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, 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
8,056,049 shares of no par value of the Registrant's Common Stock were issued
and outstanding as of November 1, 2004.
DATA I/O CORPORATION
FORM 10-Q
For the Quarter Ended September 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. Unregistered Sales of Equity 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 15
Item 6. Exhibits 15
Signatures 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------------
Sept. 30 Dec. 31,
2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $4,936 $4,380
Marketable securities 1,298 2,354
Trade accounts receivable, less allowance for
doubtful accounts of $215 and $196 6,417 5,054
Inventories 3,454 4,607
Other current assets 315 431
--------------------- ----------------
TOTAL CURRENT ASSETS 16,420 16,826
Property and equipment - net 1,622 1,151
Other assets 29 11
--------------------- ----------------
TOTAL ASSETS $18,071 $17,988
===================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,653 $1,285
Accrued compensation 835 1,186
Deferred revenue 1,355 1,430
Other accrued liabilities 1,411 1,543
Income taxes payable 198 350
--------------------- ----------------
TOTAL CURRENT LIABILITIES 5,452 5,794
Deferred gain on sale of property 858 1,106
--------------------- ----------------
TOTAL LIABILITIES 6,310 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, 8,049,706
and 7,976,296 shares 18,975 18,797
Accumulated deficit (7,549) (8,038)
Accumulated other comprehensive income 335 329
--------------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 11,761 11,088
--------------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,071 $17,988
===================== ================
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,
2004 2003 2004 2003
---------------- ------------------------------------------------------------
(in thousands, except per share data)
Net sales $7,765 $6,360 $21,495 $18,092
Cost of goods sold 3,533 3,032 10,040 8,028
Gross margin -------------- -------------- -------------- -------------
4,232 3,328 11,455 10,064
Operating expenses:
Research and development 1,262 1,294 3,642 3,534
Selling, general and administrative 2,405 1,823 6,700 5,551
Net provision (reversal) for business restructuring 432 - 502 (27)
--------------- -------------- -------------- -------------
Total operating expenses 4,099 3,117 10,844 9,058
--------------- -------------- -------------- -------------
Operating income 133 211 611 1,006
Non-operating income (expense):
Interest income 14 20 42 73
Interest expense (6) (4) (13) (16)
Other income (expense) (20) - - -
Foreign currency exchange (27) (22) (45) (103)
--------------- -------------- -------------- -------------
Total non-operating income (expense) (39) (6) (16) (46)
--------------- -------------- -------------- -------------
Income before income taxes 94 205 595 960
Income tax expense (benefit) 1 (114) 103 (10)
--------------- -------------- -------------- -------------
Net income $93 $319 $492 $970
=============== ============== ============== =============
Basic and diluted earnings per share $0.01 $0.04 $0.06 $0.12
=============== ============== ============== =============
Weighted average shares outstanding 8,046 7,937 8,019 7,888
=============== ============== ============== =============
Weighted average and potential shares outstanding 8,384 8,243 8,361 8,026
=============== ============== ============== =============
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 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net income $ 492 $ 970
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 502 563
Net loss on dispositions 632 201
Amortization of deferred gain on sale (247) (247)
Net change in:
Deferred revenue (74) (94)
Trade accounts receivable (1,362) (1,233)
Inventories 1,155 293
Other current assets 116 340
Accrued costs of business restructuring 204 (188)
Accounts payable and accrued liabilities (475) 80
------------ --------------
Net cash provided by (used in) operating activities 943 685
INVESTING ACTIVITIES:
Purchases of property and equipment (1,596) (356)
Purchase of other assets (30) -
Purchases of marketable securities (933) (3,480)
Sales of marketable securities 1,985 2,725
------------ --------------
Net cash provided by (used in) investing activities (574) (1,111)
FINANCING ACTIVITIES:
Sale of common stock 154 119
Proceeds from exercise of stock options 24 3
------------ --------------
Net cash provided by financing activities 178 122
------------ --------------
Increase/(decrease) in cash and cash equivalents 547 (304)
Effects of exchange rate changes on cash 9 200
Cash and cash equivalents at beginning of year 4,380 4,383
------------ --------------
Cash and cash equivalents at end of quarter $4,936 $4,279
============ ==============
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, 2004 and
September 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 nine months ended September 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 third quarter of 2004 and 2003
would have resulted in 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 Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
------------- ----------- ----------- --------------
Net income (loss) - as reported $93 $ 319 $492 $970
Deduct: Total stock-based employee compensation expense
determined under fair value based method for awards granted,
modified, or settled, net of related tax effects (105) (68) (268) (239)
------------- ----------- ----------- --------------
Net income - pro forma ($12) $251 $224 $731
============= =========== =========== ==============
Basic and diluted income per share - as reported $0.01 $0.04 $0.06 $0.12
Basic and diluted income per share - pro forma $0.00 $0.03 $0.03 $0.09
NOTE 2 - CLASSIFICATIONS
Certain prior periods' balances have been reclassified to conform to the
presentation used in the current period.
NOTE 3 - INVENTORIES
Inventories consisted of the following components (in thousands):
Sept. 30, Dec. 31,
2004 2003
---------------- ----------------
Raw material $1,999 $2,100
Work-in-process 860 1,411
Finished goods 595 1,096
---------------- ----------------
$3,454 $4,607
================ ================
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following components (in thousands):
Sept. 30, Dec. 31,
2004 2003
---------------- ----------------
Leasehold improvements $ 278 $259
Equipment 12,069 12,016
---------------- ----------------
12,347 12,275
Less accumulated depreciation 10,725 11,124
---------------- ----------------
Property and equipment - net $ 1,622 $ 1,151
================ ================
NOTE 5 - BUSINESS RESTRUCTURING
During the third quarter of 2004, we incurred an additional restructuring charge
of $432,000 associated primarily with severance related charges and a small
office closure, with an effective date of August 2, 2004 for most of these
actions. The total restructuring charges incurred for the nine months ended
September 30, 2004 are $502,000. The accrued restructure balance remaining at
September 30, 2004 is $204,000. The restructure 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 6 - WARRANTY
Data I/O records a liability for an estimate of costs that we expect to incur
under our basic limited warranty. Changes in the warranty reserve are as follows
(in thousands):
For the third quarter For the first nine months
-------------------------- ---------------------------
2004 2003 2004 2003
----------- -------------- -------------- ------------
Liability, beginning balance $493.4 $520.5 $562.9 $519.0
----------- -------------- -------------- -----------
Net expense (income, accrual revisions and warranty claims 1.8 40.2 (67.7) 41.7
----------- -------------- -------------- -----------
Liability, ending balance 495.2 560.7 495.2 560.7
=========== ============== ============== ===========
NOTE 7 - 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
-------------------------- ---------------------------
2004 2003 2004 2003
----------- -------------- ------------ --------------
Numerator for basic and diluted earnings per share:
Net income $93 $319 $492 $970
----------- -------------- ------------ --------------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 8,046 7,937 8,019 7,888
Employee stock options 338 306 342 138
----------- -------------- ------------ --------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions of stock options 8,384 8,243 8,361 8,026
----------- -------------- ------------ --------------
Basic and diluted earnings per share
Total basic and diluted earnings per share $0.01 $0.04 $0.06 $0.12
=========== ============== ============ ==============
At September 30, 2004 and 2003 there were 1,462,711 and 1,339,462 shares,
respectively, of outstanding options potentially issueable as common stock.
NOTE 8 - ACCOUNTING FOR INCOME TAXES
The Company's effective tax rate for the first nine months of 2004 differed from
the statutory 34% tax rate primarily due to deferred tax timing difference and
utilization of net operating loss carryforwards. The tax valuation allowance
decreased by approximately $426,281 during the quarter ended September 30, 2004.
As of September 30, 2004, the Company has a valuation allowance of $9,377,000.
NOTE 9 - COMPREHENSIVE INCOME
During the third quarter of 2004 and 2003 total comprehensive income (loss) was
comprised of the following (in thousands):
For the third quarter For the first nine months
------------------------------ -------------------------------
2004 2003 2004 2003
------------- ------------ ------------- -------------
Net income $93 $319 $492 $970
Foreign currency translation gain 94 16 5 163
------------- ------------ ------------- -------------
Total comprehensive income $ 187 $335 $497 $1,133
============= ============ ============= =============
NOTE 10 - 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 period. 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 September 30, 2004 is an unrealized loss
of $29,105 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, impact of regulatory requirements; 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 uncertain
economic environment, 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 and 2005
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 third quarter of 2004, we
obtained the rights to certain in-system programming ("ISP") technology. We are
incorporating this technology into our ISP products, and will be required to pay
a 4% royalty on product revenues associated with such technology until March 31,
2007. During the third quarter we had our first sale of our initial ISP product
and will formally launch the product in November. The 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. In the third quarter of
2004, we incurred further restructuring related charges of approximately
$432,000 that are primarily related to severance and a small office closure,
with an effective date of August 2, 2004 for most of these actions. At September
30, 2004, $204,000 remained as accrued but unpaid restructure charges, most of
which is expected to be paid in 2004 with the balance paid in 2005. The
restructure related savings are projected to save about $1.1 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 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 to 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 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 2004 % Change 2003 2004 % Change 2003
----------------------------------------------------------------------------------------------------------------------------------
Non-automated programming systems $2,694 12.4% $2,396 $7,676 0% $7,705
Automated programming systems $5,071 27.9% $3,964 $13,819 33.0% 10,387
---------------- --------------------------- ---------------------------------------------
Total programming systems $7,765 22.1% $6,360 $21,495 18.8% $18,092
=========================================== ==============================================
Third Quarter First Nine Months
------------------------------------------- ----------------------------------------------
Net sales by location 2004 % Change 2003 2004 % Change 2003
-------------------------------------------------------------------------------------------- -----------------------------------
United States $1,480 (27.5%) $2,040 $4,378 (18.8%) $5,391
% of total 19.1% 32.1% 20.4% 29.8%
International $6,285 45.5% $4,320 $17,117 34.8% $12,702
% of total 80.9% 67.9% 79.6% 70.2%
----------------------------------------------------------------------------------------------------------------------------------
Revenues for the third quarter of 2004 increased by approximately 13% over
second quarter revenues and increased 22% over the third quarter of last year.
The revenue increase results from increased deliveries of PS-300 and the new
PS-288FC automated systems. Sales of our traditional programmers also showed
growth recovery during the quarter. We also shipped the first product in the new
ISP product line to a customer in the third quarter. International sales
continued to be strong and represented 81% of total sales for the quarter with
Asia and Europe being responsible for the revenue growth. Our order level during
the quarter was again higher than shipments, increasing the backlog to $1.4
million at September 30, 2004.
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) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Margin $4,232 $3,328 $11,455 $10,064
Percentage of net sales 54.5% 52.3% 53.3% 55.6%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross margin increased in dollars and increased as a percentage of sales for the
third quarter of 2004 compared with the same period of 2003. The increased gross
margin was primarily due to a higher percentage of our products being shipped
through direct channels and a shift to a more favorable product mix. We also
realized the benefit of lower costs that we had negotiated with a critical
supplier and reduced overhead costs resulting from lower inventory levels. Gross
margins for the nine months ended September 30, 2004 decreased as a percentage
of sales as a result of more indirect sales than direct sales, a product mix of
somewhat lower margin products and unfavorable labor and overhead variance
associated with a reduction in inventory.
RESEARCH AND DEVELOPMENT
Third Quarter First Nine Months
---------------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Research and development $1,262 1,294 $3,642 $3,534
Percentage of net sales 16.3% 20.3% 16.9% 19.5%
----------------------------------------------------------------------------------------------------------------------------------
Research and development ("R&D") spending for the third quarter of 2004 as
compared to the third quarter of 2003 was slightly less in dollars and less as a
percentage of sales. This decrease in spending was primarily related to less
spending on R&D subcontractors, offset by increased spending on the ISP project.
During the second quarter, we began shipping the new PS-288FC automated
programming system. We plan to increase our engineering development spending
during the fourth quarter 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
Third Quarter First Nine Months
---------------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Selling, general & administrative $2,405 $1,823 $6,700 $5,551
Percentage of net sales 31.0% 28.7% 31.2% 30.7%
----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses for the third quarter of
2004 were $582,000 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.
During the fourth quarter and throughout 2005, we anticipate increasing spending
related to documenting and testing our internal control procedures in order to
satisfy the requirement of Section 404 of the Sarbanes Oxley Act of 2002.
Interest
Third Quarter First Nine Months
---------------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Interest income $14 $20 $42 $73
Interest expense ($6) ($4) ($13) ($16)
----------------------------------------------------------------------------------------------------------------------------------
Interest income decreased slightly during the third quarter of 2004 compared to
the same period in 2003 due to decreased funds invested.
INCOME TAXES
Third Quarter First Nine Months
----------------------------------------- ------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $1 ($114) $103 ($10)
----------------------------------------------------------------------------------------------------------------------------------
Tax expense recorded for the third quarter of 2004 was due to foreign taxes. Tax
valuation reserves decreased by approximately $426,281 during the quarter. Data
I/O has valuation reserves of $9,377,000 as of September 30, 2004.
FINANCIAL CONDITION
Liquidity and Capital Resources
Sept. 30, June 30, Dec. 31,
(in thousands) 2004 Change 2004 Change 2003
- ------------------------------------------------------------- -------------- ------------- --------------- -------------- ---------
Working capital $10,968 ($17) $10,985 ($47) $11,032
- ------------------------------------------------------------- -------------- ------------- --------------- -------------- ---------
Working capital decreased slightly during the third quarter of 2004. Cash, cash
equivalents and marketable securities increased approximately $0.6 million
during the third quarter; inventory decreased approximately $0.4 million and
accounts receivable decreased $0.1 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. 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, 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 $500,000, 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 third quarter were mostly paid out
during the third quarter. This was funded by existing and internally generated
funds. The savings from the restructure actions, anticipated to be $1.1 million
per year, are expected to approximately offset the impact of the restructure
charges taken in the second and third quarter of 2004 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
currency 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):
Estimated Fair Principal Estimated Fair
Principal Principal Value at Cash Flows to Value at
Cash Flows Cash Flows September 30, September 30 December 31,
For 2005 For Q4 2004 2004 2004 2003
--------------- ------------- ---------------- ------------- -----------------
Corporate Bonds $798 $ - $ 798 $ 754 $ 754
1.559%
Euro-dollar bonds - - - - -
Taxable Auction - - - 500 500
Securities
Tax Advantaged - 500 500 1,100 1,100
Auction Securities 1.952%
--------------- ------------- ---------------- ------------- -----------------
Total portfolio value $798 $500 $1,298 $2,354 $2,354
=============== ============= ================ ============= =================
FOREIGN CURRENCY RISK
We have operations in Germany, Canada, and China and are finalizing the set up
of 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 September 30, 2004, we had six forward contracts to sell Euros in exchange
for $1.23 million with rates ranging from 1.1938 to 1.2296 all scheduled to be
due within the next quarter and the value at maturity of $1.21 million.
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. Unregistered Sales of Equity 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
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. (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.
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)).
Page
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
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 12, 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 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 12, 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 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 12, 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 September 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)
November 12, 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 September 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)
November 12, 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, impact of regulatory requirements, restructure actions
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
DELAYS IN DEVELOPMENT, INTRODUCTION AND SHIPMENT OF NEW PRODUCTS MAY RESULT IN A
DECLINE IN SALES.
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.
QUARTERLY FLUCTUATIONS IN OUR OPERATING RESULTS MAY ADVERSELY AFFECT OUR STOCK
PRICE.
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.
FAILURE TO ADAPT TO TECHNOLOGY TRENDS IN OUR INDUSTRY MAY NEGATIVELY IMPACT OUR
COMPETITIVENESS AND FINANCIAL RESULTS.
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
custom ISP solutions
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 may 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.
A DECLINE IN ECONOMIC AND MARKET CONDITIONS MAY RESULT IN DECREASED CAPITAL
SPENDING BY OUR CUSTOMERS.
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.
WE HAVE A HISTORY OF RECENT OPERATING LOSSES AND MAY BE UNABLE TO GENERATE
ENOUGH REVENUE TO ACHIEVE AND MAINTAIN PROFITABILITY.
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.
OUR RECENT RESTRUCTURING ACTIVITIES MAY HAVE A NEGATIVE IMPACT ON OUR FUTURE
OPERATIONS.
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.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL AND OUR FUTURE ACCESS TO CAPITAL IS
UNCERTAIN.
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.
WE MAY FACE INCREASED COMPETITION AND MAY NOT BE ABLE TO COMPETE SUCCESSFULLY
WITH CURRENT AND FUTURE COMPETITORS.
Technological advances have reduced the barriers of entry into the programming
systems 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.
IF OUR RELATIONSHIP WITH SEMICONDUCTOR MANUFACTURERS DETERIORATES, OUR BUSINESS
MAY BE ADVERSELY AFFECTED.
We work closely with most semiconductor manufacturers to ensure that our
programming systems comply with their requirements. In addition, many
semiconductor manufacturers recommend our 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.
OUR RELIANCE ON A SMALL NUMBER OF SUPPLIERS MAY RESULT IN A SHORTAGE OF KEY
COMPONENTS, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
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.
IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED THIRD-PARTY DISTRIBUTORS, OUR
BUSINESS MAY BE ADVERSELY AFFECTED.
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.
OUR INTERNATIONAL OPERATIONS MAY EXPOSE US TO ADDITIONAL RISKS THAT MAY
ADVERSELY AFFECT OUR BUSINESS.
International sales represented 70% of our net revenue for the fiscal year ended
December 31, 2003 and 80% for the first nine 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.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR INFRINGE ON OTHER
INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY OR OPERATE
PROFITABLY.
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.
WE MAY PURSUE BUSINESS ACQUISITIONS THAT MAY IMPAIR OUR FINANCIAL POSITION AND
PROFITABILITY.
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.
THE LOSS OF KEY EMPLOYEES MAY ADVERSELY AFFECT OUR OPERATIONS.
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.
FAILURE TO COMPLY WITH REGULATORY REQUIREMENTS MAY ADVERSELY AFFECT OUR STOCK
PRICE AND BUSINESS.
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 of 2002, 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 Section
404 of the Sarbanes-Oxley Act of 2002 for which we are relying on not being an
accelerated filer. We are in the process of documenting and testing our internal
control procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our Independent Auditors addressing these assessments. During the course of our
testing we may identify deficiencies which we may not be able to remediate in
time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002 for
compliance with the requirements of Section 404. In addition, if we fail to
achieve and maintain the adequacy of our internal controls, as such standards
are modified, supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002. Moreover, effective internal controls, particularly
those related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to help prevent financial fraud. If we
cannot provide reliable financial reports or prevent fraud, our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop
significantly. 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.
OUR STOCK PRICE MAY BE VOLATILE AND, AS A RESULT, YOU MAY LOSE SOME OR ALL OF
YOUR INVESTMENT.
The stock prices of technology companies tend to fluctuate significantly. We
believe factors such as announcements of new products 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.