UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Or the transition period from ___________ to ______________
Commission File No. 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0864123
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10525 Willows Road N.E., Redmond, Washington, 98052
(Address of principal executive offices, including zip code)
(425) 881-6444
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
7,883,188 shares of no par value of the Registrant's Common Stock were issued
and outstanding as of May 9, 2003.
DATA I/O CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 2003
INDEX
Part I - Financial Information Page
Item 1. Financial Statements (unaudited) 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
Item 4. Controls and Procedures 13
Part II - Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 17
Certifications 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------------
Mar.31, Dec. 31,
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,645 $ 4,383
Marketable securities 339 1,076
Trade accounts receivable, less allowance for
doubtful accounts of $189 and $187 4,675 4,328
Inventories 4,383 4,476
Other current assets 236 509
--------------------- ---------------
TOTAL CURRENT ASSETS 15,278 14,772
Property and equipment - net 1,196 1,508
Other assets 67 87
--------------------- ----------------
TOTAL ASSETS $16,541 $16,367
===================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,358 $1,200
Accrued compensation 748 826
Deferred revenue 1,574 1,613
Other accrued liabilities 1,453 1,510
Accrued costs of business restructuring 22 204
Income taxes payable 314 294
--------------------- ----------------
TOTAL CURRENT LIABILITIES 5,469 5,647
Deferred gain on sale of property 1,353 1,435
--------------------- ----------------
TOTAL LIABILITIES $6,822 $7,082
COMMITMENTS - -
STOCKHOLDERS' EQUITY:
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none - -
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 7,883,188
and 7,767,630 shares 18,697 18,638
Accumulated deficit (8,962) (9,279)
Accumulated other comprehensive loss (16) (74)
--------------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 9,719 9,285
--------------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,541 $16,367
===================== ================
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Mar. 31, Mar 31,
For the three months ended 2003 2002
- -------------------------------------------------------------------------------------- ------------------ ---------------------
(in thousands, except per share data)
Net sales $6,155 $5,390
Cost of goods sold 2,718 2,887
------------------ ---------------------
Gross margin 3,437 2,503
Operating expenses:
Research and development 1,161 1,308
Selling, general and administrative 1,928 2,295
Net provision (reversal) for business restructuring (27) -
------------------ ---------------------
Total operating expenses 3,062 3,603
------------------ ---------------------
Operating income (loss) 375 (1,100)
Non-operating income (expense):
Interest income 32 26
Interest expense (3) (3)
Foreign currency exchange (76) (55)
------------------ ---------------------
Total non-operating income (expense) (47) (32)
------------------ ---------------------
Income (loss) from operations before income taxes 328 (1,132)
Income tax expense (benefit) 11 23
------------------ ---------------------
Net income (loss) $ 317 ($1,155)
================== =====================
Basic and diluted earnings (loss) per share:
Total basic and diluted earnings (loss) per share $0.04 ($0.15)
================== =====================
Weighted average shares outstanding 7,845 7,649
================== =====================
Weighted average and potential shares outstanding 7,847 7,649
================== =====================
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
Mar 31, Mar 31,
For the three months ended 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Income (loss) from operations $ 317 ($1,155)
Adjustments to reconcile income (loss) from operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 176 277
Net loss on dispositions 298 232
Amortization of deferred gain on sale (82) (83)
Net change in:
Deferred revenue (38) 59
Trade accounts receivable (351) 395
Inventories 94 312
Other current assets 274 (65)
Accrued costs of business restructuring (182) (25)
Accounts payable and accrued liabilities 45 (427)
----------- --------------
Net cash provided by (used in) operating activities 551 (480)
INVESTING ACTIVITIES:
Purchases of property and equipment (142) (295)
Net from purchase and sale of marketable securities 737 1,175
----------- --------------
Net cash provided by (used in) investing activities 595 880
FINANCING ACTIVITIES:
Sale of common stock 58 69
Proceeds from exercise of stock options 7
----------- --------------
Net cash provided by (used in) financing activities 58 76
----------- --------------
Increase/(decrease) in cash and cash equivalents 1,204 476
Effects of exchange rate changes on cash 58 (15)
Cash and cash equivalents at beginning of year 4,383 2,656
----------- --------------
Cash and cash equivalents at end of quarter $5,645 $3,117
=========== ==============
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENT PREPARATION
Data I/O prepared the financial statements as of March 31, 2003 and March 31,
2002, according to the rules and regulations of the Securities and Exchange
Commission ("SEC"). These statements are unaudited but, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments
and accruals) necessary to present fairly the results for the periods presented.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date. We have condensed or omitted certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America according to such SEC rules and regulations. Operating
results for the three months ended March 31, 2003 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003. These
financial statements should be read in conjunction with the annual audited
financial statements and the accompanying notes included in the Company's Form
10-K for the year ended December 31, 2002.
Stock-Based Compensation
Data I/O has stock-based employee compensation plans. We apply APB Opinion 25,
Accounting for Stock Issued to Employees, and related Interpretations in
accounting for our plans. Stock expense for the first quarter of 2003 and 2002
would have been the result of options issued with an exercise price below the
underlying stock's market price. The following table illustrates the effect on
net loss and loss per share if Data I/O had applied the fair value recognition
provisions of FASB Statement 123, Accounting for Stock-Based Compensation.
Data I/O's pro forma information follows (in thousands), except per share data:
Mar. 31, Mar. 31,
2003 2002
---------------- ----------------
Net income (loss) - as reported $317 ($1,155)
Deduct: Total stock-based employee compensation expense determined under fair
value based method for awards granted, modified, or settled, net of related tax
effects (80) (86)
---------------- ----------------
Net income (loss) - pro forma $237 ($1,241)
================ ================
Basic and diluted income (loss) per share - as reported $0.04 ($0.15)
Basic and diluted income (loss) per share - pro forma $0.03 ($0.16)
NOTE 2 - INVENTORIES
Inventories consisted of the following components (in thousands):
Mar. 31, Dec. 31,
2003 2002
---------------- ----------------
Raw material $2,273 $2,308
Work-in-process 938 875
Finished goods 1,172 1,293
---------------- ----------------
$4,383 $4,476
================ ================
We continued to reduce the overall level of inventory based upon the level of
sales we have been experiencing and are forecasting. During the quarter we did
not significantly change the net carrying values of our inventory.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following components (in thousands):
Mar. 31, Dec. 31,
2003 2002
---------------- ----------------
Leasehold improvement $ 240 $ $239
Equipment 11,940 12,132
---------------- ----------------
12,180 12,371
Less accumulated depreciation 10,984 10,863
---------------- ----------------
Property and equipment - net $ 1,196 $ 1,508
================ ================
NOTE 4 - BUSINESS RESTRUCTURING PROGRESS
The economic slowdown of the past few years significantly affected our business.
During 2001 and 2002, we recorded restructuring charges associated with actions
taken to reduce our breakeven point and realign Data I/O with our market
opportunities. We required this operational repositioning because of the impact
of the economic slowdown and the decline in capital spending across a high
number of customer groups on general demand for programming equipment.
During the first quarter of 2003, we completed most of the previously accrued
restructure actions. These payments were $27,000 less than anticipated from the
original restructuring related charges that totaled $1.8 million during 2001 and
2002. Accordingly, included in the results for the first quarter is a reversal
of these previously over-accrued restructure charges. At March 31, 2003, all
restructuring expenses associated with the activities detailed above had been
paid except approximately $22,000, which was primarily associated with
severance, facility, consulting and legal fees.
An analysis of the restructuring is as follows (in thousands):
Reserve March 2003 Reserve
Balance at 2003 Payments/ Balance at
Description Dec. 31, 2002 Adj. Write-offs Mar. 31, 2003
-------------- ----------------- ----------- ------------- ------------------
Downsizing U.S. Operations:
Employee severance $169 $(18) $ (146) $ 5
Redmond facility consolidation 10 - - 10
Consulting and legal expenses 25 (9) (9) 7
Downsizing Foreign Operations - - - -
----------------- ----------- ------------- ------------------
Total $204 $(27) $(155) $22
================= =========== ============= ==================
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share data):
For the first quarter
----------------------------
2003 2002
----------- -------------
Numerator for basic and diluted earnings (loss) per share:
Net loss $ 317 ($ 1,155)
----------- -------------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 7,845 7,649
Employee stock options (1) 2 -
----------- -------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions of stock options 7,847 7,649
----------- -------------
Basic and diluted earnings (loss) per share
Total basic and diluted earnings (loss) per share $0.04 ($0.15)
=========== =============
(1) At March 31, 2003 and 2002 there were 1,131,088 and 1,222,438 shares,
respectively, of outstanding options potentially issueable as common
stock. Because of the net loss for the three months ended March 31,
2002, we did not include potentially issueable common stock in the
calculation of diluted loss per share because this would be
anti-dilutive. Because the exercise price exceeds the market value of
the common stock on March 31, 2003, we did not include the outstanding
options, potentially issueable as common stock on that date, in the
calculation of diluted income per share. The 1,844 shares included in
the diluted earning per share relate to the Employee Stock Purchase
Plan.
NOTE 6 - ACCOUNTING FOR INCOME TAXES
The Company's effective tax rate for the first three months of 2003
differed from the statutory 34% tax rate primarily due to utilization of
net operating loss carryforwards. The tax valuation allowance decreased by
approximately $56,000 during the quarter ended March 31, 2003. As of March
31, 2003, the Company has a valuation allowance of $10,084,000.
NOTE 7 - COMPREHENSIVE INCOME
During the first quarter of 2003 and 2002 total comprehensive income (loss) was
comprised of the following (in thousands):
For the first quarter
------------------------------
2003 2002
------------- -------------
Net income (loss) $317 ($1,155)
Foreign currency translation gain (loss) 58 11
------------- -------------
Total comprehensive income (loss) $375 ($1,144)
============= =============
NOTE 8 - FOREIGN CURRENCY TRANSLATION AND DERIVATIVES
Data I/O translates assets and liabilities of foreign subsidiaries at the
exchange rate on the balance sheet date. We translate revenues, costs and
expenses of foreign subsidiaries at average rates of exchange prevailing during
the year. We charge or credit translation adjustments resulting from this
process to stockholders' equity, net of taxes. Realized and unrealized gains and
losses resulting from the effects of changes in exchange rates on assets and
liabilities denominated in foreign currencies are included in non-operating
expense as foreign currency transaction gains and losses.
Data I/O accounts for its hedging activities in accordance with SFAS No. 133,
Accounting for Derivatives and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and requires
recognition of derivatives as assets or liabilities in the statement of
financial position and measurement of those instruments at fair value.
Data I/O utilizes forward foreign exchange contracts to reduce the impact of
foreign currency exchange rate risks where natural hedging strategies cannot be
effectively employed. All hedging instruments held by us are fair value hedges.
Generally, these contracts have maturities less than one year and require us to
exchange foreign currencies for U.S. dollars at maturity. The change in fair
value of the open hedge contracts as of March 31, 2003 is an unrealized loss of
$22,900 and is included in accounts payable on the balance sheet.
Data I/O does not hold or issue derivative financial instruments for trading
purposes. The purpose of our hedging activities is to reduce the risk that the
valuation of the underlying assets, liabilities and firm commitments will be
adversely affected by changes in exchange rates. Our derivative activities do
not create foreign currency exchange rate risk because fluctuations in the value
of the instruments used for hedging purposes are offset by fluctuations in the
value of the underlying exposures being hedged.
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, Accounting
Changes. Data I/O has not determined the effect of adoption of EITF 00-21 on our
financial statements or the method of adoption it will use.
In May of 2003, FASB issued Statement 149, which amends Statement 133 by
clarifying various derivatives related issues and provides for more consistent
reporting of derivatives. Statement 149 is effective for contracts entered into
or modified after June 30, 2003, with some exceptions, and for hedging
relationships designated after June 30, 2003. Data I/O has not yet determined
the impact of this statement, but anticipated that it will be complying with the
provisions of the statement, which is to be applied prospectively.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q are forward-looking. In particular,
statements herein regarding industry prospects or trends; expected level of
expense; future results of operations or financial position; changes in gross
margin; integration of acquired products and operations; market acceptance of
our newly introduced or upgraded products; development, introduction and
shipment of new products; and any other guidance on future periods are
forward-looking statements. Forward-looking statements reflect management's
current expectations and are inherently uncertain. Although Data I/O believes
that the expectations reflected in these forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
achievements, or other future events. Moreover, neither Data I/O nor anyone else
assumes responsibility for the accuracy and completeness of these
forward-looking statements. Data I/O is under no duty to update any of these
forward-looking statements after the date of this report. The Reader should not
place undue reliance on these forward-looking statements. The discussions in the
section entitled "Business - Cautionary Factors That May Affect Future Results"
in Item 1 in the Company's Annual report on Form 10-K for the year ended
December 31, 2002, and in Exhibit 99.1 of this report describe some, but not
all, of the factors that could cause these differences.
CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States 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, investments, intangible assets, income taxes,
warranty obligations, restructuring charges, contingencies such as litigation,
and contract terms that have multiple elements and other complexities typical in
the telecommunications equipment industry. We base our estimates on historical
experience and other assumptions that we believe are reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of its financial
statements.
Revenue Recognition: Sales of our semiconductor programming equipment products
requiring installation by us that is other than perfunctory are recorded when
installation is complete, or at the later of customer acceptance or
installation, if an acceptance clause is specified in the sales terms. We
recognize revenue from other product sales at the time of shipment. We record
revenue from the sale of service and update contracts as deferred revenue and we
recognize it on a straight-line basis over the contractual period, which is
typically one year. We establish a reserve for sales returns based on historical
trends in product returns and estimates for new items. If the actual future
returns differ from historical levels, our revenue could be adversely affected.
Allowance for Doubtful Accounts: We base the allowance for doubtful accounts
receivable on our assessment of the collectibility of specific customer accounts
and the aging of accounts receivable. If there is a deterioration of a major
customer's credit worthiness or actual defaults are higher than historical
experience, our estimates of the recoverability of amounts due us could be
adversely affected.
Inventory Provisions: We base inventory purchases and commitments upon future
demand forecasts and historic usage. If there is a significant decrease in
demand for our products or there is a higher risk of inventory obsolescence
because of rapidly changing technology and customer requirements, we may be
required to increase our inventory provision 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.
Deferred Taxes: We have incurred tax losses in each of the last four years and
have net operating loss and tax credit carryforwards that begin expiring in
2020. We have provided a full valuation allowance against our tax assets, given
the uncertainty as to their realization. In future years, these benefits are
available to reduce or eliminate taxes on future taxable income.
Results of Operations
Net Sales
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
First Quarter
-------------------------------------------------------
Net sales by product line 2003 % Change 2002
--------------------------------------------------------------------------------------------------------------------
Non-automated programming systems $2,552 (7.4%) $2,756
Automated programming systems 3,603 36.8% 2,634
-------------------------------------------------------
Total programming systems $6,155 14.2% $5,390
=======================================================
First Quarter
-------------------------------------------------------
Net sales by location 2003 % Change 2002
--------------------------------------------------------------------------------------------------------------------
United States $1,815 1.5% $1,789
% of total 29.5% 33.2%
International $4,340 20.5% $3,601
% of total 70.5% 66.8%
--------------------------------------------------------------------------------------------------------------------
Revenues for the first quarter of 2003 increased by approximately 14% compared
to the first quarter of 2002. Revenue increased due primarily to more
ProLINE-RoadRunner product line sales, but PS automated systems service and
aftermarket increased as well. Sales declined for non-automated programming
systems with the decline primarily related to fewer sales of low cost
programmers and manufacturing related non-automated programmers. During the
quarter a vendor of a low cost programming line we distributed went out of
business and that distribution relationship ceased. These products represented
$251,000 in revenue for the year 2002. Finally, the impact of the weakened US
dollar favorably impacted us both from making products less expensive when sold
overseas in US Dollars and from Euro based sales which translated into higher US
Dollar reported sales.
Data I/O continues to experience a trend in its sales mix towards increased
international sales and believes that, with the economic situation in the United
States and with the electronics industry trend toward offshore and outsourced
manufacturing, this trend is likely to continue.
Gross Margin
First Quarter
------------------------------------------
(in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------
Gross Margin $3,437 $2,503
Percentage of net sales 55.8% 46.4%
- ----------------------------------------------------------------------------------------------------------
Gross margins increased in dollars and as a percentage of sales for the first
quarter of 2003 compared with the same period of 2002. Overall gross margins
increased primarily due to the increase in sales volume, cost reductions due to
the restructuring; and first quarter of 2002 included unfavorable inventory
reserves of approximately $240,000. The translation net impact from the weaker
US Dollar also benefited the gross margin.
Research and Development
First Quarter
------------------------------------------
(in thousands) 2003 2002
---------------------------------------------------------------------------------------------------------
Research and development $1,161 $1,308
Percentage of net sales 18.9% 24.3%
---------------------------------------------------------------------------------------------------------
Research and development ("R&D") spending for the first quarter 2003 as compared
to the first quarter 2002 was slightly less in dollars and as a percentage of
sales. This decrease in spending was primarily related to the restructuring
actions taken in the past year reducing personnel costs. During the first
quarter, Data I/O's R&D released a ProLINE-RoadRunner version for Panasonic
Panasert placement machines and microcontroller support on ProLINE FlashCORE
programming systems.
Selling, General and Administrative
First Quarter
------------------------------------------
2003 2002
---------------------------------------------------------------------------------------------------------
Selling, general & administrative $1,928 $2,295
Percentage of net sales 31.3% 42.6%
---------------------------------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses for the first quarter of
2003 were $367,000 less compared with the same period in 2002, primarily due to
Data I/O's reduced costs from the prior year's restructuring activities offset
by our recording of increased incentive compensation and higher facility-related
costs due to the loss of a sublease tenant and a rent increase in 2002. Data
I/O's management incentive compensation and employee performance bonus plans are
earned based upon various measures of quarterly profit and annual growth in
profit that will be an incremental expense for any profits in 2003, as compared
to 2002 which was a loss.
Interest
First Quarter
------------------------------------------
(in thousands) 2003 2002
---------------------------------------------------------------------------------------------------------
Interest income $32 $26
Interest expense ($3) ($3)
---------------------------------------------------------------------------------------------------------
Interest income increased slightly in the first quarter of 2003 compared to the
same period in 2002 due to increased funds invested.
Income Taxes
First Quarter
------------------------------------------
(in thousands) 2003 2002
---------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $11 $23
---------------------------------------------------------------------------------------------------------
Tax expense recorded for the first quarter of 2003 was due to foreign taxes. Tax
valuation reserves decreased by approximately $56,000 during the quarter. Data
I/O has valuation reserves of $10,084,000 as of March 31, 2003.
Financial Condition
Liquidity and Capital Resources
Mar. 31, Dec. 31,
(in thousands) 2003 Change 2002
- ------------------------------------------------------------- --------------------- -------------------- -------------------
Working capital $9,810 $685 $9,125
- ------------------------------------------------------------- --------------------- -------------------- -------------------
Working capital increased during the first three months of 2003 primarily due to
cash provided by operations. Cash, cash equivalents and marketable securities
increased approximately $0.5 million during this period, inventory decreased
$0.1 million, and accounts receivable increased $0.3 million. We have continued
to focus on reducing the amount of inventory relative to our business level.
Should our business grow significantly, we anticipate that we will need to
utilize existing liquidity to carry the increased receivables and inventory
expected to be associated with sales growth. As of March 31, 2003, Data I/O had
no debt outstanding.
Data I/O estimates that capital expenditures for property, plant and equipment
during the remainder of 2003 will be between $400,000 and $1 million, excluding
expenditures for strategic purposes. Data I/O's future capital requirements will
depend on a number of factors including; decisions to invest in new systems and
technology equipment, costs associated with R&D, successful launch of new
products and the potential use of funds for strategic purposes. We expect to
fund capital expenditures from existing and internally generated funds or we may
lease capital equipment. We believe that we have sufficient working capital
available under our operating plan to fund our operations and capital
requirements for at least 12 months.
Data I/O renewed a foreign line of credit for 50,000 Euros in the first quarter,
and maintains credit facilities for purchasing card and credit card purchases.
General
Restructuring
The economic slowdown of the past few years significantly affected our business.
During 2001 and 2002, we recorded restructuring charges associated with actions
taken to reduce our breakeven point and realign Data I/O with our market
opportunities. We required this operational repositioning because of the impact
of the economic slowdown and the decline in capital spending across a high
number of customer groups on general demand for programming equipment.
During the first quarter of 2003, we completed most of the previously accrued
restructure actions. These payments were $27,000 less than anticipated from the
original restructuring related charges that totaled $1.8 million during 2001 and
2002. Accordingly, included in the results for the first quarter is a reversal
of these previously over-accrued restructure charges. At March 31, 2003, all
restructuring expenses associated with the activities detailed above had been
paid except approximately $22,000, which was primarily associated with
severance, facility, consulting and legal fees.
New Accounting Pronouncements
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, Accounting
Changes. Data I/O has not determined the effect of adoption of EITF 00-21 on our
financial statements or the method of adoption it will use.
In May of 2003 FASB issued Statement 149, which amends Statement 133 by
clarifying various derivative related issues and provides for more consistent
reporting of derivatives. Statement 149 is effective for contracts entered into
or modified after June 30, 2003, with some exceptions, and for hedging
relationships designated after June 30, 2003. Data I/O has not yet determined
the impact of this statement, but anticipated that it will be complying with the
provisions of the statement, which is to be applied prospectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including fluctuations in foreign
exchange rates and interest rates.
INTEREST RATE RISK
We invest our cash in a variety of short-term financial instruments, including
government bonds, commercial paper and money market instruments, which are
classified as available-for-sale. Our investments are made in accordance with an
investment policy approved by our board of directors. Our portfolio is
diversified and consists primarily of investment grade securities to minimize
credit risk. Cash balances in foreign currencies are operating balances and are
invested in demand or short-term deposits of the local operating bank.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted because of a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations because of changes in interest rates or we may suffer losses in
principal if forced to sell securities that have seen a decline in market value
because of changes in interest rates. We do not attempt to reduce or eliminate
our exposure to interest rate risk through the use of derivative financial
instruments due to the short-term nature of the investments.
The table below provides information about our marketable securities, including
principal cash flows and the related weighted average interest rates (in
thousands):
Principal Estimated Fair Principal Estimated Fair
Cash Flows Value at Cash Flows Value at
For 2003 March 31, 2003 For Q1 2003 December 31, 2002
--------------- ------------------- -------------- -----------------------
Corporate Bonds $ 0 $ 0 $ 734 $ 734
2.936%
Euro-dollar bonds 339 339 342 342
2.100% 2.100%
--------------- ------------------- -------------- -----------------------
Total portfolio value $ 339 $339 $1,076 $1,076
FOREIGN CURRENCY RISK
We have operations in Germany, Canada, and China and, therefore, we are subject
to risks typical of an international business including, but not limited to,
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions and foreign exchange rate
volatility. Accordingly, our future results could be materially adversely
affected by changes in these or other factors.
Our sales and corresponding receivables are substantially in U.S. dollars other
than sales made in our subsidiaries in Germany, Canada, and China. Through our
operations in Germany, Canada, and China, we incur certain product costs;
research and development; customer service and support costs; selling, general
and administrative expenses in local currencies. We are exposed, in the normal
course of business, to foreign currency risks on these expenditures and on
related foreign currency denominated monetary assets and liabilities. We have
evaluated our exposure to these risks and believe that our only significant
exposure to foreign currencies at the present time is primarily related to
Euro-based receivables. We use forward contracts to hedge and thereby minimize
the currency risks associated with certain transactions denominated in Euros.
If our actual currency requirement or timing in the period forecasted differs
materially from the notional amount of our forward contracts and/or the natural
balancing of receivables and payables in foreign currencies during a period of
currency volatility or if we do not continue to manage our exposure to foreign
currency through forward contracts or other means, we could experience
unanticipated foreign currency gains or losses. In addition, our foreign
currency risk management policy subjects us to risks relating to the
creditworthiness of the commercial banks with which we enter into forward
contracts. If one of these banks cannot honor its obligations, we may suffer a
loss. We also invest in our international operations, which will likely result
in increased future operating expenses denominated in those local currencies. In
the future, our exposure to foreign currency risks from these other foreign
currencies may increase and if not managed appropriately, we could experience
unanticipated foreign currency gains and losses.
The purpose of our foreign currency risk management policy is to reduce the
effect of exchange rate fluctuation on our results of operations. Therefore,
while our foreign currency risk management policy may reduce our exposure to
losses resulting from unfavorable changes in currency exchange rates, it also
reduces or eliminates our ability to profit from favorable changes in currency
exchange rates.
At March 31, 2003, we had four forward contracts to sell Euros in exchange for
$860,175 with rates ranging from 1.0279 to 1.0811 all scheduled to be due within
the next quarter and the value at that date of $883,108.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, Data I/O evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) and Rule 15d-14(c) under the Exchange
Act) as of a date (the "Evaluation Date") within 90 days prior to the filing
date of this report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to Data I/O (or its consolidated subsidiaries)
required to be included in our periodic SEC filings and Form 8-K reports.
(b) Changes in internal controls.
There were no significant changes made in our internal controls or, to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following list is a subset of the list of exhibits described below and
contains all compensatory plans, contracts or arrangements in which any director
or executive officer of the Company is a participant, unless the method of
allocation of benefits thereunder is the same for management and non-management
participants:
(1) Amended and Restated 1982 Employee Stock Purchase Plan. See Exhibit 10.7.
(2) Retirement Plan and Trust Agreement. See Exhibit 10.2, 10.3, 10.4, 10.11,
10.14, 10.15, and 10.16.
(3) Summary of Management Incentive Compensation Plan. See Exhibit 10.12.
(4) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1.
(5) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.19.
(6) Form of Change in Control Agreements. See Exhibit 10.5.
(7) 1996 Director Fee Plan. See Exhibit 10.6 and 10.17.
(8) Letter Agreement with Frederick R. Hume. See Exhibit 10.21.
3 Articles of Incorporation:
3.1 The Company's restated Articles of Incorporation filed
November 2, 1987 (Incorporated by reference to Exhibit 3.1
of the Company's 1987 Annual Report on Form 10-K (File No.
0-10394)).
3.2 The Company's Bylaws as amended and restated as of March
2001. (Incorporated by reference to the Company's 2001
Annual Report on Form 10-K (File No. 0-10394)).
3.3 Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock
(Incorporated by reference to Exhibit 1 of the Company's
Registration Statement on Form 8-A filed March 13, 1998
(File No. 0-10394)).
4 Instruments Defining the Rights of Security Holders, Including
Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between Data
I/O Corporation and ChaseMellon Shareholder Services,
L.L.C. as Rights Agent, which includes: as Exhibit A
thereto, the Form of Right Certificate; and, as Exhibit B
thereto, the Summary of Rights to Purchase Series A Junior
Participating Preferred Stock (Incorporated by reference
to the Company's Current Report on Form 8-K filed on March
13, 1998).
4.2 Rights Agreement, dated as of March 31, 1988, between Data
I/O Corporation and First Jersey National Bank, as Rights
Agent, as amended by Amendment No. 1 thereto, dated as of
May 28, 1992 and Amendment No. 2 thereto, dated as of July
16, 1997 (Incorporated by reference to the Company's
Report on Form 8-K filed on March 13, 1998).
4.3 Amendment No. 1, dated as of February 10, 1999, to Rights
Agreement, dated as of April 4, 1998, between Data I/O
Corporation and ChaseMellon Shareholder Services, L.L.C.
as Rights Agent (Incorporated by reference to Exhibit 4.1
of the Company's Form 8-A/A dated February 10, 1999).
10 Material Contracts:
10.1 Amended and Restated 1983 Stock Appreciation Rights Plan
dated February 3, 1993 (Incorporated by reference to
Exhibit 10.23 of the Company's 1992 Annual Report on
Form 10-K (File No. 0-10394)).
10.2 Amended and Restated Retirement Plan and Trust Agreement.
(Incorporated by reference to Exhibit 10.26 of the
Company's 1993 Annual Report on Form 10-K
(File No. 0-10394)).
10.3 First Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.21 of the
Company's 1994 Annual Report on Form 10-K (File No.
0-10394)).
10.4 Second Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.26 of the
Company's 1995 Annual Report on Form 10-K (File No.
0-10394)).
10.5 Form of Change in Control Agreements (Incorporated by
reference to Exhibit 10.20 of the Company's 1994 Annual
Report on Form 10-K (File No. 0-10394)).
10.6 Data I/O Corporation 1996 Director Fee Plan (Incorporated
by reference to Exhibit 10.27 of the Company's 1995 Annual
Report on Form 10K (File No. 0-10394)).
10.7 Data I/O Corporation 1982 Employee Stock Purchase Plan
Amended and Restated December 11, 1996 (Incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement of Form S-8 (File No. 333-20657, filed January
29, 1997)).
10.8 Purchase and Sale Agreement dated as of July 9, 1996
(Relating to the sale of Data I/O Corporation's
headquarters property in Redmond, Washington consisting of
approximately 79 acres of land and an approximately 96,000
square foot building. (Portions of this exhibit have been
omitted pursuant to an application for an order granting
confidential treatment. The omitted portions have been
separately filed with the Commission) (Incorporated by
reference to Exhibit 10.32 of the Company's 1996 Annual
Report on Form 10-K (File No. 0-10394)).
10.9 Letter dated as of December 20, 1996, First Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.33 of the
Company's 1996 Annual Report on Form 10-K (File No.
0-10394)).
10.10 Letter dated as of February 17, 1997, Second Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.34 of the
Company's 1996 Annual Report on Form 10-K (File No.
0-10394)).
10.11 Third Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.35 of the
Company's 1996 Annual Report on Form 10-K (File No.
0-10394)).
10.12 Amended and Restated Management Incentive Compensation
Plan dated January 1, 1997 (Incorporated by reference to
Exhibit 10.25 of the Company's 1997 Annual Report on Form
10-K (File No. 0-10394)).
10.13 Amended and Restated Performance Bonus Plan dated
January 1, 1997 (Incorporated by reference to
Exhibit 10.26 of the Company's 1997 Annual Report on
Form 10-K (File No. 0-10394)).
10.14 Fourth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.27 of the
Company's 1997 Annual Report on Form 10-K (File No.
0-10394)).
10.15 Fifth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.28 of the
Company's 1997 Annual Report on Form 10-K (File No.
0-10394)).
10.16 Sixth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.29 of the
Company's 1997 Annual Report on Form 10-K (File No.
0-10394)).
10.17 Amended and Restated Data I/O Corporation 1996 Director
Fee Plan (Incorporated by reference to Exhibit 10.32 of
the Company's 1997 Annual Report on Form 10-K (File No.
0-10394)).
10.18 Amended and Restated Data I/O Corporation 1996 Director
Fee Plan (Incorporated by reference to Exhibit 10.32 of
the Company's 1997 Annual Report on 10-K
(File No. 0-10394)).
10.19 Amended and Restated 1986 Stock Option Plan dated May 12,
1998 (Incorporated by reference to Exhibit 10.37 of the
Company's 1998 Annual Report on Form 10-K (File No.
0-10394)).
10.20 Sublease dated December 22, 1999 between Data I/O
Corporation and Imandi.com, Inc. (Incorporated by
reference to Exhibit 10.34 of the Company's 1999 Annual
Report on Form 10-K (File No. 0-10394)).
10.21 Letter Agreement with Fred R. Hume dated January 29, 1999.
(Incorporated by reference to Exhibit 10.35 of the
Company's 1999 Annual Report on Form 10-K (File 0-10394)).
10.22 Letter Agreement dated May 28, 1999, among Data I/O
Corporation, JTAG Technologies B.V., and JTAG Holding B.V.
(Incorporated by reference to Exhibit 10.36 of the
Company's 1999 Annual Report on Form 10-K
(File No. 0-10394)).
10.23 Amended and Restated 2000 Stock Compensation Incentive
Plan dated May 19, 2000. (Incorporated by reference to the
Company's 2000 Proxy Statement dated March 27, 2000.)
10.24 Amended and Restated 1982 Employee Stock Purchase Plan
dated May 16, 2001 (Incorporated by reference to the
Company's 2001 Proxy Statement dated March 28, 2001.)
99 Other Exhibits
99.1 Risk Factors 23
(b) Reports on Form 8-K
On February 22, 2003, Data I/O furnished a copy of a press release announcing
Data I/O's fourth quarter results on a Form 8-K under Item 9. The information
furnished in the Form 8-K pursuant to Item 9 shall not be deemed filed under the
Securities Exchange Act of 1934, as amended.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DATA I/O CORPORATION
(REGISTRANT)
DATED: May 14, 2003
By://S//Joel S. Hatlen
Joel S. Hatlen
Vice President - Finance
Chief Financial Officer
Secretary and Treasurer
(Principal Financial Officer and Duly Authorized Officer)
By://S//Frederick R. Hume
Frederick R. Hume
President
Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)
Certification
I, Frederick R. Hume, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; 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; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Frederick R. Hume
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)
Certification
I, Joel S. Hatlen, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; 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; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
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 quarterly Report of Data I/O
Corporation (the "Company") on Form 10-Q for the period ended
March 31, 2003 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Frederick R.
Hume, Chief Executive Officer of the Company, certify, that
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Frederick R. Hume
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)
May 14, 2003
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 quarterly Report of Data I/O
Corporation (the "Company") on Form 10-Q for the period ended
March 31, 2003 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Joel S.
Hatlen, Chief Financial Officer of the Company, certify, that
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
May 14, 2003
Exhibit 99.1
Cautionary Factors That May Affect Future Results
Data I/O's disclosure and analysis in this Quarterly Report contains some
forward-looking statements. Forward-looking statements include our current
expectations or forecasts of future events. The reader can identify these
statements by the fact that they do not relate strictly to historical or current
facts. In particular, these include statements relating to future action,
prospective products, new technologies, future performance or results of current
and anticipated products, sales efforts, expenses, outsourcing of functions,
outcome of contingencies, and financial results.
Any or all of the forward-looking statements in this Quarterly 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 Quarterly Report, whether as a result of new information,
future events or otherwise. The reader should not place undue reliance on such
forward-looking statements. The reader is advised, however, to consult any
future disclosures Data I/O makes on related subjects in our 10-Q, 8-K and 10-K
reports to the SEC and press releases. Also, note that Data I/O provides the
following cautionary discussion of risks, uncertainties and possible inaccurate
assumptions relevant to our business. These are factors that we think could
cause Data I/O's actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect Data I/O. This discussion is permitted by the Private Securities
Litigation Reform Act of 1995.
RISK FACTORS
Development, Introduction and Shipment of New Products
Data I/O currently is developing new engineering and automated programming
systems. Significant technological, supplier, manufacturing or other problems
may delay the development, introduction or production of these products.
For example, we may encounter these problems:
o technical problems in the development of a new programming system
platform or the robotics for new automated handing systems
o inability to hire qualified personnel
o delays or failures to perform by third parties involved in our development
projects
Delays in the development, completion and shipment of new products, or failure
of customers to accept new products, may result in a decline in sales in 2003.
Variability in Quarterly Operating Results
Data I/O's operating results tend to vary from quarter to quarter. Our revenue
in each quarter substantially depends upon orders received within that quarter.
Conversely, our expenditures are based on investment plans and estimates of
future revenues. We may, therefore, be unable to quickly reduce our spending if
our revenues decline in a given quarter. As a result, operating results for that
quarter will suffer. Our results of operations for any one quarter are not
necessarily indicative of results for any future periods.
Other factors, which may cause our quarterly operating results to fluctuate,
include:
o increased competition
o timing of new product announcements
o product releases and pricing changes by us or our competitors
o market acceptance or delays in the introduction of new products
o production constraints
o labor or material shortages
o the timing of significant orders
o war or terrorism
o health issues (such as SARS)
o customers' budgets
o adverse movements in exchange rates, interest rates or tax rates
o cyclical nature of demand for our customers' products
o general economic conditions in the countries where we sell products
Due to all of the foregoing factors, it is possible that in some future
quarters, our operating results will be below expectations of analysts and
investors.
Rapid Technological Change
Product technology in Data I/O's industry evolves rapidly, making timely product
innovation essential to success in the marketplace. Introducing products with
improved technologies or features may render our existing products obsolete and
unmarketable. Technological advances that may negatively impact our business
include:
o new device package types, densities, and technologies requiring
hardware and software changes in order to be programmed by our products
o electronics equipment manufacturing practices, such as widespread use of
in-circuit programming
o customer software platform preferences different from those on which our
products operate
o more rigid industry standards, which would decrease the value-added element
of our products and support services
If we cannot develop products in a timely manner in response to industry
changes, or if our products do not perform well, our business and financial
condition will be adversely affected. Also, our new products may contain defects
or errors that give rise to product liability claims against us or cause our
products to fail to gain market acceptance. Our future success depends on our
ability to successfully compete with other technology firms in attracting and
retaining key technical personnel.
Economic and Market Conditions
Our business is highly impacted by capital spending plans and other economic
cycles that affect the users and manufacturers of ICs. These industries are
highly cyclical and are characterized by rapid technological change, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. As we experienced in 2002, our operations may in the
future reflect substantial fluctuations from period-to-period as a consequence
of these industry patterns, general economic conditions affecting the timing of
orders from major customers, and other factors affecting capital spending. These
factors could have a material adverse effect on our business and financial
condition.
History of Losses
We have incurred net losses in each of our last three fiscal years. We have
decreased our operating expenses in recent periods through the restructuring
plans that we initiated during our two prior fiscal years. We will continue to
examine our level of operating expense based upon our projected revenues. Any
planned increases in operating expenses may result in larger losses in future
periods if projected revenues are not achieved. As a result, we may need to
generate greater revenues than we have recently to achieve and maintain
profitability. However, we cannot provide assurance that our revenues will
increase and our strategy may not be successful, resulting in future losses.
Affects of Restructuring Activities
Beginning in the year 2001 and continuing in the past fiscal year, we reduced
our workforce from 224 to 125 employees. There have been and may continue to be
substantial costs associated with this workforce reduction related to severance
and other employee-related costs and our restructuring plan may yield
unanticipated consequences, such as increased burden on our administrative,
operational, and financial resources and has increased the responsibilities for
our management personnel. As a result, our ability to respond to unexpected
challenges may be impaired and we may be unable to take advantage of new
opportunities.
In addition, many of the employees that were terminated possessed specific
knowledge or expertise, and that knowledge or expertise may prove to have been
important to our operations. In that case, their absence may create significant
difficulties. Further, the reduction in workforce may reduce employee morale and
may create concern among current and potential employees about job security at
Data I/O, which may lead to difficulty in hiring and retaining employees, and
divert management's attention. In addition, the headcount reductions may subject
us to the risk of litigation, which could result in substantial cost. Any
failure by us to properly manage this rapid change in workforce could impair our
ability to efficiently manage our business, to maintain and develop important
relationships with third-parties, and to attract and retain customers. It could
also cause us to incur higher operating cost and delays in the execution of our
business plan or in the reporting or tracking of our financial results.
Need for Additional Funding
Our past revenues have been and our future revenues may continue to be
insufficient to support the expense of our operations and any expansion of our
business. We may therefore need additional equity or debt capital to finance our
operations. If we are unable to generate sufficient cash flows from operations
or to obtain funds through additional debt or equity financing, we may have to
reduce some or all of our development and sales and marketing efforts and limit
the expansion of our business.
We believe our existing cash and cash equivalents will be sufficient to meet our
working capital requirements for at least the next twelve months. Thereafter,
depending on the development of our business, we may need to raise additional
cash for working capital or other expenses. We may also encounter opportunities
for acquisitions or other business initiatives that require significant cash
commitments, or unanticipated problems or expenses that could result in a
requirement for additional cash before that time.
Therefore, we may seek additional funding through public or private debt or
equity financing or from other sources. We have no commitments for additional
financing, and we may experience difficulty in obtaining funding on favorable
terms, if at all. Any financing we obtain may contain covenants that restrict
our freedom to operate our business or may require us to issue securities that
have rights, preferences or privileges senior to our Common Stock and may dilute
your ownership interest.
Competition
Technological advances have reduced the barriers of entry into the programming
systems markets. We expect competition to increase from both established and
emerging companies. If we fail to compete successfully against current and
future sources of competition, our profitability and financial performance will
be adversely impacted.
Dependence on IC Manufacturers
We work closely with most semiconductor manufacturers to ensure that our
programming systems comply with their requirements. In addition, many
semiconductor manufacturers recommend our programming systems for use by users
of their programmable devices. These working relationships enable us to keep our
programming systems product line up to date and provide end-users with broad and
current programmable device support. Our business may be adversely affected if
our relationships with semiconductor manufactures deteriorate.
Dependence on Suppliers
Certain parts used in our products are currently available from either a single
supplier or from a limited number of suppliers. If we cannot develop alternative
sources of these components, if sales of parts are discontinued by the supplier
or we experience deterioration in our relationship with these suppliers, there
may be delays or reductions in product introductions or shipments, which may
materially adversely affect our operating results.
Because we rely on a small number of suppliers for certain parts, we are subject
to possible price increases by these suppliers. Also, we may be unable to
accurately forecast our production schedule. If we under estimate our production
schedule, suppliers may be unable to meet our demand for components. This delay
in the supply of key components may materially adversely affect our business.
Over estimation of demand will lead to excess inventories that may become
obsolete.
The non-automated programming system products we acquired when we acquired SMS
in November 1998 are currently manufactured to our specifications by a
third-party foreign contract manufacturer. We may not be able to obtain a
sufficient quantity of these products if and when needed, which may result in
lost sales.
Reliance on Third-Party Distribution Channels
Data I/O has an internal sales force and also utilizes third-party
representatives, and distributors. Therefore, the financial stability of these
distributors is important. Highly skilled professional engineers use most of our
products. To be effective, third-party distributors must possess significant
technical, marketing and sales resources and must devote their resources to
sales efforts, customer education, training and support. These required
qualities limit the number of potential third-party distributors. Our business
will suffer if we cannot attract and retain a sufficient number of qualified
third-party distributors to market our products.
International Operations
International sales represented 64% of our net revenue for the fiscal year ended
December 31, 2002. We expect that international sales will continue to be a
significant portion of our net revenue. International sales may fluctuate due to
various factors, including:
o migration of manufacturing to low cost geographies
o unexpected changes in regulatory requirements
o tariffs and taxes
o difficulties in staffing and managing foreign operations
o longer average payment cycles and difficulty in collecting accounts receivable
o fluctuations in foreign currency exchange rates
o impact of the Euro
o compliance with applicable export licensing requirements
o product safety and other certification requirements
o political and economic instability
The European Community and European Free Trade Association have established
certain electronic emission and product safety requirements ("CE"). Although our
products currently meet these requirements, failure to obtain either a CE
certification or a waiver for any product may prevent us from marketing that
product in Europe.
We operate subsidiaries in Germany, China and Canada. Our business and financial
condition is sensitive to currency exchange rates or any other restrictions
imposed on their currencies. Currency exchange fluctuations in Canada, China and
Germany may adversely affect our investment in our subsidiaries.
Protection of Intellectual Property
Data I/O also relies on patents, copyrights, trade secrets and trademarks to
protect our intellectual property, as well as product development and marketing
skill to establish and protect our market position. We attempt to protect our
rights in proprietary software products, including TaskLink and other software
products, by retaining the title to and copyright of the software and
documentation, by including appropriate contractual restrictions on use and
disclosure in our licenses, and by requiring our employees to execute
non-disclosure agreements. Our software products are typically shipped in sealed
packages, or on CDs, on which notices are prominently displayed informing the
end-user that, by breaking the seal of the packaging, or installing the
software, the end-user agrees to be bound by the license agreement contained in
the package or product. The license agreement includes limitations on the
end-user's authorized use of the product, as well as restrictions on disclosure
and transferability. The legal and practical enforceability and extent of
liability for violations of license agreements that purport to become effective
upon opening of a sealed package or installation of the product are unclear. We
are not aware of any situation where a license agreement restricting an
end-user's authorized use of a licensed product resulted in enforcement action.
Because of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, portions of our products might possibly
infringe upon existing patents or copyrights, and we may, therefore, be required
to obtain licenses or discontinue the use of the infringing technology. We
believe that any exposure we may have regarding possible infringement claims is
a reasonable business risk similar to that assumed by other companies in the
electronic equipment and software industries. However, any claim of
infringement, with or without merit, could be costly and a diversion of
management's attention, and an adverse determination could adversely affect our
reputation, preclude us from offering certain products, and subject us to
substantial liability.
Acquisitions
We may pursue acquisitions of complementary technologies, product lines or
businesses. Future acquisitions may include risks, such as:
o burdening management and our operating teams during the integration of the
acquired entity
o diverting management's attention from other business concerns
o failing to successfully integrate the acquired products
o lack of acceptance of the acquired products by our sales channels
or customers
o entering markets where we have no or limited prior experience
o potential loss of key employees of the acquired company
o additional burden of support for an acquired programmer architecture
Future acquisitions may also impact Data I/O's financial position. For example,
we may use significant cash or incur additional debt, which would weaken our
balance sheet. We may also capitalize goodwill and intangible assets acquired,
the impairment of which would reduce our profitability. We cannot guarantee that
future acquisitions will improve our business or operating results.
Dependence on Key Personnel
We have employees located in the U.S., Germany, Canada 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. Refer to the section captioned "Affects of Restructuring Activities"
above.
Potential Volatility of Stock Price
The stock prices of technology companies tend to fluctuate significantly, and
many experienced significant reductions in value during the past few years. We
believe factors such as announcements of new products by us or our competitors
and quarterly variations in financial results may cause the market price of Data
I/O's Common Stock to fluctuate substantially. In addition, overall volatility
in the stock market, particularly in the technology company sector, is often
unrelated to the operating performance of companies. If these market
fluctuations continue in the future, they may adversely affect the price of Data
I/O's Common Stock.