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 September 30, 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
7,972,514 shares of no par value of the Registrant's Common Stock were issued
and outstanding as of November 1, 2003.
DATA I/O CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 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 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
Item 4. Controls and Procedures 14
Part II - Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31,
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $4,279 $4,383
Marketable securities 1,830 1,076
Trade accounts receivable, less allowance for
doubtful accounts of $196 and $187 5,519 4,328
Inventories 4,173 4,476
Other current assets 176 509
--------------------- ----------------
TOTAL CURRENT ASSETS 15,977 14,772
Property and equipment - net 1,160 1,508
Other assets 27 87
--------------------- ----------------
TOTAL ASSETS $17,164 $16,367
===================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,230 $1,200
Accrued compensation 899 826
Deferred revenue 1,518 1,613
Other accrued liabilities 1,414 1,714
Income taxes payable 377 294
--------------------- ----------------
TOTAL CURRENT LIABILITIES 5,438 5,647
Deferred gain on sale of property 1,188 1,435
--------------------- ----------------
TOTAL LIABILITIES 6,626 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, 7,963,545
and 7,767,630 shares 18,760 18,638
Accumulated deficit (8,309) (9,279)
Accumulated other comprehensive income (loss) 87 (74)
--------------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 10,538 9,285
--------------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,164 $16,367
===================== ================
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarters Ended Nine Months Ended
- ----------------------------------------------------------- ------------------------------ -- --------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
- ----------------------------------------------------------- -------------- -- ------------ -- ------------ -- ----------------
(in thousands, except per share data)
Net sales $6,360 $6,443 $18,092 $16,629
Cost of goods sold 3,032 3,172 8,028 8,851
-------------- ------------ ------------ ----------------
Gross margin 3,328 3,271 10,064 7,778
Operating expenses:
Research and development 1,294 1,430 3,534 4,136
Selling, general and administrative 1,823 2,109 5,551 6,376
Net provision (reversal) for business restructuring - 497 (27) 497
-------------- ------------ ------------ ----------------
Total operating expenses 3,117 4,036 9,058 11,009
-------------- ------------ ------------ ----------------
Operating income (loss) 211 (765) 1,006 (3,231)
Non-operating income (expense):
Interest income 20 20 73 69
Interest expense (4) (4) (16) (12)
Foreign currency exchange (22) (121) (103) (179)
-------------- ------------ ------------ ----------------
Total non-operating income (expense) (6) (105) (46) (122)
-------------- ------------ ------------ ----------------
Income (loss) from operations before income taxes 205 (870) 960 (3,353)
Income tax expense (benefit) (114) (37) (10) 4
-------------- ------------ ------------ ----------------
Net income (loss) $ 319 ($ 833) $970 ($3,357)
============== ============ ============ ================
Basic and diluted earnings (loss) per share $0.04 ($0.11) $0.12 ($0.44)
============== ============ ============ ================
Weighted average shares outstanding 7,937 7,733 7,888 7,682
============== ============ ============ ================
Weighted average and potential shares outstanding 8,243 7,733 8,026 7,682
============== ============ ============ ================
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
Sept. 30, Sept. 30,
For the nine months ended 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net income (loss) from operations $970 ($3,357)
Adjustments to reconcile net income (loss) from operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 563 783
Net loss on dispositions 201 233
Amortization of deferred gain on sale (247) (247)
Net change in:
Deferred revenue (94) 7
Trade accounts receivable (1,233) 335
Inventories 293 1,658
Other current assets 340 (22)
Accrued costs of business restructuring (188) 69
Accounts payable and accrued liabilities 80 (436)
----------- --------------
Net cash provided by (used in) operating activities 685 (977)
INVESTING ACTIVITIES:
Purchases of property and equipment (356) (600)
Net from purchase and sale of marketable securities (755) 2,148
----------- --------------
Net cash provided by (used in) investing activities (1,111) 1,548
FINANCING ACTIVITIES:
Sale of common stock 119 137
Proceeds from exercise of stock options 3 -
----------- --------------
Net cash provided by (used in) financing activities 122 137
----------- --------------
Increase/(decrease) in cash and cash equivalents (304) 708
Effects of exchange rate changes on cash 200 75
Cash and cash equivalents at beginning of year 4,383 2,656
----------- --------------
Cash and cash equivalents at end of quarter $4,279 $3,439
=========== ==============
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 September 30, 2003 and
September 30, 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 nine months ended September 30, 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 third 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 income (loss) and net income (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):
Quarters Ended Nine Months Ended
------------------------------ ----------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
--------------- ----------- -------------- ----------------
Net income (loss) - as reported $319 ($833) $970 ($3,357)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for awards granted,
modified, or settled, net of related tax effects (68) (102) (239) (287)
--------------- ----------- -------------- ----------------
Net income (loss) - pro forma $251 ($935) $731 ($3,644)
=============== =========== ============== ================
Basic and diluted income (loss) per share - as reported $0.04 ($0.11) $0.12 ($0.44)
Basic and diluted income (loss) per share - pro forma $0.03 ($0.12) $0.09 ($0.47)
NOTE 2 - INVENTORIES
Inventories consisted of the following components (in thousands):
Sept. 30, Dec. 31,
2003 2002
---------------- ----------------
Raw material $2,001 $2,308
Work-in-process 945 875
Finished goods 1,227 1,293
---------------- ----------------
$4,173 $4,476
================ ================
At the end of the quarter inventories reflected increased work-in-process
related to an increase in orders in backlog. 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):
Sept. 30, Dec. 31.
2003 2002
---------------- ----------------
Leasehold improvements $ 245 $ 239
Equipment 11,825 12,132
---------------- ----------------
12,070 12,371
Less accumulated depreciation 10,910 10,863
---------------- ----------------
Property and equipment - net $ 1,160 $ 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 was a reversal
of these previously over-accrued restructure charges. At September 30, 2003, all
restructuring expenses associated with the activities detailed above had been
paid, except approximately $16,000.
An analysis of the restructuring activity is as follows (in thousands):
Reserve 2003 Reserve
Balance at 2003 Payments/ Balance at
Description Dec. 31, 2002 Adj. Write-offs Sept. 30, 2003
-------------- ----------------- ----------- ------------- ------------------
Downsizing U.S. Operations:
Employee severance $ 169 ($18) ($146) $ 5
Redmond facility consolidation 10 - (5) 5
Consulting and legal expenses 25 ( 9) (10) 6
----------------- ----------- ------------- ------------------
Total $ 204 ($27) ($161) $16
================= =========== ============= ==================
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 third quarter For the first nine months
---------------------------- --- ---------------------------
2003 2002 2003 2002
------------ ------------ ---------- -------------
Numerator for basic and diluted earnings (loss) per share:
Net income (loss) $319 ($833) $970 ($3,357)
------------ ------------ ---------- -------------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 7,937 7,733 7,888 7,682
Employee stock options (1) 306 - 138 -
------------ ------------ ---------- -------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions of stock options 8,243 7,733 8,026 7,682
------------ ------------- ---------- -------------
Basic and diluted earnings (loss) per share
Total basic and diluted earnings (loss) per share $0.04 ($0.11) $0.12 ($0.44)
============ ============= ========== =============
(1) At September 30, 2003 and 2002 there were 1,339,462 and 1,222,438 shares,
respectively, of outstanding options potentially issuable as common stock.
Because of the net loss for the nine months ended September 30, 2002, we
did not include potentially issuable common stock in the calculation of
diluted loss per share because this would be anti-dilutive. For options
having an exercise price exceeding the market value of the common stock on
September 30, 2003, we included the dilutive effect of those outstanding
options, potentially issuable as common stock on that date, in the
calculation of diluted income per share.
NOTE 6 - ACCOUNTING FOR INCOME TAXES
The Company's effective tax rate for the first nine months of 2003 differed from
the statutory 34% tax rate primarily due to utilization of net operating loss
carryforwards. The benefit recorded related to foreign taxes. The tax valuation
allowance decreased by approximately $14,000 during the quarter ended September
30, 2003. As of September 30, 2003, the Company has a valuation allowance of
$10,030,000.
NOTE 7 - COMPREHENSIVE INCOME
During the third quarter of 2003 and 2002 total comprehensive income (loss) was
comprised of the following (in thousands):
For the third quarter For the first nine months
--------------------------- --------------------------------
2003 2002 2003 2002
------------ ----------- --------------- ------------
Net income (loss) $319 ($833) $970 ($3,357)
Foreign currency translation gain (loss) 16 (21) 163 58
------------ ----------- --------------- ------------
Total comprehensive income (loss) $335 ($854) $1,133 ($3,299)
============ =========== =============== ============
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 in other comprehensive income, 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 Data I/O are fair value
hedges. Generally, these contracts have maturities less than one year and
require it to exchange foreign currencies for U.S. dollars at maturity. The
change in fair value of the open hedge contracts as of September 30, 2003 is an
unrealized loss of $24,674 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 adopted the provisions of the statement, which has had no
material impact.
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 adopted the
provisions of the statement, which has had no material impact.
In May 2003, FASB issued Statement 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." Statement 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. Statement 150
is effective for all financial instruments entered into or modified after May
31, 2003. The Company adopted Statement 150 on June 1, 2003. The adoption of
Statement 150 did not have any effect on the Company's financial position,
results of operations, or cash flows.
On January 17, 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 interprets ARB No. 51, Consolidated
Financial Statements, as amended by FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, which requires the preparation of consolidated
financial statements when one entity has a controlling financial interest in a
second entity. FIN 46 specifies disclosures that are required for financial
statements issued after January 31, 2003 but prior to the effective date of the
Interpretation for entities created before February 1, 2003 and interests in
those entities acquired before that date, as well as disclosures that will be
required for financial statements of primary beneficiaries and others with
variable interests in variable interest entities issued after the effective
date. The Company believes its adoption of this new accounting standard will not
have a material impact on the Company's results of operations or financial
position, as the Company does not have variable interest entities.
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; anticipated 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 following
discussions and 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 our financial
statements.
Revenue Recognition: Sales of our semiconductor programming equipment products
requiring installation by us that is other than perfunctory are recorded when
installation is complete, or at the later of customer acceptance or
installation, if an acceptance clause is specified in the sales terms. We
recognize revenue from other product sales at the time of shipment. We record
revenue from the sale of service and update contracts as deferred revenue and we
recognize it on a straight-line basis over the contractual period, which is
typically one year. We establish a reserve for sales returns based on historical
trends in product returns and estimates for new items. If the actual future
returns differ from historical levels, our revenue could be adversely affected.
Allowance for Doubtful Accounts: We base the allowance for doubtful accounts
receivable on our assessment of the collectibility of specific customer accounts
and the aging of accounts receivable. If there is a deterioration of a major
customer's credit worthiness or actual defaults are higher than historical
experience, our estimates of the recoverability of amounts due us could be
adversely affected.
Inventory Provisions: We base inventory purchases and commitments upon future
demand forecasts and historic usage. If there is a significant decrease in
demand for our products or there is a higher risk of inventory obsolescence
because of rapidly changing technology and customer requirements, 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 deferred 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)
Third Quarter First Nine Months
---------------------------------- ------------------------------------
Net sales by product line 2003 % Change 2002 2003 % Change 2002
------------------------------------------------------------------------------- ------------------------------------
Non-automated programming systems $2,396 (21.7%) $3,059 $7,705 (10.5%) $8,607
Automated programming systems 3,964 17.1% 3,384 10,387 29.5% 8,022
---------------------------------- ------------------------------------
Total programming systems $6,360 (1.3%) $6,443 $18,092 8.8% $16,629
================================== ====================================
Third Quarter First Nine Months
---------------------------------- ------------------------------------
Net sales by location 2003 % Change 2002 2003 % Change 2002
------------------------------------------------------------------------------- ------------------------------------
United States $2,040 (0.8%) $2,057 $5,391 (9.6%) $5,964
% of total 32.1% 31.9% 29.8% 35.9%
International $4,320 (1.5%) $4,386 $12,702 19.1% $10,665
% of total 67.9% 68.1% 70.2% 64.1%
-----------------------------------------------------------------------------------------------------------------------
Revenues for the third quarter of 2003 were basically flat compared to the third
quarter of 2002. Backlog decreased by approximately $0.6 million to $1.3 million
at September 30, 2003. Revenue for the quarter from automated systems and their
related aftermarket sales increased over the third quarter of 2002. Offsetting
this increase was a decline in non-automated programming systems aftermarket and
software as well as fewer sales of a low cost programmer product line that we
formerly distributed. The vendor of this product line went out of business and
our distribution relationship with this vendor ceased during the first quarter
of 2003. These products represented $251,000 in revenue for the year 2002.
Finally, the impact of the weakened US dollar favorably impacted us both by
making products less expensive when sold overseas in US Dollars and by
Euro-based sales that 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
Third Quarter First Nine Months
------------------------------------------- ---------------------------------------
(in thousands) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Gross Margin $3,328 $3,271 $10,064 $7,778
Percentage of net sales 52.3% 50.8% 55.6% 46.8%
- ----------------------------------------------------------------------------------------------------------------------------
Gross margins increased in dollars and as a percentage of sales for the third
quarter of 2003 compared with the same period of 2002. Overall gross margins
increased primarily due to cost reductions resulting from the restructuring. The
gross margin percentage at 52.3% was lower than expected due to the sales mix
including a larger amount of lower margin configured PS systems and fewer sales
of software and aftermarket products, which tend to have a higher margin, as
well as the reduction in inventories causing an unfavorable labor and overhead
variance. Looking forward, we believe our expected sales mix should result in a
mid-50's gross margin percentage.
Research and Development
Third Quarter First Nine Months
---------------------------------------------- -------------------------------------
(in thousands) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Research and development $1,294 $1,430 $3,534 $4,136
Percentage of net sales 20.3% 22.2% 19.5% 24.9%
--------------------------------------------------------------------------------------------------------------------------
Research and development ("R&D") spending for the third quarter 2003 as compared
to the third quarter 2002 was 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, offset in part by higher contracted R&D
costs in connection with the recently introduced TF-30 automated tray feeder
option for the PS 300. This general level of third quarter R&D spending is
expected to continue in the fourth quarter.
Selling, General and Administrative
Third Quarter First Nine Months
---------------------------------------------- ---------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Selling, general & administrative $1,823 $2,109 $5,551 $6,376
Percentage of net sales 28.7% 32.7% 30.7% 38.3%
--------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses for the third quarter of
2003 declined compared with the same period in 2002, primarily due to Data I/O's
reduced costs from the prior year's restructuring activities, offset in part by
increased incentive compensation. 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 our fiscal year 2002, in which we had a
net loss.
Interest
Third Quarter First Nine Months
-------------------------------------- --------------------------------------
(in thousands) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Interest income $20 $20 $73 $69
Interest expense ($4) ($4) ($16) ($12)
--------------------------------------------------------------------------------------------------------------------------
Income Taxes
Third Quarter First Nine Months
-------------------------------------- -------------------------------------
(in thousands) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) ($114) ($37) ($10) $4
--------------------------------------------------------------------------------------------------------------------------
Tax benefit recorded for the third quarter of 2003 was due to foreign taxes. Tax
valuation reserves decreased by approximately $14,000 during the quarter. Data
I/O has valuation reserves of $10,030,000 as of September 30, 2003 that are
primarily related to U.S. based tax assets.
Financial Condition
Liquidity and Capital Resources
Sept. 30, Dec. 31,
(in thousands) 2003 Change 2002
- ------------------------------------------------------------- --------------------- -------------------- -------------------
Working capital $10,539 $1,414 $9,125
- ------------------------------------------------------------- --------------------- -------------------- -------------------
Working capital increased during the first nine months of 2003 primarily due to
cash provided by operations. Cash, cash equivalents and marketable securities
increased approximately $0.6 million during this period, inventory decreased
$0.3 million, and accounts receivable increased $1.2 million, while accounts
payable and accrued liabilities decreased by $0.2 million. Our increase in
accounts receivable relates to sales occurring later in the quarter and slower
paying foreign customers. We have continued to focus on reducing the amount of
inventory relative to our business level, especially through a focus on lean
manufacturing processes. 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
September 30, 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 $200,000 and $400,000, 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,
computers, software and technology equipment; costs associated with R&D; cost
related to the 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 nine months 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 nine months of
2003 is a reversal of these previously over-accrued restructure charges. At
September 30, 2003, all restructuring expenses associated with the activities
detailed above had been paid, except approximately $16,000, 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 adopted the provisions of the statement, which has had no
material impact.
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 adopted the
provisions of the statement, which has had no material impact. In May 2003, FASB
issued Statement 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". Statement 150 requires that
certain financial instruments, which under previous guidance were accounted for
as equity, must now be accounted for as liabilities. Statement 150 is effective
for all financial instruments entered into or modified after May 31, 2003. The
Company adopted Statement 150 on June 1, 2003. The adoption of Statement 150 did
not have any effect on the Company's financial position, results of operations,
or cash flows.
On January 17, 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 interprets ARB No. 51, Consolidated
Financial Statements, as amended by FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, which requires the preparation of consolidated
financial statements when one entity has a controlling financial interest in a
second entity. FIN 46 specifies disclosures that are required for financial
statements issued after January 31, 2003 but prior to the effective date of the
Interpretation for entities created before February 1, 2003 and interests in
those entities acquired before that date, as well as disclosures that will be
required for financial statements of primary beneficiaries and others with
variable interests in variable interest entities issued after the effective
date. The Company believes its adoption of this new accounting standard will not
have a material impact on the Company's results of operations or financial
position, as the Company does not have variable interest entities.
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 Sept. 30, 2003 From 2003 December 31, 2002
--------------- ------------------- -------------- -----------------------
Corporate Bonds - - $ 734 $ 734
2.936%
Euro-dollar bonds $ 330 $330 - 342
2.100%
Tax Advantaged
Auction Securities 1,000 1,000 -
1.069%
Taxable Auction
Securities 500 500 - -
1.115%
--------------- ------------------- -------------- -----------------------
Total portfolio value $1,830 $1,830 $ 734 $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 September 30, 2003, we had six forward contracts to sell Euros in exchange
for $684,119 with rates ranging from 1.0752 to 1.1479 and a weighted average
rate of 1.126, all scheduled to be due within the next quarter with a value at
maturity of $683,701.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end
of the period covered by this report (the "Evaluation Date"). Based on this
evaluation, as of the Evaluation Date, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective in timely alerting them to the material information relating to
Data I/O required to be included in the reports that Data I/O files or submits
under the Exchange Act.
There were no changes in internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, this control over financial reporting.
Our management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that its disclosure controls and procedures or internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Data I/O have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
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,
10.23, and 10.24.
(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 10.18.
(6) Form of Change in Control Agreements. See Exhibit 10.5.
(7) 1996 Director Fee Plan. See Exhibit 10.6 and 10.17.
(8) Letter Agreement with Frederick R. Hume. See Exhibit 10.20.
(9) Amended and Restated 2000 Stock Compensation Incentive Plan.
See Exhibit 10.23.
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 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)).
10.19 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)).
10.20 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)).
10.21 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)).
10.22 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.)
10.23 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.)
10.24 Amended and Restated 1982 Employee Stock Purchase Plan
dated April 17, 2003 (Incorporated by reference to Exhibit
4.1 to the Company's Registration Statement of Form S-8
(File No. 333-107543, filed August 1, 2003))
31 Certification - Section 302:
31.1 Chief Executive Officer Certification 19
31.2 Chief Financial Officer Certification 20
32 Certification - Section 906:
32.1 Chief Executive Officer Certification 21
32.2 Chief Financial Officer Certification 22
99 Other Exhibits
99.1 Risk Factors 22
(b) Reports on Form 8-K
On July 30, 2003, Data I/O furnished a copy of a press release announcing Data
I/O's second quarter results on a Form 8-K under Item 12. The information
furnished in the Form 8-K pursuant to Item 12 shall not be deemed filed under
the Securities Exchange Act of 1934, as amended.
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: November 13, 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)
Exhibit 31.1
Section 302 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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
c) Disclosed in this 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; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control of financial reporting, to
the registrant's auditors and the audit committee of the 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 a 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
control over financial reporting.
Date November 13, 2003 /s/ FREDERICK R. HUME
Frederick R. Hume
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.1
Section 302 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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
c) Disclosed in this 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; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control of financial reporting, to
the registrant's auditors and the audit committee of the 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 a 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
control over financial reporting.
Date November 13, 2003 /s/ JOEL S. HATLEN
Joel S. Hatlen
Vice President and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
Certification by Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the quarterly Report of Data I/O Corporation (the "Company")
on Form 10-Q for the period ended September 30, 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)
November 13, 2003
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 quarterly Report of Data I/O Corporation (the "Company")
on Form 10-Q for the period ended September 30, 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)
November 13, 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 and known or unknown risks and
uncertainties. 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 or
additional costs in 2003 and beyond.
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 semiconductors. 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 prior fiscal year. 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 generated to 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 prior fiscal year and continuing in the past fiscal year, we
reduced our workforce from 224 to 125 employees at the end of 2002. 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 Semiconductor 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 manufacturers 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
o local competitors focused on their local market
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.