation plans as of December 31, 2016.
(a) Number of securities
to be issued upon the
exercise of outstanding
options, warrants and
rights
(b) Weighted–
average exercise
price of outstanding
options, warrants
and rights
(c) Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
136,425
$4.71
590,848
240,000
376,425
$1.96
$2.96
0
590,848
Equity compensation plans
approved by the security
holders (1) (2)
Equity compensation plans not
approved by the security
holders (3)
Total
(1) Represents shares of Data I/O’s Common Stock issuable pursuant to our 2000 Plan, 1992 Employee Stock Purchase Plan, and
Director Fee Plan (not currently in use). Table excludes unvested restricted stock awards of 464,850 from the 2000 Plan.
(2) Stock Appreciation Rights (“SAR”) Plan provides that directors, executive officers or holders of 10% or more of Data I/O’s
Common Stock have a 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.
(3) Inducement grants to Anthony Ambrose consisting of 140,000 out of an original grant of 200,000 non-qualified stock options and
to Rajeev Gulati consisting of 100,000 non-qualified stock options.
PROPOSAL 2: RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors requests that the shareholders ratify the continued appointment of Grant Thornton LLP to serve as Data I/O’s
independent auditors for calendar year 2017. Grant Thornton LLP examined the consolidated financial statements of Data I/O for the
year ended December 31, 2016. Representatives of Grant Thornton LLP are invited to be present at the Annual Meeting to make a
statement if they desire to do so and to respond to questions by shareholders.
The Board recommends a vote “FOR” the continued appointment of Grant Thornton LLP to serve as Data I/O’s independent
auditors for calendar year 2017.
PROPOSAL 3: AMENDMENT TO 2000 PLAN
At the Annual Meeting, the shareholders of Data I/O will be asked to approve an amendment and restatement of the 2000 Plan, which,
if approved, will increase the number of shares of Common Stock that have been made available under the 2000 Plan by an additional
250,000 shares, to an aggregate of 2,228,739 shares, the fair market value of such securities is $11,099,120 as of March 17, 2017 as
well as make certain other modifications to the 2000 Plan. As of March 17, 2017, Data I/O has outstanding options and awards with
respect to 772,725 shares of Common Stock and 529,461 shares of Common Stock available for grants. Approval of the proposed
increase will also be deemed a ratification of the terms of the 2000 Plan, as amended.
The Board of Directors believes that the 2000 Plan has contributed to strengthening the incentive of participating employees to
achieve the objectives of Data I/O and its shareholders by encouraging employees to acquire a greater proprietary interest in Data I/O.
The Board of Directors believes that additional shares must be reserved for use under the 2000 Plan to enable Data I/O to attract and
retain key employees through the granting of options under the 2000 Plan. The proposed increase in the number of shares reserved
under the 2000 Plan is not required or intended to cover awards previously made under the 2000 Plan. As such, no new plan benefits
have been granted to date, and future awards under the 2000 Plan are not yet determinable. Information concerning outstanding
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awards under the 2000 Plan is available in this proxy statement in the following tables and the narrative accompanying them:
Summary Compensation Table, Outstanding Equity Awards at Fiscal Year End and Director Compensation.
This proposal will be approved, if a quorum is present, and if the number of votes cast, in person or by proxy, in favor of t he proposal
exceeds the number of votes cast against the proposal. The Board of Directors recommends a vote FOR approval of the proposed
amendment and restatement of the 2000 Plan. Unless instructed otherwise, it is the intention of the persons named in the
accompanying form of proxy to vote shares represented by properly executed proxies in favor of the above-referenced amendment to
the 2000 Plan.
Description of the 2000 Plan, As Proposed to be Amended and Restated
The following description of the 2000 Plan, as proposed to be amended and restated, is qualified in its entirety by reference to the full
text of such 2000 Plan, a copy of which is attached to this Proxy Statement as Appendix A. The purpose of the 2000 Plan is to enhance
the long-term shareholder value of Data I/O by offering opportunities to employees, persons to whom offers of employment have been
extended, directors, officers, consultants, agents, advisors and independent contractors of Data I/O and its subsidiaries to participate in
Data I/O’s growth and success, and to encourage them to remain in the service of Data I/O and its subsidiaries and to acquire and
maintain stock ownership in Data I/O. The 2000 Plan may be administered either by the Board of Directors or a committee or
committees appointed by (in either case, the “Committee”), and consisting of two or more independent members of, the Board of
Directors. The Committee will have broad discretion to determine the amount and type of awards and terms and conditions of the
awards. Individual grants will generally be based on a person’s present and potential contribution to Data I/O.
As of March 17, 2017, Data I/O had approximately 92 employees and 8 non-employee directors who would be eligible to participate
in the 2000 Plan. Consultants, agents, advisors, and independent contractors can be eligible under the 2000 Plan. Because the grant of
awards is based upon a determination made by the Committee after a consideration of various factors, Data I/O currently cannot
determine the nature and amount of any awards that will be granted in the future to any eligible individual or group of individuals.
However, the maximum number of shares that can be granted under the 2000 Plan during any calendar year covered employees
(generally the chief executive officer and the three other most highly compensated officers, other than the chief financial officer,
whose compensation is required to be disclosed pursuant to the rules and regulations under the Securities Exchange Act of 1934, as
amended) is 200,000, except that Data I/O may make additional one-time grants to newly hired participants of up to 100,000 shares
per such participant. In addition, the maximum number of shares that can be granted to a non-employee director of Data I/O during
any calendar year is limited to 100,000. Data I/O believes that with these limitations and other provisions of the 2000 Plan, options
granted under the 2000 Plan will generate “qualified performance-based compensation” within the meaning of Section 162(m) of the
Internal Revenue Code and will, therefore, not be subject to the $1,000,000 cap on deductibility for federal income tax purposes of
certain compensation payments in excess of $1,000,000. See “Certain Federal Income Tax Consequences” below.
Awards may be granted in the form of incentive stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the “Code”), nonqualified stock options (“NQOs”) (each ISO or NQO, an “Option” and collectively,
“Options”), stock appreciation rights, stock awards in the form of restricted stock (“Restricted Stock”), or other arrangements
determined by the Committee. Any award may be granted either alone or in tandem with other awards granted under the 2000 Plan.
The option price of ISOs shall be as determined by the Committee, but shall not be less than 100% of the fair market value of the
Common Stock on the grant date. The option price of NQOs may be less than the fair market value of the Common Stock on the date
of the grant; however, as a matter of policy Data I/O does not grant options with an exercise price that is less than the fair market
value of the shares on the date of grant of the option. The Committee may condition the grant of the award upon the attainment of
specified performance goals or other criteria, which need not be the same for all participants. No ISOs may be granted under the 2000
Plan on or after May 10, 2022 (May 18, 2027 if this proposal is approved), but ISOs outstanding under the 2000 Plan may extend
beyond that date.
Options. Options granted under the 2000 Plan may be ISOs or NQOs. The exercise price of ISOs may not be less than the fair
market value of the shares subject to the ISO on the date of grant. The term of any ISO granted under the 2000 Plan may not exceed
ten years. In addition, ISOs are subject to certain other limitations in order to take advantage of the favorable U.S. tax treatment that
may be available for ISOs.
Restricted Stock. Restricted Stock awards consist of non-transferable shares of Common Stock of Data I/O which may be subject to
a right of purchase by Data I/O although Data I/O has not subjected any such awards to a repurchase right. The Committee may
provide for the lapse of the transfer restrictions over a period of time, or may accelerate or waive such restrictions, in whole or in part,
based on service, performance or other criteria determined by the Committee.
Stock Appreciation Rights. A stock appreciation right will give the holder the right to receive an appreciation distribution in an
amount equal to the excess of the fair market value of the number of shares of Common Stock covered by the right over the exercise
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price per share subject to the right. Stock appreciation rights may be granted separately or in tandem with a related Option. Payment
may be made in a combination of shares of Common Stock or in cash, as determined by the Committee.
The consideration payable upon issuance or exercise of an award and any taxes related to an award must generally be paid in cash or
check. However, the Committee, in its sole discretion, may, either at the time the Option is granted or at any time before it is
exercised and subject to such limitations as the Committee may determine, authorize payment by the tender of Common Stock already
owned by the participant for at least six months having a fair market value on the day prior to the exercise date equal to the aggregate
Option exercise price, by net exercise of the Option, by delivery of a promissory note, by delivery of a properly executed exercise
notice, together with irrevocable instruction (i) to a third-party designated by Data I/O to deliver to Data I/O the amount of sale or loan
proceeds to pay the exercise price and withholding tax obligations and (ii) to Data I/O to deliver the certificates for such shares to the
third-party, or by such other consideration as the Committee may permit. In addition, to assist a holder of award (excluding a holder
who is an officer or director of Data I/O due to Sarbanes Oxley restrictions) in acquiring shares of Common Stock pursuant to an
award granted under the 2000 Plan, the Committee, in its sole discretion, may authorize, either at the grant date or at any time before
the acquisition of Common Stock pursuant to the award, the extension of a loan to the holder by Data I/O, the payment by the holder
of the purchase price, if any, of the Common Stock in installments, or the guarantee by Data I/O of a loan obtained by the grantee
from a third-party. Awards generally may be exercised at any time within three months after termination of a participant’s
employment by, or consulting relationship with, Data I/O (but, only to the extent exercisable or payable at the time of termination).
However, if termination is due to the participant’s death or disability, the award generally may be exercised for one year. Except as
authorized by the Committee, no award shall be assignable or otherwise transferable by a participant other than by will or by the laws
of descent and distribution.
The Committee may adjust the performance goals and measurements applicable to awards. The Committee also may waive in whole
or in part any or all restrictions, conditions, vesting or forfeiture with respect to any award granted under the 2000 Plan. The Board of
Directors may amend, alter or discontinue the 2000 Plan or any award at any time, except that the consent of a participant is required
if the participant’s rights under an outstanding award would be impaired. In addition, the shareholders of Data I/O must approve any
amendment, alteration or discontinuance of the 2000 Plan that would (i) increase the total number of shares reserved under the 2000
Plan, (ii) with respect to provisions solely as they relate to ISOs, to the extent required for the 2000 Plan to comply with Section 422
of the Code, (iii) to the extent required by other applicable laws, rules or regulations or (iv) to the extent that the Board of Directors
otherwise concludes that shareholder approval is advisable.
The 2000 Plan constitutes an unfunded plan for incentive and deferred compensation. Data I/O is not required to create trusts or
arrangements to meet its obligations under the 2000 Plan to deliver stock or make payments.
In the event of a “change in control” of Data I/O, as defined in the 2000 Plan, in which the outstanding options do not remain
outstanding or are not assumed by the surviving entity or replaced with comparable options, the vesting of outstanding “qualifying”
awards under the 2000 Plan will, unless the applicable agreement with respect to the award or the Committee determines otherwise,
subject to certain limitations, be accelerated in full. If outstanding options remain outstanding after a change of control or are assumed
by the surviving entity or replaced with comparable options, subject to certain limitations, the vesting of outstanding “qualifying”
options will be accelerated to the extent of 25% of the unvested portion thereof and the vesting of outstanding Qualifying Shares will
be accelerated to the extent of 25% of the unvested portion thereof. Director option grants and certain change in control agreements
provide for 100% vesting of all options on a change in control. Further, if the holder of any “qualifying” award which remains
outstanding or is assumed by the surviving entity in a change of control transaction is terminated involuntarily within 180 days of the
change of control, the vesting of all options and other awards held by such person will be accelerated in full. A “qualifying” award is
defined as an option or award that has been held for at least 180 days as of the change of control. Qualifying Shares means common
stock issued pursuant to a “qualifying” award which are subject to the right of Data I/O to repurchase some or all of such shares at the
original purchase price (if any) upon the holder’s termination of services to Data I/O. A “change in control” is defined to include (i) a
merger or consolidation of Data I/O in which more than 50% of the voting power of Data I/O’s outstanding stock outstanding after the
transaction is owned by persons who are not shareholders immediately prior to such transaction, and (ii) the sale or transfer of all or
substantially all of Data I/O’s assets.
Certain Federal Income Tax Consequences
THE FOLLOWING SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES IS BASED UPON EXISTING STATUTES,
REGULATIONS AND INTERPRETATIONS THEREOF. THE APPLICABLE RULES ARE COMPLEX, AND INCOME TAX
CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH PLAN PARTICIPANT.
THIS PROXY STATEMENT DESCRIBES FEDERAL INCOME TAX CONSEQUENCES OF GENERAL APPLICABILITY, BUT DOES
NOT PURPORT TO DESCRIBE PARTICULAR CONSEQUENCES TO EACH INDIVIDUAL PLAN PARTICIPANT, OR FOREIGN,
STATE OR LOCAL INCOME TAX CONSEQUENCES, WHICH MAY DIFFER FROM THE UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES.
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Incentive Stock Options
Awards and Exercise of Options. ISOs are intended to constitute “incentive stock options” within the meaning of Section 422 of the
Code. ISOs may be granted only to employees of Data I/O (including directors who are also employees). The recipient of an Option
(the “Optionee”) does not recognize taxable income upon either the grant or exercise of an ISO. However, the excess of the fair
market value of the shares purchased upon exercise over the Option exercise price (the “Option Spread”) is includable in the
Optionee’s “alternative minimum taxable income “ (“AMTI”) for purposes of the alternative minimum tax (“AMT”). The Option
Spread is generally measured on the date of exercise and is includable in AMTI in the year of exercise. Special rules regarding the
time of AMTI inclusion may apply for shares subject to a “substantial risk of forfeiture” (including, in the case of each person subject
to the reporting requirements of Section 16(b) of the Exchange Act). In addition, when stock is acquired subject to a “substantial risk
of forfeiture”, an Optionee’s holding period for purposes of determining whether any capital gain or loss on sale is long-term will
generally not begin until the restriction lapses or the Optionee files an election under Section 83(b) of the Code (a “Section 83(b)
Election”).
Sale of Option Shares. If an Optionee holds the shares purchased under an ISO for at least two years from the date the ISO was
granted and for at least one year from the date such shares where transferred to the Optionee, any gain from a sale of the shares other
than to Data I/O should be taxable as capital gain. Under these circumstances, Data I/O would not be entitled to a tax deduction at the
time the ISO was exercised or at the time the stock was sold. If an Optionee were to dispose of stock acquired pursuant to an ISO
before the end of the required holding periods (a “Disqualifying Disposition”), the amount by which the market value of the stock at
the time the ISO was exercised exceeded the exercise price (or, if less, the amount of gain realized on the sale) would be taxable as
ordinary income, and Data I/O would be entitled to a corresponding tax deduction. Such income is subject to information reporting
requirements. Gain from a Disqualifying Disposition in excess of the amount required to be recognized as ordinary income is capital
gain. Optionees are required to notify Data I/O promptly after making a Disqualifying Disposition. If the stock is sold to Data I/O
rather than to a third party, the sale may not produce capital gain or loss. A sale of shares to Data I/O will constitute a redemption of
such shares, which could be taxable as a dividend unless the redemption is “not essentially equivalent to a dividend” within the
meaning of the Code.
Exercise With Stock. If an Optionee pays for ISO shares with shares of Data I/O acquired under an ISO or a qualified employee stock
purchase plan (“Statutory Option Stock”), the tender of shares is a Disqualifying Disposition of the Statutory Option Stock if the
above described (or other applicable) holding periods respecting those shares have not been satisfied. If the holding periods with
respect to the Statutory Option Stock are satisfied, or the shares were not acquired under a statutory stock option of Data I/O, then any
appreciation in value of the surrendered shares is not taxable upon surrender. Special basis and holding period rules apply where
previously-owned stock is used to exercise an ISO.
Nonqualified Stock Options
Awards and Exercise of Options. An Optionee is not taxable upon the award of an NQO. Federal income tax consequences upon
exercise will depend upon whether the shares thereby acquired are subject to a “substantial risk of forfeiture”. If the shares are not
subject to a “substantial risk of forfeiture”, or if they are so restricted and the Optionee files a Section 83(b) Election with respect to
the shares, the Optionee will have ordinary income at the time of exercise measured by the Option Spread on the exercise date. The
Optionee’s tax basis in the shares will be their fair market value on the date of exercise, and the holding period for purposes of
determining whether capital gain or loss upon sale is long- or short-term also will begin on that date. If the shares are subject to a
“substantial risk of forfeiture” and no Section 83(b) Election is filed, the Optionee will not be taxable upon exercise, but instead will
have ordinary income on the date the stock is no longer subject to a “substantial risk of forfeiture”, in an amount equal to the
difference between the amount paid for the shares under the Option and their fair market value as of the date of lapse; in addition, the
Optionee’s holding period will begin on the date of lapse.
Whether or not the shares are subject to a “substantial risk of forfeiture”, the amount of ordinary income taxable to an Optionee who
was an employee at the time of grant constitutes “supplemental wages” subject to a withholding of income and employment taxes by
Data I/O, and Data I/O receives a corresponding income tax deduction.
Sale of Option Shares. Upon sale, other than to Data I/O, of shares acquired under a NQO, an Optionee generally will recognize
capital gain or loss to the extent of the difference between the sale price and the Optionee’s tax basis in the shares, which will be long-
term gain or loss if the employee’s holding period in the shares is more than one year. If the stock is sold to Data I/O rather than to a
third party, the sale may not produce capital gain or loss. A sale of shares to Data I/O will constitute a redemption of such shares,
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which could be taxable as a dividend unless the redemption is “not essentially equivalent to a dividend” within the meaning of the
Code.
Exercise With Stock. If the Optionee pays the option exercise price by tendering other shares of Common Stock of the Company then
owned by the Optionee, the Optionee will recognize ordinary income in an amount equal to the fair market value of the number of
shares received upon exercise of the option, which exceed the number of shares tendered by the Optionee.
If the surrendered shares are Statutory Option Stock as described above under “Incentive Stock Options”, with respect to which the
applicable holding period requirements for favorable income tax treatment have not expired, then the newly acquired shares
substituted for the Statutory Option Shares should remain subject to the federal income tax rules governing the surrendered shares, but
the surrender should not constitute a Disqualifying Disposition of the surrendered stock.
Net Exercise. If a NQO is exercised through a net exercise, Data I/O will not require payment of the exercise price of the NQO but
will reduce the number of shares issued upon exercise by the largest number of whole shares that have a Fair Market Value that does
not exceed the aggregate exercise price. With respect to any remaining balance of the aggregate exercise price, Data I/O will accept a
cash payment from the Optionee. The Optionee will recognize ordinary income in an amount equal to the excess of the aggregate fair
market value of the shares that otherwise would be issued upon exercise of the NQO over the aggregate exercise price of the NQO
being exercised. The Optionee’s tax basis in the shares received is their fair market value at the time of exercise.
Restricted Stock Awards
Grant and Lapse of Restrictions. Section 83(b) election of the Internal Revenue Code allows a the holder of a restricted stock award to
elect, within 30 days after the date he receives a restricted stock award, to recognize and be taxed on ordinary income equal to the fair
market value of the common stock at that time. If the holder does not make a Section 83(b) election within 30 days from the date he
receives a restricted stock award, the holder will recognize ordinary income equal to the fair market value of the common stock at
expiration of the restriction period. The holder’s basis in the shares will equal their fair market value at the time the holder recognizes
ordinary income. The holder will be taxed at ordinary income rates on cash dividends paid before the end of the restriction period.
Subject to the general rules concerning deductibility of compensation, Data I/O will be allowed an income tax deduction in the amount
that, and for our taxable year in which, the holder recognizes ordinary income in connection with a restricted stock award. Dividends
on the restricted stock that are received by the holder before the end of the restriction period also will be deductible by Data I/O
subject to the general rules concerning compensation.
Forfeiture of Restricted Stock. If the holder does not make the Section 83(b) election described above and, before the restriction
period expires, he forfeits the restricted stock under the terms of the award, the holder will not recognize any ordinary income in
connection with the restricted stock award. If the holder does make a Section 83(b) election and subsequently forfeits the restricted
stock under the terms of the award, the holder will not be allowed an ordinary income tax deduction with respect to the forfeiture.
However, the holder may be entitled to a capital loss.
Sale of Shares. The holder cannot sell or otherwise dispose of the restricted stock until after the restriction period expires. When
shares are sold after the restriction period expires, the holder will recognize gain or loss in an amount by which the sale price of the
shares differs from his tax basis in the shares. If, as usually is the case, the shares are a capital asset in the hands of the holder, any
gain or loss recognized on a sale or other disposition of the shares will qualify as capital gain or loss. Any capital gain or loss
recognized upon sale of the shares will be treated as long-term capital gain or loss if the holder held the shares for more than 12
months from the date he recognized ordinary income with respect to the shares and as short-term capital gain or loss if he held the
stock for 12 months or less from the date the holder recognized ordinary income.
Stock Appreciation Rights
Grant. At the time a SAR is granted, the recipient will not recognize any taxable income.
Exercise. At the time the holder exercises a SAR, he will recognize ordinary income equal to the cash received, or fair market value
of any shares of common stock received, at that time (in the amount that is equal to the excess of the fair market value of a share of
our common stock on the date the SAR is exercised over the grant price of the SAR). The holder’s tax basis in any shares received
will equal the fair market value of those shares at the time he recognizes ordinary income as a result of exercising the SAR. Subject to
the general rules concerning deductibility of compensation, Data I/O will be allowed an income tax deduction in the amount that, and
for our taxable year in which, the holder recognizes ordinary income upon the exercise of a SAR.
Sale of Shares. If, as usually is the case, shares received upon exercise of a SAR (if any) are a capital asset in the hands of the holder,
any additional gain or loss recognized on a subsequent sale or exchange of the shares will not be ordinary income but will qualify as a
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capital gain or loss. Any capital gain or loss recognized upon sale of the shares will be characterized as long-term capital gain or loss
if the holder held the shares for more than 12 months and as short-term capital gain or loss if the holder held the stock for 12 months
or less. For purposes of determining whether the gain will be recognize long-term or short-term capital gain or loss on the subsequent
sale of the shares, the holding period will begin at the time the SAR was exercised.
Change in Control
Depending on the terms of an award and the determination of the Committee, upon a change in control of Data I/O, restrictions on
awards may lapse, or the award may mature or become exercisable, on an accelerated schedule. If this type of benefit, or other
benefits and payments connected with an award that result from a change in control of Data I/O, are granted to certain individuals
(such as our executive officers), the benefits and payments may be deemed to be “parachute payments” within the meaning of
Section 280G of the Internal Revenue Code. Section 280G provides that if parachute payments to an individual equal or exceed three
times the individual’s “base amount,” the excess of the parachute payments over one times the base amount (1) will not be deductible
by Data I/O and (2) will be subject to a 20% excise tax payable by the individual. “Base amount” is the individual’s average annual
compensation over the five taxable years preceding the taxable year in which the change in control occurs.
Deductibility of Executive Compensation Under Code Section 162(m)
Section 162(m) of the Code generally limits to $1,000,000 the amount that a publicly-held corporation is allowed each year to deduct
for the compensation paid to each of the corporation’s chief executive officer and the corporation’s three other most highly
compensated executive officers (other than the chief financial officer) whose compensation is required to be disclosed under rules and
regulations under the Securities Exchange Act of 1934. However, “qualified performance-based qualified compensation” is not
subject to the $1,000,000 deduction limit. In general, to qualify as performance-based compensation, the following requirements need
to be satisfied: (1) payments must be computed on the basis of an objective, performance-based compensation standard determined by
a committee consisting solely of two or more “outside directors,” (2) the material terms under which the compensation is to be paid,
including the business criteria upon which the performance goals are based, and a limit on the maximum bonus amount which may be
paid to any participant pursuant with respect to any performance period, must be approved by a majority of the corporation’s
shareholders and (3) the committee must certify that the applicable performance goals were satisfied before payment of any
performance-based compensation. Stock options and SARs issued with an exercise price that is not less than the fair market value of
the stock at the date of grant will performance based compensation for purposes of Section 162(m) if the shareholder approved plan
contains certain required limitations and the plan and awards have been administered in accordance with requirements under Code
Section 162(m).
PROPOSAL 4: SAY ON PAY - ADVISORY VOTE ON EXECUTIVE COMPENSATION
The Board of Directors requests that the shareholders approve, on an advisory basis, the compensation paid to Data I/O’s Named
Executive Officers, as described in “Executive Compensation”, pursuant to the following Advisory Resolution:
“RESOLVED, that Data I/O’s shareholders approve, on an advisory basis, the compensation of Data I/O’s named executive
officers, as disclosed in Data I/O’s Proxy Statement for the 2017 Annual Meeting of Shareholders pursuant to the compensation
disclosure rules of the Securities and Exchange Commission, including the 2016 Summary Compensation Table and the other related
tables and disclosure.”
Our executive compensation program contains elements of cash, incentive and equity-based compensation and is designed to align the
interests of our executives with those of our shareholders. The “Executive Compensation” section of this proxy statement, describes
in detail our executive compensation programs.
The Board has implemented an executive compensation program that is intended to reward performance based on goals established by
the Board. The Board fosters a performance-oriented culture by linking a significant portion of each executive officer’s compensation
to overall Company performance, as measured in 2017 by operating income as a percentage of revenue and/or achievement of key
development projects and corporate cost and spending objectives, which the Company believes to be important metrics for Data I/O
and its shareholders. We believe that equity awards align the interests of our executives with those of our long-term shareholders by
encouraging long-term performance and incentivizing our executives to increase long-term shareholder value. Equity awards
represent a key component, and are a significant portion, of our executive compensation.
The Board has designed Data I/O’s executive compensation program to attract, motivate, reward and retain our executive officers to
achieve Data I/O’s corporate objectives and increase shareholder value.
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The Say on Pay vote is advisory and not binding on Data I/O or the Board of Directors, however the Board will consider the outcome
of the vote when making future compensation decisions for our executive officers.
The Board recommends a vote “FOR” the Advisory Resolution (Say on Pay) approving the compensation of the Company’s
named executive officers as described in this Proxy Statement.
OTHER BUSINESS
As of the date of this Proxy Statement, Data I/O is not aware of any other business to be acted upon at the Annual Meeting. If any
other business calling for a vote of the shareholders is properly presented at the meeting, the holders of the proxies will vote or refrain
from voting in accordance with their best judgment.
SHAREHOLDER NOMINATIONS AND PROPOSALS FOR THE 2017 ANNUAL MEETING OF SHAREHOLDERS
Data I/O’s Bylaws provide that advance notice of nominations for the election of directors at a meeting of shareholders must be
delivered to or mailed and received by Data I/O at its principal offices on or before February 23, 2017 in the case of the 2017 annual
meeting of shareholders, and in the case of a special meeting of shareholders to elect directors, the close of business on the 10th day
following the date on which notice of such meeting is first given to shareholders. Data I/O’s Bylaws also provide that advance notice
of business to be brought before the 2018 Annual Meeting of Shareholders by a shareholder must be submitted in writing and
delivered to or mailed and received by Data I/O on or before February 17, 2018.
Each notice of a nomination or proposal of business must contain, among other things: (i) the name and address of the shareholder
who intends to make the nomination or proposal; (ii) a representation that the shareholder is a holder of record of stock of Data I/O
entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified
in the notice or to vote at the meeting for the proposal; (iii) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder and any material interest of such shareholder in any proposal to be submitted to the
meeting; (iv) such other information regarding each nominee or proposal as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the SEC; and (v) with respect to the nominations, the consent of each nominee to serve as a
director of Data I/O if elected.
A copy of the full text of the provisions of Data I/O’s Bylaws dealing with shareholder nominations and proposals is available to
shareholders from the Secretary of Data I/O upon written request. The Bylaws may also be accessed online, as a Form 10K exhibit as
referenced in our Annual Report on Form 10K. SEC rules establish a deadline for submission of shareholder proposals that are not
intended to be included in Data I/O’s proxy statement with respect to discretionary voting (the “Discretionary Vote Deadline”). The
Discretionary Vote Deadline for the 2017 Annual Meeting was February 23, 2017. If a shareholder gives notice of such a proposal
after the Discretionary Vote Deadline, Data I/O’s proxy holders will be allowed to use their discretionary voting authority to vote
against the shareholder proposal when and if the proposal is raised at the 2017 Annual Meeting.
Eligible shareholders who intend to have a proposal considered for inclusion in Data I/O’s proxy materials for presentation at the 2018
Annual Meeting must submit the proposal to Data I/O at its principal offices no later than December 14, 2017. Shareholders who
intend to present a proposal at the 2018 Annual Meeting without inclusion of such proposal in Data I/O’s proxy materials are required
to provide notice of such proposal to Data I/O no later than February 17, 2018, as further directed above.
To qualify as an “eligible” shareholder, a shareholder must have been a record or beneficial owner of at least one percent (1%) of Data
I/O’s outstanding Common Stock, or shares of Common Stock having a market value of at least $2,000, for a period of at least one (1)
year prior to submitting the proposal, and the shareholder must continue to hold the shares through the date on which the meeting is
held.
Data I/O reserves the right to reject, rule out of order, or take appropriate action with respect to any proposal that does not comply
with these and other applicable requirements, but only after Data I/O has notified the shareholder(s) who have submitted the proposal
of the problem and such shareholder(s) have failed to correct it. This obligation to notify the appropriate shareholder(s) does not apply
to the failure to submit such proposal prior to the deadlines discussed above.
STOCKHOLDERS SHARING THE SAME ADDRESS
To reduce the expenses of delivering duplicate materials, we are taking advantage of the SEC’s “house holding” rules which permit us
to deliver only one set of proxy materials (or one Notice of Internet Availability of Proxy Materials) to shareholders who share an
address unless otherwise requested. If you share an address with another shareholder and have received only one set of these
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request a separate copy at no cost
materials, you may
Investor Relations by email at
investorrelations@dataio.com, by phone at (425) 881-6444, by fax at (425) 881-2917 or by writing to Data I/O investor relations,
attention Joel Hatlen, 6464 185th Avenue NE, Suite 101, Redmond WA 98052. For future annual meetings, you may request separate
materials, or request that we send only one set of materials to you if you are receiving multiple copies, by contacting Investor
Relations as noted above.
to you by contacting
SOLICITATION OF PROXIES
The proxy accompanying this Proxy Statement is solicited by the Board of Directors. Proxies may be solicited by officers, directors
and regular supervisory and executive employees of Data I/O, none of whom will receive any additional compensation for their
services. In addition, Data I/O may engage an outside proxy solicitation firm to render proxy solicitation services and, if so, will pay a
fee for such services. Solicitations of proxies may be made personally, or by mail, telephone, telegraph or messenger. Data I/O will
pay persons holding shares of Common Stock in their names or in the names of nominees, but not owning such shares beneficially,
such as brokerage houses, banks and other fiduciaries, for the expense of forwarding soliciting materials to their principals. All such
costs of solicitation of proxies will be paid by Data I/O.
Copies of our annual report on Form 10-K for the year ended December 31, 2016 are being mailed with this Proxy Statement to each
shareholder of record. If you did not receive a copy of our annual report Form 10-K, you may obtain a copy (without exhibits)
without charge by writing c/o Secretary, 6645 185th Avenue NE, Suite 100, Redmond, WA 98052 or by calling (425) 881-6444.
Copies of the exhibits to our annual report on Form 10-K are available for a nominal fee or may be viewed at
http://www.dataio.com/company/investorrelations/annualmeeting.aspx or www.sec.gov in the EDGAR filing of our report.
Redmond, Washington
April 4, 2017
By Order of the Board of Directors
/s/ Anthony Ambrose
Anthony Ambrose
President and Chief Executive Officer
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Appendix A
DATA I/O CORPORATION
2000 STOCK COMPENSATION INCENTIVE PLAN
1. PURPOSES
1.1 The purpose of the Data I/O Corporation 2000 Stock Compensation Incentive Plan, as amended and restated, (the “2000
Plan”) is to enhance the long-term shareholder value of Data I/O Corporation, a Washington corporation (the “Company”), by offering
opportunities to employees, persons to whom offers of employment have been extended, directors, officers, consultants, agents,
advisors and independent contractors of Data I/O and its Subsidiaries (as defined in Section 2) to participate in Data I/O's growth and
success, and to encourage them to remain in the service of Data I/O and its Subsidiaries and to acquire and maintain stock ownership
in Data I/O.
2. DEFINITIONS
For purposes of the 2000 Plan, the following terms shall be defined as set forth below:
2.1 Acquired Entities.
“Acquired Entities” has the meaning given in Section 6.2.
2.2 Acquisition Transaction.
“Acquisition Transaction” has the meaning given in Section 6.2.
2.3 Award.
“Award” means a grant made to a Participant pursuant to the 2000 Plan, including, without limitation, grants of Options, Stock
Appreciation Rights, Stock Awards, Other Stock-Based Awards or any combination of the foregoing.
2.4 Board.
“Board” means the Board of Directors of Data I/O.
2.5 Cause.
“Cause” means dishonesty, fraud, misconduct, disclosure of confidential information, conviction of, or a plea of guilty or no
contest to, a felony under the laws of the United States or any state thereof, habitual absence from work for reasons other than illness,
intentional conduct which causes significant injury to Data I/O, habitual abuse of alcohol or a controlled substance, in each case as
determined by the Plan Administrator, and its determination shall be conclusive and binding.
2.6 Change in Control.
“Change in Control” means (i) the consummation of a merger or consolidation of Data I/O with or into another entity or any other
corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity’s securities outstanding
immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of Data I/O
immediately prior to such merger, consolidation or other reorganization or (ii) the sale, transfer or other disposition of all or
substantially all of Data I/O’s assets. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of
Data I/O’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who
held Data I/O’s securities immediately before such transaction.
2.7 Code.
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
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2.8 Common Stock.
“Common Stock” means the common stock, no par value, of Data I/O.
2.9 Disability.
“Disability” means a medically determinable mental or physical impairment or condition of the Holder which is expected to result
in death or which has lasted or is expected to last for a continuous period of twelve (12) months or more and which causes the Holder
to be unable, in the opinion of the Plan Administrator on the basis of evidence acceptable to it, to perform his or her duties for Data
I/O and, in the case of a determination of Disability for purposes of determining the exercise period for an Incentive Stock Option, to
be engaged in any substantial gainful activity. Upon making a determination of Disability, the Plan Administrator shall, for purposes of
the 2000 Plan, determine the date of the Holder’s termination of employment, service or contractual relationship.
2.10 Exchange Act.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
2.11 Fair Market Value.
“Fair Market Value” shall be as established in good faith by the Plan Administrator or (a) if the Common Stock is listed on the
NASDAQ Capital Market, the mean between the high and low selling prices for the Common Stock as reported by the NASDAQ
Capital Market for a single trading day or (b) if the Common Stock is listed on the New York Stock Exchange or the American Stock
Exchange, the mean between the high and low selling prices for the Common Stock as such prices are officially quoted in the
composite tape of transactions on such exchange for a single trading day. If there is no such reported price for the Common Stock for
the date in question, then such price on the last preceding date for which such price exists shall be determinative of Fair Market Value.
2.12 Grant Date.
“Grant Date” means the date the Plan Administrator adopted the granting resolution or a later date designated in a resolution of
the Plan Administrator as the date an Award is to be granted.
2.13 Holder.
“Holder” means the Participant to whom an Award is granted or the personal representative of a Holder who has died.
2.14 Incentive Stock Option.
“Incentive Stock Option” means an Option to purchase Common Stock granted under Section 7 with the intention that it qualify
as an “incentive stock option” as that term is defined in Section 422 of the Code.
2.15 Involuntary Termination.
“Involuntary Termination” means termination of the Holder’s service to Data I/O (or the parent or subsidiary company employing
such Holder) or the other party to the transaction constituting a Change in Control by reason of (i) the involuntary discharge of such
Holder by Data I/O (or the parent or subsidiary company employing such Holder) or the other party to the transaction constituting a
Change in Control for reasons other than Cause or (ii) the voluntary resignation of the Holder following (A) a change in such Holder’s
position with Data I/O (or its successor or the parent or subsidiary company that employs such Holder) or the other party to the
transaction constituting a Change in Control that materially reduces such Holder’s level of authority or responsibility or (B) a
reduction in such Holder’s compensation (including base salary, fringe benefits and participation in bonus or incentive programs based
on corporate performance) by more than 20%.
2.16 Nonqualified Stock Option.
“Nonqualified Stock Option” means an Option to purchase Common Stock granted under Section 7 other than an Incentive Stock
Option.
2.17 Option.
“Option” means the right to purchase Common Stock granted under Section 7.
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2.18 Option Shares.
“Option Shares” means the shares of Common Stock issuable upon a Holder’s exercise of an Option granted under the 2000 Plan.
2.19 Other Stock-Based Award.
“Other Stock-Based Award” means an Award granted under Section 11.
2.20 Participant.
“Participant” means an individual who is a Holder of an Award or, as the context may require, any employee, director (including
directors who are not employees), officer, consultant, agent, advisor or independent contractor of Data I/O or a Subsidiary who has
been designated by the Plan Administrator as eligible to participate in the 2000 Plan.
2.21 Plan Administrator.
“Plan Administrator” means the Board or any committee designated to administer the 2000 Plan under Section 3.1.
2.22 Qualifying Award.
“Qualifying Award” means an Option or an Award that is held by a person who had been an employee, director, consultant or
agent to Data I/O for at least 180 days as of the effective date of a Change in Control.
2.23 Qualifying Shares.
“Qualifying Shares” means shares of Common Stock issued pursuant to a Qualifying Award which are subject to the right of
Data I/O to repurchase some or all of such shares at the original purchase price (if any) upon termination of the Holder’s services to
Data I/O.
2.24 Restricted Stock.
“Restricted Stock” means shares of Common Stock granted pursuant to a Stock Award under Section 10, the rights of ownership
of which are subject to restrictions prescribed by the Plan Administrator.
2.25 Securities Act.
“Securities Act” means the Securities Act of 1933, as amended.
2.26 Stock Appreciation Right.
“Stock Appreciation Right” means an Award granted under Section 9.
2.27 Stock Award.
“Stock Award” means an Award granted under Section 10.
2.28 Subsidiary.
“Subsidiary,” except as expressly provided otherwise, means any entity that is directly or indirectly controlled by Data I/O or in
which Data I/O has a significant ownership interest, as determined by the Plan Administrator, and any entity that may become a direct
or indirect parent of Data I/O.
2.29 Unvested Portion.
“Unvested Portion” means the portion of a Qualifying Award or Qualifying Shares that is/are unvested as of the effective date of
a Change in Control.
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2.30 Vested Portion.
“Vested Portion” means the portion of a Qualifying Award or Qualifying Shares that is/are vested as of the effective date of a
Change in Control.
3. ADMINISTRATION
3.1 Plan Administrator.
The 2000 Plan shall be administered by the Board or a committee or committees (which term includes subcommittees) appointed
by, and consisting of two or more members of, the Board. Any such committee shall have the powers and authority vested in the
Board hereunder (including the power and authority to interpret any provision of the 2000 Plan or of any Award). The Board, or any
committee thereof appointed to administer the 2000 Plan, is referred to herein as the "Plan Administrator." If and so long as the
Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in selecting the Plan
Administrator and the membership of any committee acting as Plan Administrator for any persons subject or likely to become subject
to Section 16 under the Exchange Act the provisions regarding (a) “outside directors” as contemplated by Section 162(m) of the Code
and (b) “Non-Employee Directors” as contemplated by Rule 16b-3 under the Exchange Act. The Board or Plan Administrator may
delegate the responsibility for administering the 2000 Plan with respect to designated classes of eligible Participants to one or more
senior executive officers or committees thereof, the members of which need not be members of the Board, subject to such limitations
as the Board deems appropriate. Committee members shall serve for such term as the Board may determine, subject to removal by the
Board at any time.
3.2 Administration and Interpretation by the Plan Administrator.
Except for the terms, conditions and limitations explicitly set forth in the 2000 Plan, the Plan Administrator shall have exclusive
authority, in its absolute discretion, to determine all matters relating to Awards under the 2000 Plan, including the selection of
individuals to be granted Awards, the type of Awards, the number of shares of Common Stock subject to an Award, all terms,
conditions, restrictions and limitations, if any, of an Award and the terms of any instrument that evidences the Award. The Plan
Administrator shall also have exclusive authority to interpret the 2000 Plan and may from time to time adopt, change and rescind rules
and regulations of general application for the 2000 Plan's administration. This authority shall include the sole authority to correct any
defect, supply any omission or reconcile any inconsistency in this 2000 Plan and make all other determinations necessary or advisable
for the administration of the 2000 Plan and do everything necessary or appropriate to administer the 2000 Plan. The Plan
Administrator's interpretation of the 2000 Plan and its rules and regulations, and all actions taken and determinations made by the Plan
Administrator pursuant to the 2000 Plan shall be conclusive and binding on all parties involved or affected. The Plan Administrator
may delegate administrative duties to such of Data I/O's officers as it so determines.
4. STOCK SUBJECT TO THE 2000 PLAN
4.1 Authorized Number of Shares.
As of March 10, 2000, Data I/O had outstanding options with respect to 1,215,000 shares of Common Stock and 270,499 shares
of Common Stock available for additional grants under the 2000 Plan and the Data I/O 1986 Employee Stock Option Plan (“1986
Plan”). Subject to adjustment from time to time as provided in Section 14.1, Awards of the authorized but unissued shares of
Common Stock under the 1986 Plan, or shares of Common Stock that become available under the 1986 Plan as a result of the
expiration or termination of options, may be granted under this 2000 Plan. Awards for an additional 300,000 shares of Common Stock
shall also be available for issuance under the 2000 Plan. Shares issued under the 2000 Plan shall be drawn from authorized and
unissued shares. See also Section 18 for 2000 Plan amendments.
4.2 Limitations.
(a)
Subject to adjustment from time to time as provided in Section 14.1, not more than 200,000 shares of Common Stock
may be made subject to Awards under the 2000 Plan to any individual Participant in the aggregate in any one (1) calendar year, except
that Data I/O may make additional one-time grants to newly hired Participants of up to 100,000 shares per such Participant; such
limitation shall be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the
exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code.
(b)
Subject to adjustment from time to time as provided in Section 14.1, not more than 100,000 shares of Common Stock
may be made subject to Awards to any non-employee director in the aggregate in any one calendar year.
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4.3 Reuse of Shares.
Any shares of Common Stock that have been made subject to an Award that cease to be subject to the Award (other than by
reason of exercise or payment of the Award to the extent it is exercised for or settled in shares) and any shares repurchased by Data
I/O from a Holder upon exercise of a right of repurchase shall again be available for issuance in connection with future grants of
Awards under the 2000 Plan; provided, however, that any such shares shall be counted in accordance with the requirements of Section
162(m) of the Code if and to the extent applicable. Shares that are subject to tandem Awards shall be counted only once. Also, upon a
stock-for-stock exercise only the net number of shares will be deemed to have been used under this 2000 Plan.
5. ELIGIBILITY
Awards may be granted under the 2000 Plan to those officers, directors and key employees of Data I/O and its Subsidiaries as the
Plan Administrator from time to time selects. Awards may also be made to consultants, agents, advisors and independent contractors
who provide services to Data I/O and its Subsidiaries.
6. AWARDS
6.1 Form and Grant of Awards.
The Plan Administrator shall have the authority, in its sole discretion, to determine the type or types of Awards to be made under
the 2000 Plan. Such Awards may include, but are not limited to, Incentive Stock Options, Nonqualified Stock Options, Stock
Appreciation Rights, Stock Awards and Other Stock-Based Awards. Awards may be granted singly, in combination or in tandem so
that the settlement or payment of one automatically reduces or cancels the other. Awards may also be made in combination or in
tandem with, in replacement of, as alternatives to, or as the payment form for, grants or rights under any other employee or
compensation plan of Data I/O.
6.2 Acquired Company Awards.
Notwithstanding anything in the 2000 Plan to the contrary, the Plan Administrator may grant Awards under the 2000 Plan in
substitution for awards issued under other plans, or assume under the 2000 Plan awards issued under other plans, if the other plans are
or were plans of other acquired entities (“Acquired Entities”) (or the parent of the Acquired Entity) and the new Award is substituted,
or the old Award is assumed, by reason of a merger, consolidation, acquisition of property or of stock, reorganization or liquidation
(an “Acquisition Transaction”). If a written agreement pursuant to which an Acquisition Transaction is completed is approved by the
Board and said agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the
Acquired Entity, said terms and conditions shall be deemed to be the action of the Plan Administrator without any further action by
the Plan Administrator, except as may be required for compliance with Rule 16b-3 under the Exchange Act, and the persons holding
such Awards shall be deemed to be Participants and Holders.
7. AWARDS OF OPTIONS
7.1 Grant of Options.
The Plan Administrator is authorized under the 2000 Plan, in its sole discretion, to issue Options as Incentive Stock Options or as
Nonqualified Stock Options, which shall be appropriately designated.
7.2 Option Exercise Price.
The exercise price for shares purchased under an Option shall be as determined by the Plan Administrator, but shall not be less
than 100% of the Fair Market Value of the Common Stock on the Grant Date with respect to Incentive Stock Options.
7.3 Term of Options.
The term of each Option shall be as established by the Plan Administrator or, if not so established, shall be six (6) years from the
Grant Date.
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7.4 Exercise of Options.
The Plan Administrator shall establish and set forth in each instrument that evidences an Option the time at which or the
installments in which the Option shall become exercisable, which provisions may be waived or modified by the Plan Administrator at
any time. If not so established in the instrument evidencing the Option or otherwise set at the time of grant, the Option will be subject
to the following: (a) 25% of the Option shall vest and become exercisable on each anniversary of the Grant Date such that the Option
shall be fully vested on the fourth anniversary of the Grant Date; (b) in no event shall any additional Option Shares vest after
termination of Holder’s employment by or service to Data I/O; and (c) the Plan Administrator may waive or modify the foregoing
schedule at any time.
To the extent that the right to purchase shares has accrued there under, an Option may be exercised from time to time by written
notice to Data I/O, in accordance with procedures established by the Plan Administrator, setting forth the number of shares with
respect to which the Option is being exercised and accompanied by payment in full as described in Section 7.5. An Option may not be
exercised as to less than 100 shares at any one time (or the lesser number of remaining shares covered by the Option).
7.5 Payment of Exercise Price.
The exercise price for shares purchased under an Option shall be paid in full to Data I/O by delivery of consideration equal to
the product of the Option exercise price and the number of shares purchased. Such consideration must be paid in cash or check
(unless, at the time of exercise, the Plan Administrator determines not to accept a personal check), except that the Plan Administrator,
in its sole discretion, may, either at the time the Option is granted or at any time before it is exercised and subject to such limitations as
the Plan Administrator may determine, authorize payment in cash and/or one or more of the following alternative forms: (a) tendering
(either actually or, if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation)
Common Stock already owned by the Holder for at least six months (or any shorter period necessary to avoid a charge to Data I/O's
earnings for financial reporting purposes) having a Fair Market Value on the day prior to the exercise date equal to the aggregate
Option exercise price; (b) a promissory note delivered pursuant to Section 12; (c) if and so long as the Common Stock is registered
under Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed exercise notice, together with irrevocable
instructions, to (i) a third party designated by Data I/O to deliver promptly to Data I/O the aggregate amount of sale or loan proceeds
to pay the Option exercise price and any withholding tax obligations that may arise in connection with the exercise and (ii) Data I/O to
deliver the certificates for such purchased shares directly to such third party, all in accordance with the regulations of the Federal
Reserve Board; (d) the net exercise of the Option as defined below; or (e) such other consideration as the Plan Administrator may
permit.
In the case of a "net exercise" of an Option, the Company will not require a payment of the exercise price of the Option from
the Holder but will reduce the number of shares of Common Stock issued upon the exercise by the largest number of whole shares that
have a Fair Market Value that does not exceed the aggregate exercise price. With respect to any remaining balance of the aggregate
exercise price, the Company will accept a cash payment from the Participant.
The number of shares of Common Stock underlying an Option will decrease following the exercise of such Option to the
extent of (i) shares used to pay the exercise price of an Option under the "net exercise" feature, (ii) shares actually delivered to the
Holder as a result of such exercise, and (iii) shares withheld for purposes of tax withholding.
7.6 Post-Termination Exercises.
The Plan Administrator may establish and set forth in each instrument that evidences an Option whether the Option will continue
to be exercisable, and the terms and conditions of such exercise, if a Holder ceases to be employed by, or to provide services to, Data
I/O or its Subsidiaries, which provisions may be waived or modified by the Plan Administrator at any time.
If not so established in the instrument evidencing the Option, the Option will be exercisable according to the following terms and
conditions, which may be waived or modified by the Plan Administrator at any time.
In case of termination of the Holder’s employment or services other than by reason of death or Cause, the Option shall be
exercisable, to the extent of the number of shares purchasable by the Holder at the date of such termination, only (a) within one (1)
year if the termination of the Holder’s employment or services are coincident with Disability or (b) within three (3) months after the
date the Holder ceases to be an employee, director, officer, consultant, agent, advisor or independent contractor of Data I/O or a
Subsidiary if termination of the Holder’s employment or services is for any reason other than death or Disability, but in no event later
than the remaining term of the Option. Any Option exercisable at the time of the Holder’s death may be exercised, to the extent of the
number of shares purchasable by the Holder at the date of the Holder’s death, by the personal representative of the Holder’s estate
entitled thereto at any time or from time to time within one (1) year after the date of death, but in no event later than the remaining
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term of the Option. In case of termination of the Holder’s employment or services for Cause, the Option shall automatically terminate
upon first discovery by Data I/O of any reason for such termination and the Holder shall have no right to purchase any Shares pursuant
to such Option, unless the Plan Administrator determines otherwise. If a Holder’s employment or services with Data I/O are
suspended pending an investigation of whether the Holder shall be terminated for Cause, all the Holder’s rights under any Option
likewise shall be suspended during the period of investigation.
A transfer of employment or services between or among Data I/O and its Subsidiaries shall not be considered a termination of
employment or services. The effect of a Company-approved leave of absence or short-term break in service on the terms and
conditions of an Option shall be determined by the Plan Administrator, in its sole discretion.
8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options shall be subject to the following additional terms and
conditions:
8.1 Dollar Limitation.
To the extent the aggregate Fair Market Value (determined as of the Grant Date) of Common Stock with respect to which
Incentive Stock Options are exercisable for the first time during any calendar year (under the 2000 Plan and all other stock option
plans of Data I/O) exceeds $100,000, such portion in excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the Participant holds two (2) or more such Options that become exercisable for the first time in the same calendar year, such limitation
shall be applied on the basis of the order in which such Options were granted.
8.2 10% Shareholders.
If a Participant owns more than 10% of the total voting power of all classes of Data I/O's stock, then the exercise price per share
of an Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the Grant Date and the
Option term shall not exceed five (5) years. The determination of 10% ownership shall be made in accordance with Section 422 of the
Code.
8.3 Eligible Employees.
Individuals who are not employees of Data I/O or one of its parent corporations or subsidiary corporations may not be granted
Incentive Stock Options. For purposes of this Section 8.3, “parent corporation” and “subsidiary corporation” shall have the meanings
attributed to those terms for purposes of Section 422 of the Code.
8.4 Term.
The term of an Incentive Stock Option shall not exceed ten (10) years.
8.5 Exercisability.
To qualify for Incentive Stock Option tax treatment, an Option designated as an Incentive Stock Option must be exercised within
three (3) months after termination of employment for reasons other than death, except that, in the case of termination of employment
due to total Disability, such Option must be exercised within one (1) year after such termination. Employment shall not be deemed to
continue beyond the first 90 days of a leave of absence unless the Participant's reemployment rights are guaranteed by statute or
contract.
8.6 Taxation of Incentive Stock Options.
In order to obtain certain tax benefits afforded to Incentive Stock Options under Section 422 of the Code, the Participant must
hold the shares issued upon the exercise of an Incentive Stock Option for two (2) years after the Grant Date of the Incentive Stock
Option and one (1) year from the date the shares are transferred to the Participant. A Participant may be subject to the alternative
minimum tax at the time of exercise of an Incentive Stock Option. The Participant shall give Data I/O prompt notice of any
disposition of shares acquired by the exercise of an Incentive Stock Option prior to the expiration of such holding periods.
8.7 Promissory Notes.
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The amount of any promissory note delivered pursuant to Section 12 in connection with an Incentive Stock Option shall bear
interest at a rate specified by the Plan Administrator but in no case less than the rate required to avoid imputation of interest (taking
into account any exceptions to the imputed interest rules) for federal income tax purposes.
8.8 Incorporation of Other Provisions.
With respect to Incentive Stock Options, if this 2000 Plan does not contain any provision required to be included herein under
Section 422 of the Code, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision
had been set out in full herein; provided, however, that to the extent any Option that is intended to qualify as an Incentive Stock
Option cannot so qualify, the Option, to that extent, shall be deemed to be a Nonqualified Stock Option for all purposes of this 2000
Plan.
9. STOCK APPRECIATION RIGHTS
9.1 Grant of Stock Appreciation Rights.
The Plan Administrator may grant a Stock Appreciation Right separately or in tandem with a related Option.
9.2 Tandem Stock Appreciation Rights.
A Stock Appreciation Right granted in tandem with a related Option will give the Holder the right to surrender to Data I/O all or a
portion of the related Option and to receive an appreciation distribution (in shares of Common Stock or cash or any combination of
shares and cash, as the Plan Administrator, in its sole discretion, shall determine at any time) in an amount equal to the excess of the
Fair Market Value for the date the Stock Appreciation Right is exercised over the exercise price per share of the right, which shall be
the same as the exercise price of the related Option. A tandem Stock Appreciation Right will have the same other terms and provisions
as the related Option. Upon and to the extent a tandem Stock Appreciation Right is exercised, the related Option will terminate.
9.3 Stand-Alone Stock Appreciation Rights.
A Stock Appreciation Right granted separately and not in tandem with an Option will give the Holder the right to receive an
appreciation distribution in an amount equal to the excess of the Fair Market Value for the date the Stock Appreciation Right is
exercised over the exercise price per share of the right. A stand-alone Stock Appreciation Right will have such terms as the Plan
Administrator may determine, except that the term of the right, if not otherwise established by the Plan Administrator, shall be ten (10)
years from the Grant Date.
9.4 Exercise of Stock Appreciation Rights.
Unless otherwise provided by the Plan Administrator in the instrument that evidences the Stock Appreciation Right, the
provisions of Section 7.6 relating to the termination of a Holder’s employment or services shall apply equally, to the extent applicable,
to the Holder of a Stock Appreciation Right.
10. STOCK AWARDS
10.1 Grant of Stock Awards.
The Plan Administrator is authorized to make Awards of Common Stock or of rights to receive shares of Common Stock to
Participants on such terms and conditions and subject to such restrictions, if any (which may be based on continuous service with Data
I/O or the achievement of performance goals related to (i) sales, gross margin, operating profits or profits, (ii) growth in sales, gross
margin, operating profits or profits, (iii) return ratios related to sales, gross margin, operating profits or profits, (iv) cash flow, (v) asset
management (including inventory management), or (vi) total shareholder return, where such goals may be stated in absolute terms or
relative to comparison companies), as the Plan Administrator shall determine, in its sole discretion, which terms, conditions and
restrictions shall be set forth in the instrument evidencing the Award. The terms, conditions and restrictions that the Plan
Administrator shall have the power to determine shall include, without limitation, the manner in which shares subject to Stock Awards
are held during the periods they are subject to restrictions and the circumstances under which forfeiture of Restricted Stock shall occur
by reason of termination of the Holder's services or upon the occurrence of other events.
10.2 Issuance of Shares.
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Upon the satisfaction of any terms, conditions and restrictions prescribed with respect to a Stock Award, or upon the Holder's
release from any terms, conditions and restrictions of a Stock Award, as determined by the Plan Administrator, Data I/O shall transfer,
as soon as practicable, to the Holder or, in the case of the Holder's death, to the personal representative of the Holder's estate or as the
appropriate court directs, the appropriate number of shares of Common Stock covered by the Award.
10.3 Waiver of Restrictions.
Notwithstanding any other provisions of the 2000 Plan, the Plan Administrator may, in its sole discretion, waive the forfeiture
period and any other terms, conditions or restrictions on any Restricted Stock under such circumstances and subject to such terms and
conditions as the Plan Administrator shall deem appropriate.
11. OTHER STOCK-BASED AWARDS
The Plan Administrator may grant other Awards under the 2000 Plan pursuant to which shares of Common Stock (which may, but
need not, be shares of Restricted Stock pursuant to Section 10) are or may in the future be acquired, or Awards denominated in stock
units, including ones valued using measures other than market value. Such Other Stock-Based Awards may be granted alone or in
addition to or in tandem with any Award of any type granted under the 2000 Plan and must be consistent with the 2000 Plan’s
purpose.
12. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist a Holder (excluding a Holder who is an officer or director of Data I/O) in acquiring shares of Common Stock pursuant
to an Award granted under the 2000 Plan, the Plan Administrator, in its sole discretion, may authorize, either at the Grant Date or at
any time before the acquisition of Common Stock pursuant to the Award, (a) the extension of a loan to the Holder by Data I/O, (b) the
payment by the Holder of the purchase price, if any, of the Common Stock in installments, or (c) the guarantee by Data I/O of a loan
obtained by the grantee from a third party. The terms of any loans, installment payments or loan guarantees, including the interest rate
and terms of and security for repayment, will be subject to the Plan Administrator's discretion; provided, however, that repayment of
any Company loan to the Holder shall be secured by delivery of a full-recourse promissory note for the loan amount executed by the
Holder, together with any other form of security determined by the Plan Administrator. The maximum credit available is the purchase
price, if any, of the Common Stock acquired, plus the maximum federal and state income and employment tax liability that may be
incurred in connection with the acquisition.
13. ASSIGNABILITY
Except as otherwise specified or approved by the Plan Administrator at the time of grant of an Award or any time prior to its
exercise, no Award granted under the 2000 Plan may be assigned, pledged or transferred by the Holder other than by will or by the
laws of descent and distribution, and during the Holder's lifetime, such Awards may be exercised only by the Holder.
Notwithstanding the foregoing, and to the extent permitted by Section 422 of the Code, the Plan Administrator, in its sole discretion,
may permit such assignment, transfer and exercise ability and may permit a Holder of such Awards to designate a beneficiary who
may exercise the Award or receive compensation under the Award after the Holder's death; provided, however, that (i) any Award so
assigned or transferred shall be subject to all the same terms and conditions contained in the instrument evidencing the Award, (ii) the
original Holder shall remain subject to withholding taxes upon exercise, (iii) any subsequent transfer of an Award shall be prohibited and
(iv) the events of termination of employment or contractual relationship set forth in subsection 7.6 shall continue to apply with respect to
the original transferor-Holder.
14. ADJUSTMENTS
14.1 Adjustment of Shares.
In the event that, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares,
recapitalization, merger, consolidation, distribution to shareholders other than a normal cash dividend, or other change in Data I/O's
corporate or capital structure results in (a) the outstanding shares, or any securities exchanged therefor or received in their place, being
exchanged for a different number or class of securities of Data I/O or of any other corporation or (b) new, different or additional
securities of Data I/O or of any other corporation being received by the holders of shares of Common Stock of Data I/O, then the Plan
Administrator, in its sole discretion, shall make such equitable adjustments as it shall deem appropriate in the circumstances in (i) the
maximum number and class of securities subject to the 2000 Plan as set forth in Section 4.1, (ii) the maximum number and class of
securities that may be made subject to Awards to any individual Participant as set forth in Section 4.2, and (iii) the number and class
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of securities that are subject to any outstanding Award and the per share price of such securities, without any change in the aggregate
price to be paid therefor. The determination by the Plan Administrator as to the terms of any of the foregoing adjustments shall be
conclusive and binding.
14.2 Dissolution, Liquidation or Change in Control Transactions.
(a)
In the event of the proposed dissolution or liquidation of Data I/O, Data I/O shall notify each Holder at least fifteen
(15) days prior to such proposed action. To the extent not previously exercised, all Awards will terminate immediately prior to the
consummation of such proposed action.
(b) Unless the applicable agreement representing an Award provides otherwise, or unless the Plan Administrator
determines otherwise in its sole and absolute discretion in connection with any Change in Control, a Qualifying Award which is not
vested or is not exercisable in full shall become exercisable or vested in connection with a Change in Control which becomes effective
before the Holder’s service to Data I/O terminates as follows:
(i)
If the Qualifying Award remains outstanding following the Change in Control, is assumed by the surviving
entity or its parent, or the surviving entity or its parent substitutes awards with substantially the same terms for such Qualifying
Award, the vesting and exercisability of the Qualifying Award shall be accelerated to the extent of 25% of the Unvested Portion
thereof, and the remaining 75% of the Unvested Portion of such Qualifying Award shall vest in accordance with the vesting schedule
set forth in the applicable Award agreement.
(ii)
If the Qualifying Award remains outstanding following the Change in Control, is assumed by the surviving
entity or its parent, or the surviving entity or its parent substitutes options with substantially the same terms for such Qualifying Award
and if the Holder thereof is subject to an Involuntary Termination within 180 days following such Change in Control, then all Awards
held by such Holder (or options issued in substitution thereof) shall become vested or exercisable in full, whether or not the vesting
requirements set forth in the Award agreement have been satisfied, for a period of 90 days commencing on the effective date of such
Holder’s Involuntary Termination, or if shorter, the remaining term of the Award.
(iii) If a Qualifying Award does not remain outstanding, and either such Qualifying Award is not assumed by the
surviving entity or its parent, or the surviving entity or its parent does not substitute awards with substantially the same terms for such
Qualifying Award, such Qualifying Award shall become vested or exercisable in full, whether or not the vesting requirements set forth
in the Award agreement have been satisfied, for a period prior to the effective date of such Change in Control of a duration specified
by the Plan Administrator, and thereafter the Award shall terminate.
(c) Unless the applicable agreement representing an Award provides otherwise, or unless the Plan Administrator
determines otherwise in its sole and absolute discretion in connection with any Change in Control, the vesting of Qualifying Shares
shall be accelerated, and Data I/O’s repurchase right with respect to such shares shall lapse, in connection with a Change in Control
which becomes effective before such Holder’s service to Data I/O terminates as follows:
(i)
If Qualifying Awards were outstanding at the effective time of the Change in Control and they are partially
accelerated pursuant to Subsection (b)(i) above or if there were no Qualifying Awards outstanding at the effective time of the Change
in Control, the vesting of all Qualifying Shares shall be accelerated to the extent of 25% of the Unvested Portion thereof, and the
remaining 75% of the Unvested Portion of such Qualifying Shares shall vest in accordance with the vesting schedule set forth in the
applicable Award agreement.
(ii)
If the preceding clause (i) applied and if a Holder of Qualifying Shares is subject to an Involuntary
Termination within 180 days following the same Change in Control, then all Qualifying Shares held by such Holder (or shares issued
in substitution thereof) shall become vested in full, whether or not the vesting requirements set forth in the applicable Award
agreement have been satisfied.
(iii) If Qualifying Awards were outstanding at the effective time of the Change in Control and they are accelerated
in full pursuant to Subsection (b)(iii) above or otherwise, the vesting of all Qualifying Shares shall be accelerated in full, and Data
I/O’s repurchase right with respect to all such shares shall lapse in full, whether or not the vesting requirements set forth in the
applicable Award agreement have been satisfied.
14.3 Further Adjustment of Awards.
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Subject to the preceding Section 14.2, the Plan Administrator shall have the discretion, exercisable at any time before a sale,
merger, consolidation, reorganization, dissolution, liquidation or Change in Control of Data I/O, as defined by the Plan Administrator,
to take such further action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to Awards.
Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or
duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional time for exercise, payment or
settlement or lifting restrictions, differing methods for calculating payments or settlements, alternate forms and amounts of payments
and settlements and other modifications, and the Plan Administrator may take such actions with respect to all Participants, to certain
categories of Participants or only to individual Participants. The Plan Administrator may take such actions before or after granting
Awards to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation,
reorganization, dissolution, liquidation or Change in Control that is the reason for such action. Without limiting the generality of the
foregoing, if Data I/O is a party to a merger or consolidation, outstanding Awards shall be subject to the agreement of merger or
consolidation. Such agreement, without the Holder’s consent, may provide for:
(a)
the continuation of such outstanding Award by Data I/O (if Data I/O is the surviving corporation);
(b)
the assumption of the 2000 Plan and some or all outstanding Awards by the surviving corporation or its parent;
(c)
the substitution by the surviving corporation or its parent of Awards with substantially the same terms for such
outstanding Awards; or
(d) the cancellation of such outstanding Awards with or without payment of any consideration.
14.4 Limitations.
The grant of Awards will in no way affect Data I/O's right to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
14.5 Fractional Shares.
In the event of any adjustment in the number of shares covered by any Award, any fractional shares resulting from such
adjustment shall be disregarded and each such Award shall cover only the number of full shares resulting from such adjustment.
15. WITHHOLDING
Data I/O may require the Holder to pay to Data I/O in cash the amount of any withholding taxes that Data I/O is required to
withhold with respect to the grant, exercise, payment or settlement of any Award. Data I/O shall have the right to withhold from any
Award or any shares of Common Stock issuable pursuant to an Award or from any cash amounts otherwise due or to become due
from Data I/O to the Participant an amount equal to such taxes. Data I/O may also deduct from any Award any other amounts due
from the Participant to Data I/O or a Subsidiary.
16. AMENDMENT AND TERMINATION OF 2000 PLAN
16.1 Amendment of 2000 Plan.
The 2000 Plan may be amended by the Board in such respects as it shall deem advisable including, without limitation, such
modifications or amendments as are necessary to maintain compliance with applicable statutes, rules or regulations; however, to the extent
required for compliance with Section 422 of the Code or any applicable law or regulation, shareholder approval will be required for
any amendment that will increase the aggregate number of shares as to which Incentive Stock Options may be granted or change the
class of persons eligible to participate. Amendments made to the 2000 Plan which would constitute “modifications” to Incentive
Stock Options outstanding on the date of such Amendments shall not be applicable to such outstanding Incentive Stock Options but
shall have prospective effect only. The Board may condition the effectiveness of any amendment on the receipt of shareholder
approval at such time and in such manner as the Board may consider necessary for Data I/O to comply with or to avail Data I/O, the
Holders or both of the benefits of any securities, tax, market listing or other administrative or regulatory requirement which the Board
determines to be desirable. Whenever shareholder approval is sought, and unless required otherwise by applicable law or exchange
requirements, the proposed action shall require the affirmative vote of holders of a majority of the shares present, entitled to vote and voting
on the matter without including abstentions or broker non-votes in the denominator.
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16.2 Termination Of 2000 Plan.
Data I/O's shareholders or the Board may suspend or terminate the 2000 Plan at any time. The 2000 Plan will have no fixed
expiration date; provided, however, that no Incentive Stock Options may be granted more than ten (10) years after the earlier of the
2000 Plan's adoption by the Board or approval by the shareholders.
17. GENERAL
17.1 Award Agreements.
Awards granted under the 2000 Plan shall be evidenced by a written agreement which shall contain such terms, conditions,
limitations and restrictions as the Plan Administrator shall deem advisable and which are not inconsistent with the 2000 Plan.
17.2 Continued Employment or Services; Rights In Awards.
None of the 2000 Plan, participation in the 2000 Plan as a Participant or any action of the Plan Administrator taken under the
2000 Plan shall be construed as giving any Participant or employee of Data I/O any right to be retained in the employ of Data I/O or
limit Data I/O's right to terminate the employment or services of the Participant.
17.3 Registration; Certificates For Shares.
Data I/O shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the
Securities Act, or to register or qualify under state securities laws, any shares of Common Stock, security or interest in a security paid
or issued under, or created by, the 2000 Plan, or to continue in effect any such registrations or qualifications if made. Data I/O may
issue certificates for shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as counsel for
Data I/O deems necessary or desirable for compliance by Data I/O with federal and state securities laws.
Inability of Data
the authority deemed by
Data I/O's counsel to be necessary for the lawful issuance and sale of any shares hereunder or the unavailability of an exemption from
registration for the issuance and sale of any shares hereunder shall relieve Data I/O of any liability in respect of the non-issuance or
sale of such shares as to which such requisite authority shall not have been obtained.
regulatory body having
jurisdiction,
to obtain,
from any
I/O
17.4 No Rights As A Shareholder.
No Option, Stock Appreciation Right or Other Stock-Based Award shall entitle the Holder to any cash dividend, voting or other
right of a shareholder unless and until the date of issuance under the 2000 Plan of the shares that are the subject of such Award, free of
all applicable restrictions.
17.5 Compliance With Laws And Regulations.
In interpreting and applying the provisions of the 2000 Plan, any Option granted as an Incentive Stock Option pursuant to the
2000 Plan shall, to the extent permitted by law, be construed as an “incentive stock option” within the meaning of Section 422 of the
Code.
17.6 No Trust Or Fund.
The 2000 Plan is intended to constitute an “unfunded” plan. Nothing contained herein shall require Data I/O to segregate any
monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or
deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured
creditor of Data I/O.
17.7 Severability.
If any provision of the 2000 Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to
any person, or would disqualify the 2000 Plan or any Award under any law deemed applicable by the Plan Administrator, such
provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended
without, in the Plan Administrator’s determination, materially altering the intent of the 2000 Plan or the Award, such provision shall
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be stricken as to such jurisdiction, person or Award, and the remainder of the 2000 Plan and any such Award shall remain in full force
and effect.
18. EFFECTIVE DATE
The 2000 Plan's effective date is the date on which it is adopted by the Board, so long as it is approved by Data I/O's
shareholders at any time within twelve (12) months of such adoption.
The original 2000 Plan was adopted by the Board on February 28, 2000 and approved by Data I/O's shareholders in May
2000. The 2000 Plan was amended and approved by the Board and Data I/O's shareholders in: 2002 to add an additional 200,000
shares, 2004, to add an additional 300,000 shares, 2006, to add an additional 300,000 shares, 2009, to add an additional 300,000
shares, 2011, to add an additional 300,000 shares and 2012 to add an additional 300,000 shares of Common Stock to be reserved for
issuance under the 2000 Plan. The 2000 Plan was amended and approved by the Board on April 30, 2014 to clarify certain sections
of the 2000 Plan and in 2017 to add an additional 250,000 shares of Common Stock to be reserved for issuance under the 2000 Plan.
39
Proxy
Board of Directors
Corporate Offices:
Form 10-K
Anthony Ambrose (2012)
President/CEO
Douglas W. Brown (2011)
Executive Chairman
All Star Directories, Inc.
(Web Services Software)
Brian T. Crowley (2012)
President
Symbio
(R&D Software Engineering)
Mark J. Gallenberger (2013)
Sr. Vice President/CFO/COO
Xcerra Corporation
(Semiconductor Test Equipment)
Alan B. Howe (2013)
Managing Partner
Broadband Initiatives, LLC
(Corporate Advisory & Consulting)
The calendar year in ( ) indicates when
the individuals became directors of
Data I/O.
Corporate Officers
Anthony Ambrose
President/CEO
Joel S. Hatlen
Vice President
Chief Financial Officer
Secretary/Treasurer
Rajeev Gulati
Vice President
Chief Technology Officer
Data I/O Corporation
6645 185th Ave NE
Suite 100
Redmond, WA 98052
Sales and Service Offices:
China
Data I/O Electronics (Shanghai) Co.
Ltd
6F, Building 3, JuXin Park
188 Ping Fu Road
Shanghai, China PRC 200231
Germany
Data I/O GmbH
Am Haag 10
82166 Graefelfing
To obtain a copy of the Company’s Annual
Report on Form 10-K, filed with the Securities
and Exchange Commission, go to our website at
http://www.dataio.com/company/investorrelatio
ns/financialreports.aspx
or contact Joel Hatlen, Vice President and Chief
Financial Officer, 6645 185th Ave NE,
Suite 100, Redmond, WA 98052.
Shareholders Meeting:
The 2016 Annual Meeting of Shareholders will
be held on Tuesday, May 24, 2016 at 9:00 a.m.
Pacific Time at the Company’s headquarters:
Data I/O Corporation
6645 185th Ave NE, Suite 100
Redmond, Washington 98052
Legal Counsel:
Shareholder Information:
Dorsey & Whitney LLP
Columbia Center
701 5th Ave #6100,
Seattle, WA 98101
Auditors:
Grant Thornton LLP
520 Pike Street
Seattle, WA 98101-2310
Investor Relations:
Shareholders of Data I/O Corporation
who would like information about
the Company are invited to contact:
Darrow Associates, Inc.
Jordan Darrow
(512) 551-9296
jdarrow@darrowir.com
Joel Hatlen
Vice President & Chief Financial Officer
6645 185th Ave NE, Suite 100,
Redmond, WA 98052
(425) 881-6444
investorrelations@dataio.com.
Shareholders needing information relating to
their shareholdings in Data I/O should contact
the Company’s Transfer Agent and Registrar at
the mailing address, telephone number or Web
address below.
Transfer Agent and Registrar:
Computershare
P.O. Box 505000
Louisville, KY 40233
(888) 540-9882
Overnight correspondence
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
Shareholder website:
www.computershare.com/investor
Shareholder online inquiries:
https://www-
us.computershare.com/investor/Contact
Exchange Listing:
Stock Symbol: DAIO
NASDAQ
6645 185th Ave NE
Suite 100
Redmond, WA 98052
Programming Matters
Since 1972 Data I/O has developed innovative solutions to enable the design and manufacture of electronic
products for automotive, Internet-of-Things, medical, wireless, consumer electronics, industrial controls and other
markets. Today, our customers use Data I/O security provisioning and programming solutions to reliably, securely,
and cost-effectively bring innovative new products to life. These solutions are backed by a global network of Data
I/O support and service professionals, assuring success for our customers.
For more information, please visit www.dataio.com.