<PAGE>
- --------------------------------------------------------------------------------
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 28, 1995 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, 98073-9746
(address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (206) 881-6444
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
----- -----
7,630,600 shares of no par value Common Stock outstanding as of October 25, 1995
Page 1 of 17
Exhibit Index on Page 16
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<PAGE>
DATA I/O CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 28, 1995
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
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
Exhibit 11 17
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Sept. 28, Dec. 29,
1995 1994
- ------------------------------------------------------------------------------------
(In thousands, except share data) (Unaudited) (Note 1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,488 $ 7,279
Trade accounts receivable,
less allowance for doubtful
accounts of $301 and $277 11,861 10,145
Inventories 8,462 6,937
Recoverable income taxes 0 453
Deferred income taxes 1,073 675
Other current assets 575 1,361
------- -------
TOTAL CURRENT ASSETS 30,459 26,850
Land held for sale 2,074 2,006
Property, plant and equipment - net 10,194 10,737
Other assets 4,836 3,894
------- -------
TOTAL ASSETS $47,563 $43,487
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,127 $ 1,908
Accrued compensation 3,735 3,460
Deferred revenue 5,420 5,331
Other accrued liabilities 2,691 2,786
Accrued costs of business restructuring 1,441 1,890
Income taxes payable 1,111 997
Notes payable 421 440
------- -------
TOTAL CURRENT LIABILITIES 16,946 16,812
LONG TERM DEBT 1,500 1,500
LONG TERM OTHER PAYABLES 1,105 361
DEFERRED INCOME TAXES 219 471
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, 7,630,600
and 7,431,901 shares, respectively 21,563 20,729
Retained earnings 5,760 3,185
Currency translation adjustments 470 429
------- -------
TOTAL STOCKHOLDERS' EQUITY 27,793 24,343
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $47,563 $43,487
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements
Page 3
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
- -------------------------------------------------------------------------------------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $15,648 $15,620 $47,982 $46,154
Cost of goods sold 7,663 7,239 22,357 21,985
------- ------- ------- -------
Gross margin 7,985 8,381 25,625 24,169
Operating expenses:
Research and development 2,019 2,437 6,749 6,885
Selling, general and administrative 4,870 4,583 14,942 15,011
Write-off of acquired in-process R&D 825 0 825 0
------- ------- ------- -------
Total operating expenses 7,714 7,020 22,516 21,896
------- ------- ------- -------
Operating income 271 1,361 3,109 2,273
Non-operating (income) expense:
Interest income (112) (46) (323) (76)
Interest expense 65 55 207 190
Foreign currency exchange 6 (12) 7 (5)
------- ------- ------- -------
Total non-operating (income) expense (41) (3) (109) 109
------- ------- ------- -------
Income before taxes 312 1,364 3,218 2,164
Income tax expense 68 567 644 979
------- ------- ------- -------
Net income $ 244 $ 797 $ 2,574 $ 1,185
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Net income $ 0.03 $ 0.11 $ 0.32 $ 0.16
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding 8,045 7,422 7,947 7,374
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
For the nine months ended: Sept. 28, Sept. 29,
1995 1994
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,574 $ 1,185
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,240 3,488
Write-off of acquired in-process R&D 825 0
Deferred income taxes and tax refunds (83) 2,368
Deferred revenue 100 879
Changes in current items other
than cash and cash equivalents:
Trade accounts receivable (497) (2,528)
Inventories (1,393) 1,289
Other current assets 788 366
Accounts payable and accrued liabilities (111) 834
Business restructure (449) (1,858)
------- -------
Net cash provided by operating activities 4,994 6,023
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,771) (665)
Investment in assets of acquired business (2,055) 0
(Additions to)/dispositions of other assets (198) 3
------- -------
Cash used for investing activities (4,024) (662)
FINANCING ACTIVITIES:
Additions to/(repayment of) notes payable (616) (1,439)
Sale of common stock 333 327
Proceeds from exercise of stock options 501 21
------- -------
Cash provided by/(used for) financing activities 218 (1,091)
------- -------
Increase in cash and cash equivalents 1,188 4,270
Effects of exchange rate changes on cash 21 (3)
Cash and cash equivalents - Beginning of period 7,279 1,704
------- -------
Cash and cash equivalents - End of period $ 8,488 $ 5,971
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $104 $225
Income taxes $888 $141
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE>
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENT PREPARATION
The financial statements as of September 28, 1995 and September 29, 1994,
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 29, 1994
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 quarter and nine months ended
September 28, 1995 are not necessarily indicative of the results that may be
expected for the year ending December 28, 1995. 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 29, 1994.
NOTE 2 - CLASSIFICATIONS
Certain prior period's 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):
<TABLE>
<CAPTION>
Sept. 28, Dec. 29,
1995 1994
--------- --------
<S> <C> <C>
Raw material $3,650 $3,327
Work-in-process 2,466 1,955
Finished goods 2,346 1,655
------ ------
$8,462 $6,937
------ ------
------ ------
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
<TABLE>
Sept. 28, Dec. 29,
1995 1994
--------- --------
<S> <C> <C>
Land $ 910 $ 910
Building and improvements 7,525 7,334
Equipment 22,363 21,507
------- -------
30,798 29,751
Less accumulated depreciation 20,604 19,014
------- -------
$10,194 $10,737
------- -------
------- -------
</TABLE>
Page 6
<PAGE>
NOTE 5 - ACCOUNTING FOR INCOME TAXES
Statement of Financial Accounting Standards ("SFAS") 109 requires the
establishment of deferred tax assets and liabilities for expected future tax
consequences of events that have been recognized in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and the tax basis of assets and liabilities using currently enacted
tax rates which are expected to be in effect during the years in which the
differences are anticipated to reverse.
The Company was able to reverse deferred tax asset valuation allowances for
the quarter ended September 28, 1995, due to the Company's profit generated
in the current period and utilization of alternative minimum tax credit
carryforwards. The valuation allowance for deferred tax assets decreased by
approximately $100,000 during the third quarter and $400,000 for the first
nine months of 1995 to $3.0 million as of September 28, 1995.
NOTE 6 - BUSINESS ACQUISITION
On August 31,1995, the Company acquired the assets of Reel-Tech, Inc.
(Reel-Tech) of Indianapolis, Indiana and entering into employment and
non-compete agreements with its two founding technologists. The purchase
price for the assets of Reel Tech included an initial cash payment of $2
million and assumed certain liabilities of approximately $1.2 million. The
Company has agreed to make additional payments of up to a maximum of $2.0
million over the next three years, with these payments contingent upon the
acquired operation achieving specified performance goals.
The transaction was accounted for using the purchase method. In addition to
the initial cash payment, the Company accrued approximately $700,000 of the
future contingent payment obligation. The Company recorded approximately
$1.3 million of tangible assets consisting of approximately $1.2 million of
trade receivables and approximately $100,000 of inventory. As part of the
purchase price allocation, intangible assets of approximately $1.7 million
were recorded consisting of established technology, customer base, workforce
and non-competition agreements which are being amortized over their estimated
useful lives of 5 to 7 years. The Company recorded an operating expense in
the third quarter of $825,000 related to the acquisition of in-process
research and development.
Reel-Tech designs, manufactures and sells equipment that is used in handling
and marking integrated circuits during the semiconductor manufacturing
process. Reel-Tech's revenues for the first nine months of 1995 totaled
approximately $2.0 million (excluding sales to Data I/O). For the past year,
Reel-Tech has partnered with Data I/O in the development and manufacture of
the handling portion of Data I/O's ProMaster 9500. Data I/O expects to have
as a result of the acquisition, increased sales from the semiconductor
equipment product lines and improved ProMaster 9500 gross margins by
manufacturing the handling portion of the product. With the exception of the
above discussed charge for in-process research and development, the Company
does not expect this transaction to have a material effect on earnings for
1995 or 1996, as the amortization of the capitalized portion of the purchase
price is expected to substantially offset the additional earnings generated
due to this acquisition.
Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
BUSINESS ACQUISITION
As discussed in Note 6 of ""Notes to Consolidated Financial Statements'', on
August 31, 1995 the Company acquired the assets of Reel-Tech, Inc. and
entered into employment and non-compete agreements with its two founding
technologists. The purchase included an initial cash payment of $2.0 million
and assumption of certain liabilities. The Company has agreed to make
additional payments of up to $2.0 million over the next three years, with
these payments contingent upon the acquired operation achieving specified
performance goals.
SHARE REPURCHASE PROGRAM
The Company announced on October 27, 1995 a share repurchase program in which
the Company may repurchase up to 7.5% (approximately 570,000 shares) of its
outstanding shares of common stock. These purchases may be executed through
open market purchases at prevailing market prices, through block purchases or
in privately negotiated transactions. Purchases may commence or be
discontinued at any time.
RESTRUCTURE PROGRESS
During the fourth quarter of 1993, the Company recorded a pretax charge of
$6.1 million related to the restructure of its sales and distribution
channels, downsizing its operations to a level consistent with anticipated
lower sales and product margins, and to consolidate and outsource certain
manufacturing processes. The purpose of the restructure was primarily to
reduce expenses and significantly lower the Company's break-even point in
reaction to the reduced sales and gross margins the Company was experiencing
in 1993. Additionally, the Company made several strategic changes to its
sales and distribution channels to better align distribution of the Company's
current and anticipated future products to their markets and customers. The
general downsizing of operations and restructure of the sales and
distribution system were substantially completed during the fourth quarter of
1993 and first quarter of 1994. The Company began implementation of the
planned changes to its manufacturing processes in the first quarter of 1994
for completion during 1997.
Of the total $6.1 million restructuring charge, approximately $1.9 million
remained as an accrued liability at December 29, 1994. At September 28,
1995, the remaining accrued liability was approximately $1.4 million. The
reduction during the first nine months of 1995 related primarily to
implementation of changes in manufacturing processes, facility consolidation
and abandoned office space lease payments.
As of September 28, 1995, the Company's restructuring has proceeded
approximately as planned. No significant changes were made to the Company's
restructuring plans during the third quarter of 1995. The relocation to
Redmond, Washington of the Company's Anaheim, California manufacturing
operations began during the quarter with remaining stages scheduled to occur
during the next two quarters. The Company has made significant efforts to
minimize disruption of production of the Company's automated handling
systems, most of which historically have been manufactured in Anaheim.
However, there can be no assurance that the transfer of these operations will
not cause delays in production and delivery of product or other adverse
consequences.
Page 8
<PAGE>
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- -------------------
(in thousands) 1995 1994 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $15,648 $15,620 $47,982 $46,154
Change Net Sales 0.2% 4.0%
- -----------------------------------------------------------------------------
</TABLE>
Net sales in the Company's non-automated IC programmer product lines declined
approximately 7% in the third quarter and approximately 2% in the first nine
months of 1995 compared to the same periods of 1994. The Company believes
these declines reflect the continuing market shift away from the Company's
traditional line of higher-priced IC programmers for the engineering market.
Partially offsetting these declines were increased sales of in the Company's
parallel programmer products used in the manufacturing environment and in the
combined sales of the Company's lower-priced engineering IC programmer
products, the 2700 product, introduced in the third quarter of 1995, and the
ChipLab product, the Company's lowest priced IC programmer.
The Company believes the market shift to lower-priced IC programmers has been
caused in part by advances in semiconductor processing technology that have
lowered the barriers to entry in the programmer business over the last
several years. This has caused new market entrants to appear regularly, each
trying to carve out a niche. New entrants cause downward price pressure, and
each cycle of new competitors lowers the acceptable price of a conventional
IC programmer in the customer's view. In addition, the Company believes
that there has been a shift in the demand for tools by engineering design
teams in favor of increased software design tools. These industry changes
had, and are continuing to have, an adverse effect on the Company's IC
programmer sales and gross margins, especially since the Company's products
historically have been oriented toward hardware tools and, within hardware
tools, toward higher-priced IC programmers. However, the Company believes
these trends are creating and will continue to generate increased sales for
its newer products including ChipLab, 2700 and Synario.
Sales of the Company's ProMaster line of automated handling systems for the
manufacturing environment increased by approximately 17% for third quarter
and 22% for the first nine months of 1995 compared to the same periods of
1994. Automated handling systems accounted for approximately 30% of total
revenues for the third quarter and approximately 27% for the first nine
months of 1995, compared with 25% for the third quarter and 23% for the first
nine months of 1994. A market shift in the ProMaster product mix toward
higher priced models also contributed to the sales increase. During the
third quarter, the Company shipped its second and third ProMaster 9500 units
after shipping the first unit of this product during the first quarter of
1995. The Company received orders for three more units during the third
quarter, bringing the total backlog of these units to five or $2.5 million at
September 28, 1995. However, due to the complexity of designing and
manufacturing this new product, timing of shipment of these units is
uncertain.
The Company believes the increase in sales of the Company's ProMaster and
parallel programming products reflects the expanded use of programmable
integrated circuits in the mid- to high-volume manufacturing environment.
The Company believes that in the electronic manufacturing market, the
proliferation of hard-to-handle surface mount packages in a variety of types
is causing a worldwide trend toward automation and integration of
manufacturing processes. The Company believes its line of automated handling
systems is well positioned to capitalize on this trend.
Software product sales increased by approximately 5% in the third quarter and
2% in the first nine months of 1995 compared with the same periods in 1994.
The Company's Synario software product sales increased by 82% in the third
quarter and 69% in the first nine months of 1995 compared to the same periods
in 1994. Revenues for the Synario product line comprise approximately 50% of
the total software product revenues during the third quarter of 1995 compared
with approximately 25% in the third quarter of 1994. Combined revenues for
the Company's older design software products including FutureNet, which the
Company discontinued selling in 1995, and ABEL, combined declined by
approximately 24% for the third quarter and the first nine months of 1995
compared to the same periods in 1994.
International sales were favorably impacted by foreign currency exchange rate
changes by approximately $200,000 during the third quarter of 1995 compared
to the third quarter of 1994, which was due primarily to rate changes for the
German Mark and the Japanese Yen. Currency markets fluctuate and there can
be no assurance of continued benefit from currency rate
Page 9
<PAGE>
changes. International sales were 46% of total net sales for the third
quarter of 1995 compared to 44% of total net sales in the third quarter of
1994.
GROSS MARGIN
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- -------------------
(in thousands) 1995 1994 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Margin $7,985 $8,381 $25,625 $24,169
Percentage of net sales 51.0% 53.7% 53.4% 52.4%
- -----------------------------------------------------------------------------
</TABLE>
Gross margin for the third quarter of 1995 decreased compared to the third
quarter of 1994 due primarily to lower product margins. The shift in mix of
product revenues from higher-priced and higher margin non-automated IC
programmers to the lower-priced alternatives have lowered the overall product
gross margins. In addition, the gross margin on the ProMaster 9500 was below
that of the Company's traditional handlers due to higher material and labor
costs. The Company expects these costs to decline in future periods due to
the acquisition of Reel-Tech and anticipated improvements in the proficiency
of manufacturing and service personnel in building and servicing the
ProMaster 9500. Additionally, during the third quarter, the Company incurred
higher material and labor costs on custom products and services which
resulted in a substantially lower margin than it experienced for the same
period in 1994. These gross margin decreases were partially offset by
improvements due to the positive currency effects of a weaker dollar. As
stated above, there is no assurance of continued benefit from currency rate
changes.
For the first nine months of 1995 compared to 1994 the increase in gross
margin is largely due to the increase in sales volume. In particular, the
Company achieved improved margins on automated handling system products due
to higher volume and a market shift toward higher priced models as well as
the positive currency effects of a weaker dollar. In addition, gross margin
as a percent of net sales increased largely due to the better utilization of
fixed manufacturing overhead. This occurred as a result of increased
inventory production related to the higher sales volume, as well as reduced
costs in manufacturing, service and distribution operations as a result of
the Company's restructuring.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- -------------------
(in thousands) 1995 1994 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Research and development $2,019 $2,437 $6,749 $6,885
Percentage of net sales 12.9% 15.6% 14.1% 14.9%
- -----------------------------------------------------------------------------
</TABLE>
The decrease in research and development spending compared to the third
quarter and the first nine months of 1994 is primarily due to lower personnel
and project material costs as well as higher reclassifications of costs for
custom products and services to cost of goods sold during the third quarter
of 1995. The lower personnel costs relates primarily to open job positions
during the third quarter of 1995. The lower project material costs relates to
projects, including the PSX 400, that were in a stage of high materials
spending during the third quarter of 1994. The charge for in-process
research and development acquired as part of the Reel-Tech acquisition is
discussed above in the Business Acquisition section and is not included in
the research and development amounts. The Company expects to continue its
significant investment in research and development.
The Company believes it is essential to invest in research and development to
support its existing products and to create new products as markets develop
and technologies change. The Company is focusing its research and
development efforts in its strategic growth markets, namely automated
handling systems for the manufacturing environment, Windows-based EDA
software design tools and lower-priced IC programmers.
Page 10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- ---------------------
(in thousands) 1995 1994 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Selling, general &
administrative $4,870 $4,583 $14,942 $15,011
Percentage of net sales 31.1% 29.3% 31.1% 32.5%
- ---------------------------------------------------------------------------------
</TABLE>
The increase in selling, general and administrative expenditures in the third
quarter of 1995 is due primarily to the timing of marketing expenditures. Third
quarter 1994 marketing expenditures were abnormally low as a number of programs
were delayed to more appropriately match the timing of product introductions.
The decrease in selling, general and administrative expenditures during the
first nine months of 1995 compared to 1994 is due primarily to the restructure
efforts which decreased headcount world-wide by approximately 28% and focused on
matching cost effective sales channels to the Company's products and markets.
Partially offsetting these expense reductions were increased expenses in the
Company's foreign offices, due to currency rate changes.
INTEREST
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- ---------------------
(in thousands) 1995 1994 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $112 $46 $323 $76
Interest expense $65 $55 $207 $190
- --------------------------------------------------------------------------------
</TABLE>
Interest income increased during the third quarter and first nine months of 1995
compared with 1994, primarily due to an increase in the average level of funds
available for investment. In addition, the interest rate earned on investments
was approximately one percentage point higher in the third quarter of 1995
compared to the same period of 1994.
INCOME TAXES
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- ---------------------
(in thousands) 1995 1994 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income taxes $68 $567 $644 $979
Effective tax rate 22% 42% 20% 45%
- --------------------------------------------------------------------------------
</TABLE>
The Company's effective tax rate for the third quarter and the first nine months
of 1995 differed from the statutory 34% tax rate primarily due to the reversal
of tax valuation reserves. The valuation reserves reversed primarily due to the
Company utilizing net operating loss and alternative minimum tax credit
carryforwards. The Company has valuation reserves of $3 million that may
continue to reverse as the Company records income. The Company believes these
potential reversing valuation reserves may continue to substantially reduce its
effective tax rate from the statutory rate during the balance of 1995.
Page 11
<PAGE>
NET INCOME AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- ---------------------
(in thousands) 1995 1994 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $244 $797 $2,574 $1,185
Earnings per share $0.03 $0.11 $0.32 $0.16
- --------------------------------------------------------------------------------
</TABLE>
The decrease in net income and earnings per share compared with the third
quarter of 1994 is due to the charge of $660,000 net of tax or $0.08 per share
for in-process research and development related to the Reel Tech acquisition.
For the first nine months of 1995 compared to the same period in 1994 the
increase in net income is primarily due to increased sales volume, a higher
gross margin percentage, reduced costs and operating expenses resulting from the
Company's restructure of its operations and the reversal of deferred tax
valuation reserves. These improvements were partially offset by the
acquisition related charge.
INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
Historically, the Company has been able to offset the impact of inflation
through efficiency increases and price adjustments. Increasing price
competition, especially in IC programmers, is currently diminishing and may
continue to diminish the Company's ability to offset the impacts of inflation in
the future.
Sales and expenses incurred by foreign subsidiaries are denominated in the
subsidiary's local currency and translated into U.S. dollar amounts at average
rates of exchange during the year. Exchange rates impact absolute U.S. dollar
amounts but do not have a significant impact on the percentage of net sales
ratios. Because only approximately one-third of the Company's sales are made by
foreign subsidiaries and independent currency fluctuations tend to minimize the
effect of any individual currency exchange, fluctuations to date in foreign
currency rates have not significantly impacted the Company's overall financial
results.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
Sept. 28, Dec. 29,
(in thousands) 1995 Change 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital $13,513 $3,475 $10,038
Total debt $1,921 ($19) $1,940
- --------------------------------------------------------------------------------
</TABLE>
Working capital increased during the third quarter and first nine months of 1995
primarily due to funds provided by operations.
The Company's trade accounts receivable decreased by approximately $600,000
during the third quarter. However, trade receivables increased by approximately
$1.7 million over the first nine months of 1995. This increase relates to
acquired Reel-Tech receivables, a higher percentage of international sales,
which have longer collection periods and a general increase in the collection
period related to automated handling products. The Company also increased its
inventory level by approximately $600,000 in the third quarter and $1.5 million
in the first nine months. This increase is primarily to support the growth in
the automated handling systems volume as well as to provide a level of safety
stock during the Anaheim factory relocation. Additionally, inventory increased
approximately $100,000 due to the Reel-Tech acquisition. The Company reduced
its other current assets by approximately $800,000 primarily due to the
collection of former lease deposits. Other long term assets increased by $1.4
million during the third quarter reflecting the capitalization of intangible
assets purchased from Reel-Tech. The Company's other long term payables
increased approximately $700,000 due to the accrual of a contingent future
payment obligation related to the Reel-Tech acquisition. Funding for these
changes was provided primarily by operations and approximately $800,000 in stock
sale proceeds under the Company's employee stock benefit plans.
Page 12
<PAGE>
As of September 28, 1995, the Company had total debt of $1.9 million or
approximately 7% of its $27.8 million in equity. Of this debt, $1.5 million is a
note payable due in 1998 for the balance of the purchase price of the CAD/CAM
Group. The remaining $421,000 is current debt, consisting entirely of
borrowings on the Company's $1.5 million foreign line of credit.
No borrowings were outstanding under the Company's $8.0 million U.S. line of
credit.
The U.S. line of credit was renewed in May of 1995 and matures in 1996. The
foreign line of credit matures in November 1995. Historically, these credit
lines have been structured as short-term and have been renewed on their maturity
dates. The Company currently expects to be able to renew these lines of credit
on maturity under substantially the same terms as those presently in place.
The Company estimates that capital expenditures for property, plant and
equipment during the remainder of 1995 will be approximately $1.0 million. Such
expenditures are currently expected to be funded from internally generated funds
and, if necessary, borrowings under the Company's existing credit lines.
Although the Company fully expects that such expenditures will be made, it has
purchase commitments for only a small portion of these amounts.
At September 28, 1995, the Company's material short-term unused sources of
liquidity consisted of approximately $8.5 million in cash and cash equivalents,
available borrowings of $8.0 million under its U.S. line of credit and available
borrowings of approximately $1.1 million under its foreign line of credit. The
Company believes that cash, cash flow from operations and borrowings available
under its U.S. and foreign lines of credit will be sufficient to fund working
capital needs, service existing debt, finance planned capital expenditures, fund
the Company's share repurchase program and fund its remaining restructure
accrued liabilities. In addition, if the Company's is successful in selling its
land held for sale, additional capital will be available.
Page 13
<PAGE>
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
- ------- -----------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K PAGE
- ------- -------------------------------- ----
(a) Exhibits
11. Statement Regarding Computation
of Earnings Per Share 17
(b) A report on Form 8-K dated November 6,
1995, was filed relating to the acquisition
of all the assets of Reel Tech, Inc. N/A
Page 14
<PAGE>
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 6, 1995
By: /S/ Steven M. Gordon
------------------------------------
Steven M. Gordon
Vice President
Finance and Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurer
Page 15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Title Page Number
- -------------- ------------------------------------------ -----------
<S> <C> <C>
11 Statement Regarding Computation of Earnings
per Share 17
</TABLE>
Page 16
<PAGE>
EXHIBIT 11
DATA I/O CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Earnings per share reported in Form 10-Q for the quarters ended September 28,
1995, and September 29, 1994 are based on the following (In thousands):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
---------------------- -----------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
Primary and fully diluted: 1995 1994 1995 1994
- -------------------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted Average Shares
Outstanding 7,613 7,372 7,539 7,334
Dilutive Effect of Stock
Options 432 50 408 40
----- ----- ----- -----
Weighted Average Common
and Equivalent Shares
Outstanding 8,045 7,422 7,947 7,374
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Page 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1995
<PERIOD-START> DEC-30-1994
<PERIOD-END> SEP-28-1995
<CASH> 8,488
<SECURITIES> 0
<RECEIVABLES> 12,162
<ALLOWANCES> 301
<INVENTORY> 8,462
<CURRENT-ASSETS> 30,459
<PP&E> 30,798
<DEPRECIATION> 20,604
<TOTAL-ASSETS> 47,563
<CURRENT-LIABILITIES> 16,946
<BONDS> 0
<COMMON> 21,563
0
0
<OTHER-SE> 6,230
<TOTAL-LIABILITY-AND-EQUITY> 47,563
<SALES> 47,982
<TOTAL-REVENUES> 47,982
<CGS> 22,357
<TOTAL-COSTS> 22,480
<OTHER-EXPENSES> (316)
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 207
<INCOME-PRETAX> 3,218
<INCOME-TAX> 644
<INCOME-CONTINUING> 2,574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,574
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
