UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 1999 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, 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
7,285,790 shares of no par value Common Stock outstanding as of November 2, 1999
Page 1 of 18
Exhibit Index on Page 18
DATA I/O CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1999
INDEX
Part I - Financial Information Page
Item 1.Financial Statements (unaudited) 3
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II - Other Information
Item 1.Legal Proceedings 16
Item 2.Changes in Securities 16
Item 3.Defaults Upon Senior Securities 16
Item 4.Submission of Matters to a Vote of Security Holders 16
Item 5.Other Information 16
Item 6.Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- - -------------------------------------------------------------------------------
Sept. 30, Dec. 31,
1999 1998
- - -------------------------------------------------------------------------------
(in thousands, except share data) (unaudited) (note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,344 $4,008
Marketable securities 11,692 14,894
Trade accounts receivable, less allowance for
doubtful accounts of $457 and $445 5,793 5,352
Inventories 6,467 4,442
Recoverable income taxes 868 3,366
Deferred income taxes - 331
Other current assets 420 1,117
---------- ----------
TOTAL CURRENT ASSETS 27,584 33,510
Property, plant and equipment - net 2,203 2,174
Other assets 2,382 4,345
Deferred income taxes 192 60
---------- ----------
TOTAL ASSETS $32,361 $40,089
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,897 $3,781
Accrued compensation 2,004 2,926
Deferred revenue 2,890 3,895
Other accrued liabilities 2,340 3,328
Accrued costs of business restructuring 624 2,339
Income taxes payable 1,213 1,593
Deferred income taxes payable 205 -
Notes payable and current maturities of long-term - 564
debt
---------- ----------
TOTAL CURRENT LIABILITIES 11,173 18,426
Deferred gain on sale of property 2,507 2,754
---------- ----------
TOTAL LIABILITIES 13,680 21,180
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior
Participating
Issued and outstanding, none
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 7,285,790
and 7,186,851 shares 17,803 17,637
Retained earnings 941 715
Accumulated other comprehensive income (loss) (63) 557
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 18,681 18,909
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,361 $40,089
========== ==========
See notes to consolidated financial statements.
Page 3
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarters Ended Nine Months Ended
- - ----------------------------------------------------------------------------------------
Sept. Sept. Sept. Sept.
30, 24, 30, 24,
1999 1998 1999 1998
- - ----------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $9,439 $8,028 $26,137 $25,236
Cost of goods sold 5,404 6,925 13,982 16,948
-------- -------- -------- ---------
Gross margin 4,035 1,103 12,155 8,288
Operating expenses:
Research and development 2,265 2,022 6,228 6,833
Selling, general and administrative 2,494 3,526 8,492 11,165
Provision for business restructuring - 2,039 (215) 2,039
-------- -------- -------- ---------
Total operating expenses 4,759 7,587 14,505 20,037
-------- -------- -------- ---------
Operating loss (724) (6,484) (2,350) (11,749)
Non-operating income (expense):
Interest income 174 375 577 1,226
Interest expense (8) (14) (28) (63)
Foreign currency exchange 10 2 12 (1)
Net gain (loss) on dispositions - - 1,199 (355)
-------- -------- -------- ---------
Total non-operating income 176 363 1,760 807
-------- -------- -------- ---------
Loss from continuing operations
before income taxes (548) (6,121) (590) (10,942)
Income tax (benefit) expense (8) 257 15 294
-------- -------- -------- ---------
Loss from continuing operations (540) (6,378) (605) (11,236)
Income from discontinued operations, net of - 158 831 865
taxes -------- -------- -------- ---------
Net income (loss) ($540) ($6,220) $226 ($10,371)
======== ======== ======== =========
Basic and diluted earnings (loss) per share:
From continuing operations ($0.07) ($0.89) ($0.08) ($1.57)
From discontinued operations 0.00 0.02 0.11 0.12
-------- -------- -------- ---------
Total basic and diluted earnings (loss) per ($0.07) ($0.87) $0.03 ($1.45)
share ======== ======== ======== =========
Weighted average shares outstanding 7,270 7,174 7,243 7,143
======== ======== ======== =========
Weighted average and potential shares 7,270 7,174 7,243 7,143
outstanding ======== ======== ======== =========
See notes to consolidated financial statements.
Page 4
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- - --------------------------------------------------------------------------------
For the nine months ended: Sept. 30, Sept. 24,
1999 1998
- - --------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Loss from continuing operations ($605) ($11,236)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 1,597 1,544
Net gain on dispositions (1,199) -
Equity losses from minority interest (17) -
Deferred income taxes 404 1,595
Deferred revenue (521) (1,146)
Amortization of deferred gain on sale of property (247) (248)
Non-cash stock-based compensation expense - 540
Net change in:
Trade accounts receivable (773) 694
Inventories (2,199) 1,645
Recoverable income taxes 2,498 (1,603)
Other current assets 658 2,610
Business restructuring (1,715) 974
Accounts payable and accrued liabilities (3,821) (2,337)
----------- -----------
Cash used in operating activities of continuing
operations (5,940) (6,969)
Cash provided by operating activities of
discontinued operations 831 865
----------- -----------
Net cash used in operating activities (5,109) (6,104)
INVESTING ACTIVITIES:
Additions to property, plant and equipment (977) (326)
Net proceeds on sale of subsidiary 72 -
Proceeds from sale of minority interest 1,067 73
Additions to other assets - (979)
Purchases of marketable securities (7,398) (20,321)
Proceeds from sales of marketable securities 10,600 25,816
----------- -----------
Cash provided by investing activities 3,364 4,263
FINANCING ACTIVITIES:
Additions to (repayment of) notes payable 6 (1,601)
Sale of common stock 165 259
Proceeds from exercise of stock options 1 423
----------- -----------
Cash provided by (used in) financing activities 172 (919)
----------- -----------
Decrease in cash and cash equivalents (1,573) (2,760)
Effects of exchange rate changes on cash (92) (7)
Cash and cash equivalents at beginning of period 4,008 8,113
----------- -----------
Cash and cash equivalents at end of period $2,344 $5,346
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $112 $60
Income taxes $104 $2,130
See notes to consolidated financial statements.
Page 5
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENT PREPARATION
The financial statements as of September 30, 1999 and September 24, 1998, have
been prepared by the Company pursuant 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, 1998 has been derived
from the audited financial statements at that date. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Operating results for the
nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 30, 1999. 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 fiscal year ended December 31, 1998. Certain prior period's
balances have been reclassified to conform to the presentation used in the
current period.
NOTE 2 - INVENTORIES
Inventories consisted of the following components (in thousands):
Sept. 30, Dec. 31,
1999 1998
------------ ------------
Raw material $2,380 $1,357
Work-in-process 1,609 877
Finished goods 2,478 2,208
------------ ------------
$6,467 $4,442
============ ============
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Sept. 30, Dec. 31,
1999 1998
------------ ------------
Building and improvements $ 171 $ 181
Equipment 12,268 15,155
------------ ------------
12,439 15,336
Less accumulated
depreciation 10,236 13,162
------------ ------------
$ 2,203 $ 2,174
============ ============
NOTE 4 - DISCONTINUED OPERATIONS
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc. Also in November 1997,
the Company entered into a licensing agreement and an agreement to sell certain
assets of its Synario Design Automation Division (SDAD) to MINC Washington
Incorporated. These transactions discontinued the Semiconductor Equipment
Division and SDAD operations of the Company. Although the Company was entitled
to receive certain licensing, source code and training and support services
revenues related to certain of its former SDAD products through December 31,
1999, during the second quarter 1999 the Company closed final settlements and
transfer of its retained licensing rights. The Company has recognized net
earnings of $831,000 and $865,000 from SDAD licensing agreements, source code
sales and training and support services provided during the first nine months of
1999 and 1998, respectively. No further income is expected in future periods
from SDAD discontinued operations. Operating results of these discontinued
divisions are classified as discontinued operations in the financial statements.
Page 6
NOTE 5 - BUSINESS RESTRUCTURING PROGRESS
During the third and fourth quarters of 1998 the Company recorded a pretax
charge of $4.4 million related to the restructure of its Redmond operations and
certain of its international subsidiaries. With the implementation of the
restructuring initiatives during 1998 and continuing into 1999, the Company had
four objectives: (1) to reduce its corporate overhead costs; (2) to reduce
research and development expenses and to focus its on-going research and
development spending in the segments of the market that show the best potential
for growth and return on investment for the Company; (3) to create a more
variable cost operating structure including the out-sourcing of certain of its
manufacturing operations during 1999; and (4) to eliminate redundant products
and operations after the acquisition of SMS GmbH in November 1998.
The implementation of the restructuring plan continued during the first nine
months of 1999. By the end of the second quarter of 1999 the Company completed
all of the planned headcount downsizing.
Of the total $4.4 million restructuring charge taken in 1998, approximately $2.3
million remained as an accrued liability at December 31, 1998. At September 30,
1999, the remaining accrued liability was approximately $624,000. The reduction
during the first nine months of 1999 related primarily to severances and related
payments to terminated employees, plus the reversal of $215,000 of restructure
reserve during the second quarter 1999 primarily due to the Company's settlement
of certain supplier related claims for less than had been anticipated at the
time the restructuring charge was taken in 1998. The remaining accrued liability
primarily relates to lease abandonment costs and machinery and equipment to be
disposed of, and is expected to be utilized during the next few quarters.
The Company's original restructuring plans included the outsourcing of certain
of its manufacturing operations by the second half of 1999. These plans were
altered and resulted in far less of the Company's manufacturing operations being
outsourced than was originally planned, which has been completed with respect to
the Company's existing products. With respect to developing and prospective
products and technologies the Company continues to evaluate its manufacturing
capabilities against future requirements and the related investment required to
enhance or upgrade capabilities versus its options for outsourcing to best
support the long-term direction of the Company.
NOTE 6 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share data):
Third Quarter First Nine Months
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- ---------
Numerator for basic and diluted earnings per share:
Loss from continuing operations ($540) ($6,378) ($605) ($11,236)
Income from discontinued operations - 158 831 865
-------- -------- -------- ---------
Net income (loss) ($540) ($6,220) $226 ($10,371)
======== ======== ======== =========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 7,270 7,174 7,243 7,143
Employee stock options (1) - - - -
-------- -------- -------- ---------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 7,270 7,174 7,243 7,143
======== ======== ======== =========
Basic and diluted earnings (loss) per share
From continuing operations ($0.07) ($0.89) ($0.08) ($1.57)
From discontinued operations 0.00 0.02 0.11 0.12
-------- -------- -------- ---------
Total basic earnings (loss) per share ($0.07) ($0.87) $0.03 ($1.45)
======== ======== ======== =========
(1) Excludes 13,346 and 14,873 employee stock options which were antidilutive
for the third quarter and the nine months ended September 30, 1999,
respectively, and 15,615 and 69,316 which were antidilutive for the third
quarter and the nine months ended September 24, 1998, respectively.
Page 7
NOTE 7 - ACCOUNTING FOR INCOME TAXES
The Company's effective tax rate for the first nine months of 1999 differed from
the statutory 34% tax rate primarily due to operating losses for which no tax
benefit was recorded. Tax valuation reserves increased by approximately $621,000
during the first nine months of 1999. As of September 30, 1999 the Company has
valuation reserves of $6,566,000 that may increase should the Company continue
to incur losses or reverse as the Company records income.
NOTE 8 - COMPREHENSIVE INCOME
During the third quarter and first nine months of 1999 and 1998 total
comprehensive income (loss) was comprised of the following (in thousands):
For the Third Quarter For the Nine Months
---------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ------------
Net income (loss) ($540) ($6,220) $226 ($10,371)
Unrealized gain on marketable
securities - - - -
Foreign currency translation
gain (loss) - (2) 21 (14)
---------- ---------- ---------- ------------
Total comprehensive income
(loss) ($540) ($6,222) $247 ($10,385)
========== ========== ========== ============
Page 8
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; future results of operations or
financial position; integration of acquired products and operations; market
acceptance and increased sales of the Company's reconstituted products;
development, introduction and shipment of new products; completion of
outsourcing of manufacturing and certain sustaining engineering functions on
favorable terms and without significant disruption and achievement of cost
savings from such outsourcing; the assessment of the Company's year 2000
exposure and completion of remediation efforts; and any other guidance on future
periods are forward-looking statements. Forward-looking statements reflect
management's current expectations and are inherently uncertain. The Company's
actual results may differ significantly from management's expectations. The
following discussions and discussions under the caption "Business - Additional
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, 1998, describe some, but not all,
of the factors that could cause these differences.
Business restructuring
During the first nine months of 1999 the Company continued to implement the
restructuring of its Redmond operations and certain of its international
subsidiaries. This restructuring plan was initiated in the second half of 1998
and is expected to be substantially completed in the fourth quarter of 1999.
During the first nine months of 1999, approximately $1.5 million in accrued
restructuring costs, primarily severance related, were paid. Also, reserves of
$215,000 were reversed during the second quarter of 1999 primarily related to
the Company's settlement of certain supplier related claims for less than had
been anticipated at the time the restructuring charge was taken in 1998. The
remaining restructure reserve of $624,000 primarily relates to lease abandonment
costs and machinery and equipment to be disposed of. The remaining restructuring
reserve is expected to be utilized during the next few quarters.
This restructuring has lowered the Company's operating costs which is reflected
in the results for the first nine months of 1999 (see discussions below). The
Company's original restructuring plans included the outsourcing of certain of
its manufacturing operations by the second half of 1999. These plans were
altered and resulted in far less of the Company's manufacturing operations being
outsourced than was originally planned, which has been completed with respect to
the Company's existing products. With respect to developing and prospective
products and technologies the Company continues to evaluate its manufacturing
capabilities against future requirements and the related investment required to
enhance or upgrade capabilities versus its options for outsourcing, to best
support the long-term direction of the Company.
In February 1999 the Company sold its Japan sales and service subsidiary to a
former sub-distributor who continues to distribute the Company's products in
Japan (see "Net Gain on Dispositions" below). Additionally, the Company
continues to realign its operations in Germany.
Page 9
Results of Continuing Operations
For all periods presented in this section, results of operations have been
reclassified to reflect the classification of the Company's Semiconductor
Equipment and Synario Design Automation Divisions as discontinued operations
(see "Discontinued Operations").
Net Sales
---------------------------------------------------------------------------------------
(in thousands)
Third Quarter First Nine Months
---------------------------- -----------------------------
Net sales 1999 % Change 1998 1999 % Change 1998
--------------------------------------------------------- -----------------------------
Non-automated
programming systems $5,325 (17.6%) $6,462 $15,984 (20.0%) $19,974
Automated programming
systems 4,114 162.7% 1,566 10,153 92.9% 5,262
---------------------------- ----------------------------
Total programming systems $9,439 17.6% $8,028 $26,137 3.6% $25,236
============================ =============================
Third Quarter First Nine Months
---------------------------- -----------------------------
Net sales by location 1999 % Change 1998 1999 % Change 1998
--------------------------------------------------------- -----------------------------
United States $3,976 1.0% $3,937 $11,281 (8.8%) $12,365
% of total 42.1% 49.0% 43.2% 49.0%
International 5,463 33.5% 4,091 14,856 15.4% $12,871
% of total 57.9% 51.0% 56.8% 51.0%
---------------------------------------------------------------------------------------
Sales and orders increased for the Company's programming system products in the
third quarter of 1999 compared to the third quarter of 1998. Orders in the third
quarter of 1999 increased approximately 5% to $7.6 million, compared with $7.2
million in 1998. The increase in orders during the third quarter of 1999 is
primarily due to higher orders for the Company's automated programming systems,
specifically the PP100, offset partially by decreased orders for the Company's
non-automated programming system products.
The increase in sales for the third quarter of 1999 compared to the third
quarter of 1998 was due primarily to an overall increase in sales of the
Company's PP100 automated programming systems. Sales of the Company's
non-automated programming systems were lower in the third quarter of 1999
compared to the same quarter of 1998. Specifically, sales of the Company's older
non-automated products, some of which have been discontinued, decreased 42%
during the third quarter, but this was offset partially by sales of the SMS
Sprint non-automated products which were integrated into the Data I/O product
line during the first half of 1999 following the acquisition of SMS in November
1998.
Sales of the Sprint products are expected to increase during the year as those
products are fully integrated into the Data I/O product lines and sales
channels. However, there can be no assurance that the Sprint products will be
accepted in the market or that sales of Sprint products will fully offset the
decline in sales related to older Data I/O products or those which have been
cancelled.
Page 10
Gross Margin
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1999 1998 1999 1998
- - --------------------------------------------------------------------------------
Gross Margin $4,035 $1,103 $12,155 $8,288
Percentage of net sales 42.7% 13.7% 46.5% 32.8%
- - --------------------------------------------------------------------------------
Gross margin for both the third quarter and first nine months of 1999 increased
compared to the same periods in 1998 due primarily to the $2.2 million inventory
reserve charge recognized in the third quarter of 1998 related to the Company's
restructuring. Also contributing to the improved gross margins in 1999 was lower
labor costs as a result of the Company's restructuring and, with respect to the
first nine months of 1999, the recognition of contract and upgrade revenue
related to the PM970 program during the second quarter of 1999 that had been
deferred from 1998.
Research and Development
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1999 1998 1999 1998
-------------------------------------------------------------------------------
Research and development $2,265 $2,022 $6,228 $6,833
Percentage of net sales 24.0% 25.2% 23.8% 27.1%
-------------------------------------------------------------------------------
The Company initiated a restructuring plan in the second half of 1998. This
restructuring resulted in significant layoffs in the Redmond headquarters
engineering staff in the third and fourth quarters of 1998, as well as the first
quarter of 1999. Consequently research and development spending was reduced in
the third quarter 1998 compared to prior quarters as a significant number of the
staff were released in August 1998. This accounts for the reduction in research
and development spending in the first nine months of 1999 over the same period
in 1998. Third quarter 1999 research and development spending increased over the
third quarter 1998 level primarily due to incremental expenses in the Company's
Wangen, Germany operations which were acquired in November 1998, and due to an
increased investment in certain areas of new product development and software
support.
Selling, General and Administrative
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1999 1998 1999 1998
-------------------------------------------------------------------------------
Selling, general & $2,494 $3,526 $8,492 $11,165
administrative
Percentage of net sales 26.4% 43.9% 32.5% 44.2%
-------------------------------------------------------------------------------
The decrease in selling, general and administrative expenditures in both the
third quarter and first nine months of 1999 as compared with the same periods in
1998 is due primarily to a reduction in headcount across most SG&A departments
as a result of the Company's restructuring which was initiated in the second
half of 1998. Also, the sale of the Company's Japan subsidiary in February 1999
resulted in lower spending in selling, general and administrative expenses as
compared to the prior year. Furthermore, first quarter 1998 expenses included a
non-cash charge in the amount of $540,000 related to the modification of stock
options of a former CEO of the Company. Partially offsetting the reduced
spending are incremental expenses of the Company's Wangen, Germany operations
which were acquired in November 1998.
Page 11
Interest
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1999 1998 1999 1998
-------------------------------------------------------------------------------
Interest income $174 $375 $577 $1,226
Interest expense ($8) ($14) ($28) ($63)
-------------------------------------------------------------------------------
The decrease in interest income for both the third quarter and first nine months
of 1999 as compared to the same periods of 1998 is due to the decrease in cash,
cash equivalents and marketable securities, due primarily to the funding of
operating losses during the past four quarters and the purchase of SMS in the
fourth quarter of 1998.
Net Gain on Dispositions - Sale of Japan Subsidiary and JTAG Technologies
Minority Interest
In connection with the Company's restructuring, during the first quarter of 1999
the Company sold its Japan sales subsidiary to Synchro-Work Corporation, one of
its sub-distributors in Japan, for total consideration of approximately
$100,000. The sale resulted in a gain before taxes of approximately $1.1 million
primarily due to previously unrecognized accumulated currency translations. In
connection with this sale, the Company and Synchro-Work also entered into a new
distribution agreement for sales into Japan. See "Business Restructuring" above.
During the second quarter of 1999 the Company sold its minority interest in JTAG
Technologies back to JTAG Holdings BV, resulting in a net gain of $85,000. Also
in connection with this sale the Company terminated its distribution agreement
with JTAG. The decision to sell this interest and terminate the agreement was
due to the Company's low sales volume of the JTAG products.
Income Taxes
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1999 1998 1999 1998
-------------------------------------------------------------------------------
Income tax (benefit)
expense from
continuing operations ($8) $257 $15 $294
Effective tax rate 1.5% (4.2%) (2.5%) (2.7%)
-------------------------------------------------------------------------------
The tax benefit and expense recorded for the third quarter and first nine months
of 1999, respectively, were due primarily to foreign taxes. Tax valuation
reserves increased by approximately $621,000 during the first nine months of
1999. As of September 30, 1999 the Company had valuation reserves of $6,566,000
that may increase should the Company continue to incur losses or reverse as the
Company records income.
Page 12
Net Income and Earnings Per Share
Third Quarter First Nine Months
------------------------------------------------
(in thousands, except per 1999 1998 1999 1998
share data)
- - --------------------------------------------------------------------------------
Loss from continuing operations ($540) ($6,378) ($605) ($11,236)
Percentage of net sales (5.7%) (79.4%) (2.3%) (44.5%)
Basic and diluted loss per
share from continuing operations ($0.07) ($0.89) ($0.08) ($1.57)
- - --------------------------------------------------------------------------------
Losses from continuing operations for both the third quarter and first nine
months of 1999 decreased as compared to the same periods of 1998 due primarily
to higher gross margin and lower operating costs as a result of the Company's
restructuring, as well as, with respect to the first nine months of 1999, the
gain on the sale of the Company's Japan subsidiary during the first quarter of
1999 and the reversal of $215,000 of restructure reserve during the second
quarter of 1999.
The Company expects that during the remainder of 1999, it is likely to incur
losses from operations due to continued efforts to integrate and support the
Sprint product line, which was acquired in November 1998, the declining trend in
sales of its older programming systems and the continued high investment in
research and development.
Discontinued Operations
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc. Also in November 1997,
the Company entered into a licensing agreement and an agreement to sell certain
assets of its Synario Design Automation Division (SDAD) to MINC Washington
Incorporated. These transactions discontinued the Semiconductor Equipment
Division and SDAD operations of the Company. Although the Company was entitled
to receive certain licensing, source code and training and support services
revenues related to certain of its former SDAD products through December 31,
1999, during the second quarter of 1999 the Company closed final settlements and
transfer of its retained licensing rights. The Company has recognized net
earnings of $831,000 and $865,000 from SDAD licensing agreements, source code
sales and training and support services provided during the first nine months
1999 and 1998, respectively. No further income is expected in future periods
from SDAD discontinued operations. Operating results of these discontinued
divisions are classified as discontinued operations in the financial statements.
Financial Condition
Liquidity and Capital Resources
Sept. Dec.
(in thousands) 30, Change 31,
1999 1998
- - ------------------------------------------------------------------------------
Working capital $16,411 $1,327 $15,084
Total debt $0 (564) $564
- - ------------------------------------------------------------------------------
Working capital increased during the first nine months of 1999 primarily due to
proceeds from the sale of the Company's minority interest investment in JTAG
Technologies during the second quarter of 1999 for which it received a cash
payment of $1.1 million. Cash, cash equivalents and marketable securities, which
decreased $4.9 million during the first nine months, were used to: pay accrued
liabilities of $3.6 million, primarily related to the Company's restructuring,
pay an earnout payment related to the 1997 Reel-Tech disposition, pay accrued
employee benefits and fund operating losses; and increase inventory by
approximately $2.2 million related to the PP100 and Sprint programming systems.
In addition, the sale of the Company's Japan subsidiary lowered working capital
by approximately $400,000. However, during the third quarter of 1999 $3.2
million cash was provided by an income tax refund received.
Page 13
As of September 30, 1999, the Company had no debt outstanding. Borrowings as of
December 31, 1998 consisted of borrowings under the Japan subsidiary line of
credit. This subsidiary was sold during the first quarter of 1999. No borrowings
were outstanding under the German subsidiary line of credit or the $4.0 million
U.S. line of credit which matures in May 2000.
The Company estimates that capital expenditures for property, plant and
equipment during the remainder of 1999 will be less than $250,000. The Company
believes that cash, cash equivalents and marketable securities and cash flows
generated from operations are sufficient to meet current and future planned
capital expenditures. Although the Company expects that such expenditures will
be made, it has purchase commitments for only a small portion of this amount.
At September 30, 1999, the Company's material short-term unused sources of
liquidity consisted of approximately $14.0 million in cash, cash equivalents and
marketable securities and available borrowings of $240,000 under its German
subsidiary line of credit and $4.0 million under its U.S. line of credit. The
Company believes these sources and cash flow from operations will be sufficient
during the remainder of 1999 to fund working capital needs, service existing
debt and finance planned capital acquisitions.
Share Repurchase Program
Under a previously announced share repurchase program, the Company is authorized
to repurchase up to 1,123,800 shares (approximately 15.6%) of its outstanding
common stock. These purchases may be executed through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and may commence or be discontinued at any time. As of September
30, 1999, the Company has repurchased 1,016,200 shares under this repurchase
program at a total cost of approximately $7.1 million. The Company has not
repurchased shares under this plan since the second quarter of 1997 although it
still has the authority to do so.
Other
Impact of Year 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities or failure of devices with imbedded
technology.
The Company has completed an assessment of its data processing systems and will
have to modify or replace portions of its software so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project budget was initially estimated and authorized for
approximately $1 million, which included approximately $200,000 for new hardware
to be capitalized and approximately $800,000 of costs to be expensed as
incurred. The Company has completed the most significant portion of this phase
of the Year 2000 project and currently estimates that the cost of this project
will be less than the initial budgeted amount. As of September 30, 1999, the
Company has incurred and expensed approximately $300,000 and capitalized
approximately $213,000 related to this project.
The Company believes, based on its current understanding of its systems, that
with modifications to the existing software and conversions to new software, the
Year 2000 issue should not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not
properly made, or are not completed timely, the Year 2000 issue could have a
material adverse impact on the operations of the Company. The cost of the
project and the date on which the Company believes it will complete the Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, cooperation of vendors and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in the area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
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The Company has also mailed letters to its significant vendors and service
providers and has verbally communicated with many strategic customers to
determine the extent to which interfaces with such entities are vulnerable to
Year 2000 issues and whether the products and services purchased from or by such
entities are Year 2000 compliant. As of October 1999 the Company had obtained
responses from such third parties contacted and, after analyzing the responses,
believes that there is no significant risk to operations due to Year 2000
issues.
The Company is also in the process of evaluating its internal systems with
embedded technology that are subject to the Year 2000 issue. This evaluation and
any required remediation are expected to be completed before December 31, 1999.
The Company presently believes that the Year 2000 issues will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.
The Company has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning before December 31, 1999.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On September 6, 1999 David C. Bullis resigned from the Board of
Directors.
Item 6. Exhibits and Reports on Form 8-K Page
(a) Exhibits
27 Financial Data Schedule which is submitted 19
electronically to the Securities and
Exchange Commission for information purposes only
and not filed.
(b) Reports on Form 8-K
None
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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 5, 1999
By://S//Joel S. Hatlen
-----------------------
Joel S. Hatlen
Vice President - Finance
Chief Financial Officer
Secretary and Treasurer
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EXHIBIT INDEX
Exhibit Number Title Page Number
27 Financial Data Schedule which is submitted 19
electronically to the Securities and Exchange
Commission for information purposes only and
not filed.
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