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 June 30, 2004
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
8,043,611 shares of no par value of the Registrant's Common Stock were issued
and outstanding as of August 7, 2004.
DATA I/O CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2004
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 14
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 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
- -----------------------------------------------------------------------------------------------------------------------------------
June 30, Dec. 31,
2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,298 $4,380
Marketable securities 2,343 2,354
Trade accounts receivable, less allowance for
doubtful accounts of $208 and $202 6,528 5,054
Inventories 3,877 4,607
Other current assets 384 431
--------------------- ----------------
TOTAL CURRENT ASSETS 16,430 16,826
Property and equipment - net 1,437 1,151
Other assets 3 11
--------------------- ----------------
TOTAL ASSETS $17,870 $17,988
===================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,554 $1,285
Accrued compensation 982 1,186
Deferred revenue 1,516 1,430
Other accrued liabilities 1,115 1,543
Income taxes payable 278 350
--------------------- ----------------
TOTAL CURRENT LIABILITIES 5,445 5,794
Deferred gain on sale of property 941 1,106
--------------------- ----------------
TOTAL LIABILITIES 6,386 6,900
COMMITMENTS - -
STOCKHOLDERS' EQUITY:
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none - -
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 8,012,998
and 7,976,296 shares 18,891 18,797
Accumulated deficit (7,647) (8,038)
Accumulated other comprehensive income 240 329
--------------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 11,484 11,088
---------------------
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,870 $17,988
===================== ================
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarters Ended Six Months Ended
- ---------------------------------------------------------- --------------- -- -------------- -- -------------- --- -------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
- ---------------------------------------------------------- --------------- -------------- -- -------------- -------------
(in thousands, except per share data)
Net sales $6,895 $5,578 $13,729 $11,733
Cost of goods sold 3,385 2,279 6,506 4,997
--------------- -------------- -------------- -------------
Gross margin 3,510 3,299 7,223 6,736
Operating expenses:
Research and development 1,177 1,078 2,381 2,239
Selling, general and administrative 2,121 1,801 4,294 3,729
Net provision (reversal) for business restructuring 70 - 70 (27)
--------------- -------------- -------------- -------------
Total operating expenses 3,368 2,879 6,745 5,941
--------------- -------------- -------------- -------------
Operating income 142 420 478 795
Non-operating income (expense):
Interest income 13 20 48 53
Interest expense (6) (7) (7) (11)
Foreign currency exchange (5) (7) (18) (82)
--------------- -------------- -------------- -------------
Total non-operating income (expense) 2 6 23 (40)
--------------- -------------- -------------- -------------
Income before income taxes 144 426 501 755
Income tax expense 40 94 102 105
--------------- -------------- -------------- -------------
Net income $104 $332 $399 $650
=============== ============== ============== =============
Basic and diluted earnings per share $0.01 $0.04 $0.05 $0.08
=============== ============== ============== =============
Weighted average shares outstanding 8,013 7,883 8,005 7,864
=============== ============== ============== =============
Weighted average and potential shares outstanding 8,286 7,988 8,350 7,917
=============== ============== ============== =============
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
June 30, June 30,
For the six months ended 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net income $ 399 $ 650
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 382 381
Net loss on dispositions 84 220
Amortization of deferred gain on sale (164) (165)
Net change in:
Deferred revenue 87 60
Trade accounts receivable (1,477) (266)
Inventories 729 (206)
Other current assets 47 249
Accrued costs of business restructuring 70 (187)
Accounts payable and accrued liabilities (505) (126)
------------ --------------
Net cash provided by (used in) operating activities (348) 610
INVESTING ACTIVITIES:
Purchases of property and equipment (742) (277)
Net from purchase and sale of marketable securities 2 341
------------ --------------
Net cash provided by (used in) investing activities (740) 64
FINANCING ACTIVITIES:
Sale of common stock 81 58
Proceeds from exercise of stock options 13 2
----------- --------------
Net cash provided by financing activities 94 60
----------- --------------
Increase/(decrease) in cash and cash equivalents (994) 734
Effects of exchange rate changes on cash (88) 184
Cash and cash equivalents at beginning of year 4,380 4,383
----------- --------------
Cash and cash equivalents at end of quarter $3,298 $5,301
=========== ==============
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 June 30, 2004 and June 30,
2003, 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, 2003 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 six months ended June 30, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004. 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, 2003.
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 second quarter of 2004 and 2003
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 and earnings 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 Six Months Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------------- ------------- ----------- --------------
Net income (loss) - as reported $104 $ 332 $399 $650
Deduct: Total stock-based employee compensation expense
determined under fair value based method for awards granted,
modified, or settled, net of related tax effects 77 (65) (157) 145
------------- ---------- ----------- --------------
Net income (loss) - pro forma $27 $267 $242 $505
============= ========== =========== ==============
Basic and diluted income (loss) per share - as reported $0.01 $0.04 $0.05 $0.08
Basic and diluted income (loss) per share - pro forma $0.00 $0.03 $0.03 $0.06
NOTE 2 - INVENTORIES
Inventories consisted of the following components (in thousands):
June 30, Dec. 31,
2004 2003
---------------- ----------------
Raw material $2,121 $2,100
Work-in-process 925 1,411
Finished goods 831 1,096
---------------- ----------------
$3,877 $4,607
================ ================
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):
June 30, Dec. 31,
2004 2003
---------------- ----------------
Leasehold improvements $ 276 $259
Equipment 12,566 12,016
---------------- ----------------
12,842 12,275
Less accumulated depreciation 11,405 11,124
---------------- ----------------
Property and equipment - net $ 1,437 $ 1,151
================ ================
NOTE 4 - BUSINESS RESTRUCTURING
During the second quarter of 2004, we accrued a restructuring charge of $70,000
associated primarily with severance related charges. As a result of subsequent
actions in the third quarter of 2004, we anticipate having further restructuring
related charges of approximately $500,000 that are primarily related to
severance and a small office closure, with an effective date of August 2, 2004
for most of these actions. The restructure related savings are projected to save
about $1.2 million per year. These actions were taken to lower production and
operating costs to reduce our breakeven point, particularly in view of our
reduced margins in the second quarter; the continued need to control costs in
North America and Europe; and the need to build staff serving China and Eastern
Europe.
During the first quarter of 2003, we completed most of the remaining 2001 and
2002 previously accrued restructure charges associated with actions taken to
reduce our breakeven point and realign Data I/O with our market opportunities.
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 2003 was a reversal of these previously
over-accrued restructure charges. At December 31, 2003, all restructuring
actions associated with the activities from the 2001 and 2002 actions had been
completed.
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 second quarter For the first six months
-------------------------- ------------------------
2004 2003 2004 2003
----------- -------------- ------------ -----------
Numerator for basic and diluted earnings per share:
Net income $104 $ 332 $399 $650
----------- -------------- ------------ ---------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 8,013 7,883 8,005 7,864
Employee stock options 273 105 345 53
----------- -------------- ------------ ---------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions of stock options 8,286 7,988 8,350 7,917
----------- -------------- ------------ ---------
Basic and diluted earnings per share
Total basic and diluted earnings per share $0.01 $0.04 $0.05 $0.08
=========== ============== ============ =========
At June 20, 2004 and 2003 there were 1,534,617 and 1,384,775 shares,
respectively, of outstanding options potentially issueable as common stock.
NOTE 6 - ACCOUNTING FOR INCOME TAXES
The Company's effective tax rate for the first six months of 2004 differed from
the statutory 34% tax rate primarily due to utilization of net operating loss
carryforwards. The tax valuation allowance increased by approximately $20,000
during the quarter ended June 30, 2004. As of June 30, 2004, the Company has a
valuation allowance of $9,803,000.
NOTE 7 - COMPREHENSIVE INCOME
During the second quarter of 2004 and 2003 total comprehensive income (loss) was
comprised of the following (in thousands):
For the second quarter For the first six months
------------------------------ -------------------------------
2004 2003 2004 2003
------------- ------------ ------------- -------------
Net income $104 $332 $399 $650
Foreign currency translation gain (loss) (33) 17 (89) 74
------------- ------------ ------------- -------------
Total comprehensive income $ 71 $349 $310 $724
============= ============ ============= =============
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 June 30, 2004 is an unrealized loss of
$13,259 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.
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; restructure costs and savings; 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, 2003, and in Exhibit 99.1 of this report describe
some, but not all, of the factors that could cause these differences.
OVERVIEW
Our goal is to continue to focus on managing the business to achieve profitable
operations, while developing and enhancing products to drive revenue and
earnings growth. Our challenge continues to be operating in the weak and
uncertain economic environment with its limited capacity related demand and weak
capital spending, while positioning Data I/O to take advantage of an anticipated
recovery in capital spending. We expect that demand for programming capacity
should improve, in part based on forecasted increased 2004 unit sales for the
semiconductor industry, which should provide improved business opportunities for
Data I/O.
We are continuing our efforts to balance increasing costs and strategic
investments in our business with the level of demand and mix of business we
expect. We are focusing our research and development efforts in our strategic
growth markets, namely new programming technology, in-system programming, and
automated programming systems for the manufacturing environment, particularly
extending the capabilities and support for our FlashCORE architecture and the
ProLINE-RoadRunner and PS families. During the beginning of the third quarter of
2004, we obtained the rights to certain in-system programming ("ISP")
technology. We expect to incorporate this technology into our ISP product in
development, and will be required to pay a 4% royalty on product revenues
associated with such technology until March 31, 2007. Revenues from ISP products
are expected to start later this year, but related royalties are not expected to
be a material amount in 2004. To better support our customers in their
geographic areas and time zones, we have expanded device support operations in
Germany and India and are in the process of setting up a new device support
center in Shanghai, China.
Our customer focus has been on strategic high volume manufacturers and
programming centers and supporting NAND Flash and microcontrollers on our newer
products to gain new accounts and break into new markets, such as
microcontrollers for the automotive market. We are finalizing the operational
set up for our new subsidiaries in China and Brazil. We are expanding our China
operations to take advantage of the growth of manufacturing in China and are
establishing a service operation in Brazil. We continue our efforts to partner
with the semiconductor manufacturers to better serve our mutual customers.
RESTRUCTURE ACTIONS
During the second quarter of 2004, we accrued a restructuring charge of $70,000
associated primarily with severance related charges. As a result of subsequent
actions in the third quarter of 2004, we anticipate having further restructuring
related charges of approximately $500,000 that are primarily related to
severance and a small office closure, with an effective date of August 2, 2004
for most of these actions. The restructure related savings are projected to save
about $1.2 million per year. These actions were taken to lower production and
operating costs to reduce our breakeven point, particularly in view of our
reduced margins in the second quarter; the continued need to control costs in
North America and Europe; and the need to build staff serving China and Eastern
Europe.
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
2019. 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)
Second Quarter First Six Months
------------------------------------------- ---------------------------------------
Net sales by product line 2004 % Change 2003 2004 % Change 2003
---------------------------------------------------------------------------------------- ---------------------------------------
Non-automated programming systems $2,400 (13.0%) $2,758 $4,982 (6.2%) $5,310
Automated programming systems $4,495 59.4% 2,820 $8,747 36.2% 6,423
------------------------------------------- ---------------------------------------
Total programming systems $6,895 23.6% $5,578 $13,729 17.0% $11,733
=========================================== =======================================
Second Quarter First Six Months
------------------------------------------- ---------------------------------------
Net sales by location 2004 % Change 2003 2004 % Change 2003
- ---------------------------------------------------------------------------------------- ---------------------------------------
United States $1,509 (1.8%) $1,536 $2,899 (13.5%) $3,351
% of total 21.9% 27.5% 21.1% 28.6%
International $5,386 33.3% $4,042 $10,830 29.2% $8,382
% of total 78.1% 72.5% 78.9% 71.4%
-----------------------------------------------------------------------------------------------------------------------------------
Revenues for the second quarter of 2004 increased by approximately 23.6%
compared to the second quarter of 2003. The revenue increase relates to our
increased sales of automated systems. During the quarter we had the first sales
of our new PS 288FC automated system we introduced at the APEX tradeshow during
the first quarter. We had the highest unit shipments of Pro-LINE RoadRunner
since the end of 2000, which we believe is due to additional capacity needs, as
well as lowering the price on certain versions. Our revenue growth is due to the
increased sales in Asia and Latin America. During the second quarter of 2004,
our backlog of orders increased from $820,000 to $1.2 million. This level of
orders for the quarter is the highest we have experienced since the fourth
quarter of 2000.
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. We expect that with the
increased backlog and business outlook, revenues in the third quarter of 2004
should be 5% higher than in the second quarter of 2004.
GROSS MARGIN
Second Quarter First Six Months
---------------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Margin $3,510 $3,299 $7,223 $6,736
Percentage of net sales 50.9% 59.1% 52.6% 57.4%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross margins increased in dollars but decreased as a percentage of sales for
the second quarter of 2004 compared with the same period of 2003. The lower
gross margins were primarily a result of more indirect sales than direct sales
in the quarter, a product mix shift to somewhat lower margin products and
unfavorable labor and overhead variances associated with a reduction in
inventory. We expect the gross margin percentage to improve in the third quarter
of 2004 by two percentage points from the second quarter's level, because we
expect a return to a more typical distribution sales channel mix and do not plan
a reduction in inventory. Sales to distributors are recorded net of the
distributor discount allowed and contribute less to gross margin than direct
sales. Sales by representative firms and our direct sales force are recorded at
direct customer pricing and have a representative commission or sales commission
that is included in selling expense; as a result there is a higher gross margin
associated with these sales.
RESEARCH AND DEVELOPMENT
Second Quarter First Six Months
---------------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Research and development $1,177 1,078 $2,381 $2,239
Percentage of net sales 17.1% 19.3% 17.3% 19.1%
----------------------------------------------------------------------------------------------------------------------------------
Research and development ("R&D") spending for the second quarter 2004 as
compared to the second quarter 2003 was slightly more in dollars but less as a
percentage of sales. This increase in spending was primarily related to our new
development initiative in In-System Programming (ISP). During the quarter, we
began shipping the new PS-288FC automated programming system. We plan to
increase our engineering development spending during the remainder of 2004 due
to development projects and with the hiring of additional new engineering
positions in our new Shanghai based subsidiary in China formed in April of 2004.
SELLING, GENERAL AND ADMINISTRATIVE
Second Quarter First Six Months
---------------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Selling, general & administrative $2,121 $1,801 $4,294 $3,729
Percentage of net sales 30.8% 32.3% 31.3% 31.8%
----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses for the second quarter of
2004 were $320,000 more compared with the same period in 2003, primarily due to
our strategic investments in Asia and the hiring of additional key personnel, as
well as the unfavorable currency translation impact of European based operating
costs. In addition, we incurred higher commission costs based on the higher
sales volume and a higher mix of representative sales than distributor sales.
INTEREST
Second Quarter First Six Months
---------------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Interest income $13 $21 $48 $53
Interest expense ($6) ($7) ($7) ($11)
----------------------------------------------------------------------------------------------------------------------------------
Interest income decreased slightly in the second quarter of 2004 compared to the
same period in 2003 due to decreased funds invested.
INCOME TAXES
Second Quarter First Six Months
----------------------------------------- ------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $40 $94 $102 $105
----------------------------------------------------------------------------------------------------------------------------------
Tax expense recorded for the second quarter of 2004 was due to foreign taxes.
Tax valuation reserves increased by approximately $20,000 during the quarter.
Data I/O has valuation reserves of $9,803,000 as of June 30, 2004.
Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
June 30, March 31, 2004 Dec. 31,
(in thousands) 2004 Change Change 2003
- ---------------------------------------------------------- -------------- ------------- --------------- -------------- ------------
Working capital $10,985 $17 $10,968 ($66) $11,032
- ---------------------------------------------------------- -------------- ------------- --------------- -------------- ------------
Working capital increased slightly during the second quarter of 2004. Cash, cash
equivalents and marketable securities decreased approximately $0.4 million
during this period; inventory decreased $0.2 million: and accounts receivable
increased $0.9 million. The change in inventory relates to our continued focus
on reducing the amount of inventory relative to our business level. We do not
expect to further reduce inventory in the next quarter. Our receivables increase
is due in part to the increased mix of international sales, which typically have
longer sales terms and collection periods, and a large proportion of the sales
taking place at quarter end. 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 June 30, 2004, Data I/O had no debt outstanding.
Data I/O estimates that capital expenditures for property, plant and equipment
during the remainder of 2004 will be approximately $400,000, excluding
expenditures for strategic purposes. Data I/O's future capital requirements will
depend on a number of factors including international operations expansion,
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. The restructure
charges taken in the second quarter and anticipated for the third quarter are
expected to be mostly paid out during the third quarter. This will be funded by
existing and internally generated funds. The savings from the restructure
actions, anticipated to be $1.2 million per year, are expected to offset the
impact of the charge by the end of the year. 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.
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 2004 June 30, 2004 For Q2 2004 December 31,
2003
---------------- ------------------ -------------- ----------------
Corporate Bonds $236 $1,040 $ 754 $ 754
1.310% 1.315%
Euro-dollar bonds 303 303 - -
1.290%
Taxable Auction Securities 500 500 500 500
1.369% 1.136%
Tax Advantaged Auction Securities 500 500 1,100 1,100
1.572% 1.286%
---------------- ------------------ -------------- ----------------
Total portfolio value $1,539 $2,343 $2,354 $2,354
================ ================== ============== ================
FOREIGN CURRENCY RISK
We have operations in Germany, Canada, and China and are setting up operations
in Brazil. 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 and soon in Brazil, 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 June 30, 2004, we had four forward contracts to sell Euros in exchange for
$676,317 with rates ranging from 1.1754 to 1.2025 all scheduled to be due within
the next quarter and the value at that date of $663,058.
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-15(e) and Rule 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report (the "Evaluation Date").
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to Data I/O (or 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.
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, Use of Proceeds and Issuer Purchases of
Equity Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Shareholders held on May 20, 2004, there were present
in person or by proxy the holders of 7,714,912 (96.33%) shares of Common Stock
of Data I/O thereby constituting a quorum. The following are the matters
approved and the voting results:
(a) Election of a Board of Directors consisting of the following seven (7)
directors:
Name Votes For Votes Withheld
Glen F. Ceiley 7,640,550 74,357
Daniel A. DiLeo 7,598,200 116,712
Paul A. Gary 7,643,201 71,711
Frederick R. Hume 7,643,255 71,657
Edward D. Lazowska 7,613,775 101,137
Steven M. Quist 7,618,000 96,912
William R. Walker 7,615,800 99,112
(b) Approval to amend the Data I/O Corporation 2000 Stock Compensation Incentive
Plan as described in the Proxy Statement for the 2004 Annual Meeting. The
amendment passed as follows: 3,253,866 votes for; 398,056 against; and 57,099
abstain.
(c) The proposal to ratify the selection of Grant Thornton LLP as Data I/O's
independent auditors passed as follows: 7,642,880 for; 40,843 against; and
31,189 abstain.
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 Data I/O is a participant, unless the method of
allocation of benefits thereunder is the same for management and non-management
participants:
(1) Amended and Restated 1982 Employee Stock Purchase Plan. See Exhibit 10.7,
10.22, and 10.24.
(2) Amended and Restated Retirement Plan and Trust Agreement. See Exhibit 10.2,
10.3, 10.4, 10.11, 10.14, 10.15, 10.16 and 10.25.
(3) Summary of Amended and Restated Management Incentive Compensation Plan.
See Exhibit 10.12.
(4) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1.
(5) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.19.
(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 10.20.
(9) Amended and Restated 2000 Stock Compensation Incentive Plan.
See Exhibit 10.21 and 10.23.
3 Articles of Incorporation:
3.1 Data I/O's restated Articles of Incorporation filed November 2,
1987 (Incorporated by reference to Exhibit 3.1 of Data I/O's 1987
Annual Report on Form 10-K (File No. 0-10394)).
3.2 Data I/O's Bylaws as amended and restated as of October 2003.
3.3 Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock (Incorporated by reference
to Exhibit 1 of Data I/O's Registration Statement on Form 8-A
filed March 13, 1998 (File No. 0-10394)).
4 Instruments Defining the Rights of Security Holders, Including
Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between Data
I/O Corporation and ChaseMellon Shareholder Services, L.L.C.
as Rights Agent, which includes: as Exhibit A thereto, the
Form of Right Certificate; and, as Exhibit B thereto, the
Summary of Rights to Purchase Series A Junior Participating
Preferred Stock (Incorporated by reference to Data I/O's
Current Report on Form 8-K filed on March 13, 1998).
4.2 Rights Agreement, dated as of March 31, 1988, between Data
I/O Corporation and First Jersey National Bank, as Rights
Agent, as amended by Amendment No. 1 thereto, dated as of
May 28, 1992 and Amendment No. 2 thereto, dated as of July
16, 1997 (Incorporated by reference to Data I/O's Report on
Form 8-K filed on March 13, 1998).
4.3 Amendment No. 1, dated as of February 10, 1999, to Rights
Agreement, dated as of April 4, 1998, between Data I/O
Corporation and ChaseMellon Shareholder Services, L.L.C. as
Rights Agent (Incorporated by reference to Exhibit 4.1 of
Data I/O's Form 8-A/A dated February 10, 1999).
10 Material Contracts:
10.1 Amended and Restated 1983 Stock Appreciation Rights Plan
dated February 3, 1993 (Incorporated by reference to Exhibit
10.23 of Data I/O's 1992 Annual Report on Form 10-K (File
No. 0-10394)).
10.2 Amended and Restated Retirement Plan and Trust Agreement.
(Incorporated by reference to Exhibit 10.26 of Data I/O's
1993 Annual Report on Form 10-K (File No. 0-10394)).
10.3 First Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.21 of Data I/O's
1994 Annual Report on Form 10-K (File No. 0-10394)).
10.4 Second Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.26 of Data
I/O's 1995 Annual Report on Form 10-K (File No. 0-10394)).
10.5 Form of Change in Control Agreements (Incorporated by
reference to Exhibit 10.20 of Data I/O's 1994 Annual Report
on Form 10-K (File No. 0-10394)).
10.6 Data I/O Corporation 1996 Director Fee Plan (Incorporated by
reference to Exhibit 10.27 of Data I/O's 1995 Annual Report
on Form 10K (File No. 0-10394)).
10.7 Data I/O Corporation 1982 Employee Stock Purchase Plan
Amended and Restated December 11, 1996 (Incorporated by
reference to Exhibit 10.1 to Data I/O's Registration
Statement of Form S-8 (File No. 333-20657, filed January 29,
1997)).
10.8 Purchase and Sale Agreement dated as of July 9, 1996
(Relating to the sale of Data I/O Corporation's headquarters
property in Redmond, Washington consisting of approximately
79 acres of land and an approximately 96,000 square foot
building. (Portions of this exhibit have been omitted
pursuant to an application for an order granting
confidential treatment. The omitted portions have been
separately filed with the Commission) (Incorporated by
reference to Exhibit 10.32 of Data I/O's 1996 Annual Report
on Form 10-K (File No. 0-10394)).
10.9 Letter dated as of December 20, 1996, First Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.33 of Data I/O's
1996 Annual Report on Form 10-K (File No. 0-10394)).
10.10 Letter dated as of February 17, 1997, Second Amendment and
extension of the Closing Date under that certain Purchase
and Sale Agreement dated as of July 9, 1996. (Portions of
this exhibit have been omitted pursuant to an application
for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission)
(Incorporated by reference to Exhibit 10.34 of Data I/O's
1996 Annual Report on Form 10-K (File No. 0-10394)).
10.11 Third Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.35 of Data
I/O's 1996 Annual Report on Form 10-K (File No. 0-10394)).
10.12 Amended and Restated Management Incentive Compensation Plan
dated January 1, 1997 (Incorporated by reference to Exhibit
10.25 of Data I/O's 1997 Annual Report on Form 10-K (File
No. 0-10394)).
10.13 Amended and Restated Performance Bonus Plan dated January
1, 1997 (Incorporated by reference to Exhibit 10.26 of Data
I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).
10.14 Fourth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.27 of Data
I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).
10.15 Fifth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.28 of Data
I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).
10.16 Sixth Amendment to the Data I/O Tax Deferred Retirement
Plan (Incorporated by reference to Exhibit 10.29 of Data
I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).
10.17 Amended and Restated Data I/O Corporation 1996 Director Fee
Plan (Incorporated by reference to Exhibit 10.32 of Data
I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).
10.18 Amended and Restated 1986 Stock Option Plan dated May 12,
1998 (Incorporated by reference to Exhibit 10.37 of Data
I/O's 1998 Annual Report on Form 10-K (File No. 0-10394)).
10.19 Sublease dated December 22, 1999 between Data I/O
Corporation and Imandi.com, Inc.
10.20 Letter Agreement with Fred R. Hume dated January 29, 1999.
10.21 Amended and Restated 2000 Stock Compensation Incentive Plan
dated May 19, 2000. (Incorporated by reference to Data I/O's
2000 Proxy Statement dated March 27, 2000.)
10.22 Amended and Restated 1982 Employee Stock Purchase Plan
dated May 16, 2001 (Incorporated by reference to Data I/O's
2001 Proxy Statement dated March 28, 2001.)
10.23 Amended and Restated 2000 Stock Compensation Incentive Plan
dated May 19, 2000. (Incorporated by reference to Data I/O's
2002 Proxy Statement dated April 19, 2002.)
10.24 Amended and Restated 1982 Employee Stock Purchase Plan
dated May 16, 2001. (Incorporated by reference to Data I/O's
2003 Proxy Statement dated March 31, 2003.)
10.25 Amended and Restated Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.25 of Data I/O's
Quarterly Report on Form 10-Q for the quarter ended March
31, 2004 (File No. 0-10394)).
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 23
(b) Reports on Form 8-K
Data I/O furnished a copy of a press release made on April 23, 2004 entitled
"Data I/O Reports Sixth Consecutive Quarter of Profitability" 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: August 13, 2004
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 over 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 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 August 13, 2004 /s/ FREDERICK R. HUME
Frederick R. Hume
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
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 over 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 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 August 13, 2004 /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 June 30, 2004 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)
August 13, 2004
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 June 30, 2004 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)
August 13, 2004
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 2004.
Variability in Quarterly Operating Results
Data I/O's operating results tend to vary from quarter to quarter. Our revenue
in each quarter substantially depends upon orders received within that quarter.
Conversely, our expenditures are based on investment plans and estimates of
future revenues. We may, therefore, be unable to quickly reduce our spending if
our revenues decline in a given quarter. As a result, operating results for that
quarter will suffer. Our results of operations for any one quarter are not
necessarily indicative of results for any future periods.
Other factors, which may cause our quarterly operating results to fluctuate,
include:
o increased competition
o timing of new product announcements
o product releases and pricing changes by us or our competitors
o market acceptance or delays in the introduction of new products
o production constraints
o labor or material shortages
o the timing of significant orders
o the sales channel mix of direct vs. indirect distribution
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 recent years, our operations may in
the future reflect substantial fluctuations from period-to-period as a
consequence of these industry patterns, general economic conditions affecting
the timing of orders from major customers, and other factors affecting capital
spending. These factors could have a material adverse effect on our business and
financial condition.
History of Losses
We have incurred net losses in two of our last three fiscal years. We will
continue to examine our level of operating expense based upon our projected
revenues. Any planned increases in operating expenses may result in larger
losses in future periods if projected revenues are not achieved. As a result, we
may need to generate greater revenues than we have recently to achieve and
maintain profitability. However, we cannot provide assurance that our revenues
will increase and our strategy may not be successful, resulting in future
losses.
Affects of Restructuring Activities
Our restructuring plans may yield unanticipated consequences, such as increased
burden on our administrative, operational, and financial resources and increased
responsibilities for our management personnel. As a result, our ability to
respond to unexpected challenges may be impaired and we may be unable to take
advantage of new opportunities.
In addition, many of the employees that were terminated as a part of our
restructuring possessed specific knowledge or expertise, and that knowledge or
expertise may prove to have been important to our operations. In that case,
their absence may create significant difficulties, particularly if our business
experiences significant growth. Also, the reduction in workforce related to our
restructuring 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 70% of our net revenue for the fiscal year ended
December 31, 2003 and 79% for the first six months of 2004. 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 difficulties in integrating foreign and outsourced operations
o political and economic instability
The European Community and European Free Trade Association have established
certain electronic emission and product safety requirements ("CE"). Although our
products currently meet these requirements, failure to obtain either a CE
certification or a waiver for any product may prevent us from marketing that
product in Europe.
We operate subsidiaries in Germany, China and Canada and soon in Brazil. 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, Brazil and Germany may adversely affect our investment in our
subsidiaries.
Protection of Intellectual Property
Data I/O 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.
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.
Compliance with Regulating Requirements
We are subject to numerous governmental and stock exchange requirements as a
public company, which we believe we are in compliance with. The Sarbanes-Oxley
Act, the Securities and Exchange Commission (SEC) and the Public Company
Oversight Accounting Board (PCOAB) have requirements that we may fail to meet by
required deadlines or we may fall out of compliance with, such as the internal
controls assessment, reporting and auditor attestation required under
Sarbanes-Oxley Act Section 404 for which we are relying on not being an
accelerated filer. Our failure to meet requirements and exchange listing
standards may result in actions such as the delisting of our stock impacting our
stock's liquidity; SEC enforcement actions; and result in securities claims and
litigation.
Potential Volatility of Stock Price
The stock prices of technology companies tend to fluctuate significantly. We
believe factors such as announcements of new products by us or our competitors
and quarterly variations in financial results may cause the market price of Data
I/O's Common Stock to fluctuate substantially. In addition, overall volatility
in the stock market, particularly in the technology company sector, is often
unrelated to the operating performance of companies. If these market
fluctuations continue in the future, they may adversely affect the price of Data
I/O's Common Stock.