<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 26, 1996 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
----- -----
6,774,720 shares of no par value Common Stock outstanding as of November 4, 1996
Page 1 of 17
Exhibit Index on Page 16
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DATA I/O CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 26, 1996
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
- --------------------------------------------------------------------------------
Sept. 26, Dec. 28,
1996 1995
- --------------------------------------------------------------------------------
(in thousands, except share data) (Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,877 $ 4,496
Trade accounts receivable,
less allowance for doubtful
accounts of $401 and $311 9,294 13,115
Inventories 9,042 8,539
Deferred income taxes 1,014 976
Other current assets 530 893
------------ ------------
TOTAL CURRENT ASSETS 24,757 28,019
Land held for sale 2,185 2,095
Property, plant and equipment - net 10,046 10,240
Other assets 3,444 4,422
------------ ------------
TOTAL ASSETS $40,432 $44,776
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,880 $ 2,071
Accrued compensation 3,328 3,612
Deferred revenue 5,600 5,436
Other accrued liabilities 3,394 2,672
Accrued costs of business restructuring 465 965
Income taxes payable 489 1,141
Notes payable 109 117
------------ ------------
TOTAL CURRENT LIABILITIES 15,265 16,014
LONG TERM DEBT 1,500 1,500
LONG TERM OTHER PAYABLES 490 1,117
DEFERRED INCOME TAXES 462 216
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, 6,774,470
and 7,083,825 shares, respectively 15,229 17,528
Retained earnings 7,044 7,946
Currency translation adjustments 442 455
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 22,715 25,929
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,432 $44,776
------------ ------------
------------ ------------
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. 26, Sept. 28, Sept. 26, Sept. 28,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $14,529 $15,648 $45,493 $47,982
Cost of goods sold 7,344 7,663 23,174 22,357
---------- ---------- ---------- ----------
Gross margin 7,185 7,985 22,319 25,625
Operating expenses:
Research and development 2,815 2,019 7,941 6,749
Selling, general and administrative 4,575 4,870 14,967 14,942
Write-off of acquired in-process R&D 0 825 0 825
---------- ---------- ---------- ----------
Total operating expenses 7,390 7,714 22,908 22,516
---------- ---------- ---------- ----------
Operating income (loss) (205) 271 (589) 3,109
Non-operating (income) expense:
Interest income (46) (112) (147) (323)
Interest expense 61 65 194 207
Foreign currency exchange 1 6 5 7
---------- ---------- ---------- ----------
Total non-operating (income) expense 16 (41) 52 (109)
---------- ---------- ---------- ----------
Income (loss) before taxes (221) 312 (641) 3,218
Income tax expense 37 68 261 644
---------- ---------- ---------- ----------
Net income (loss) ($258) $244 ($902) $2,574
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share:
Net income (loss) ($0.04) $0.03 ($0.13) $0.32
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 6,773 8,045 6,884 7,947
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
For the nine months ended: Sept. 26, Sept. 28,
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net income (loss) ($902) $2,574
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,031 3,240
Write-off of acquired in-process R&D 0 825
Deferred income taxes and tax refunds (443) (83)
Deferred revenue 154 100
Changes in current items other
than cash and cash equivalents:
Trade accounts receivable 3,786 (497)
Inventories (503) (1,393)
Other current assets 361 788
Accounts payable and accrued liabilities (320) (111)
Business restructure (564) (449)
---------- ----------
Net cash provided by operating activities 4,600 4,994
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,899) (1,771)
Investment in assets of acquired business 0 (2,055)
Additions to other assets 0 (198)
---------- ----------
Cash used for investing activities (1,899) (4,024)
FINANCING ACTIVITIES:
Additions to/(repayment of) notes payable (9) (616)
Sale of common stock 154 333
Repurchase of common stock (3,026) 0
Proceeds from exercise of stock options 574 501
---------- ----------
Cash provided by/(used for) financing activities (2,307) 218
---------- ----------
Increase in cash and cash equivalents 394 1,188
Effects of exchange rate changes on cash (13) 21
Cash and cash equivalents - Beginning of period 4,496 7,279
---------- ----------
Cash and cash equivalents - End of period $4,877 $8,488
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $89 $104
Income taxes $517 $888
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 26, 1996 and September 28, 1995, 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 28, 1995 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 26, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 26, 1996.
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 28, 1995.
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):
Sept. 26, Dec. 28,
1996 1995
------------ ------------
Raw material $4,978 $4,839
Work-in-process 2,466 2,125
Finished goods 1,598 1,575
------------ ------------
$9,042 $8,539
------------ ------------
------------ ------------
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Sept. 26, Dec. 28,
1996 1995
------------ ------------
Land $ 910 $ 910
Building and improvements 7,627 7,539
Equipment 22,359 22,329
------------ ------------
30,896 30,778
Less accumulated depreciation 20,850 20,538
------------ ------------
$10,046 $10,240
------------ ------------
------------ ------------
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 unable to record a benefit for its pre-tax losses, or offset its
foreign taxes for the quarter ended September 26, 1996. The Company recorded
deferred tax asset valuation allowances due to the Company's loss generated in
the current period and the inability to utilize foreign tax credits. The
valuation allowance for deferred tax assets increased by approximately $100,000
during the third quarter and $500,000 for the first nine months of 1996 to $3.1
million as of September 26, 1996.
Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
AGREEMENT TO PURCHASE MINORITY INTEREST IN BUSINESS
On April 25, 1996 the Company announced it had reached an agreement in principle
to purchase a minority interest in Needham's Electronics and to enter into a
worldwide distribution agreement for Needham's Electronics' programmer products.
Completion of the minority investment and creation of the distribution rights
are subject to negotiation of definitive agreements and satisfaction of certain
conditions. The Company continues to negotiate the definitive agreement. Due to
the complexity of the transaction and certain conditions which must be
satisfied, there is no assurance that this transaction will be completed.
SHARE REPURCHASE PROGRAM
The Company announced on October 27, 1995 a share repurchase program which
authorized the Company to repurchase up to 7.5% (approximately 570,000 shares)
of its outstanding shares of common stock. On February 21, 1996 the Company
announced an extension of the share repurchase program which authorized the
Company to repurchase up to an additional 8% (approximately 570,000 shares) 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. Purchases may commence or be discontinued at
any time. At September 26, 1996 the Company had repurchased an aggregate of
1,015,700 shares at a total cost of approximately $7.1 million since inception
of the share repurchase program.
SALE OF HEADQUARTERS PROPERTY
The Company announced on July 18, 1996 that it had reached an agreement to sell
the land and building comprising its Redmond, Washington headquarters campus for
approximately $14.0 million to a major real estate company. The transaction
would include a lease back of the building by Data I/O for ten years with
options for an additional ten years. Data I/O's corporate headquarters campus
includes the Company's 96,000 square foot building and approximately 79 acres of
land. The Company had been marketing a portion of the land on its headquarters
campus for the past five years and in 1995 decided to market the building to
enhance the value of the entire property.
Closing of the sale is subject to the buyer's due diligence and a number of
conditions and contingencies, including a zoning variance and other governmental
approvals, which are not currently expected to be resolved until late this year
or early 1997. As closing of the sale is subject to a number of conditions and
government approvals, there can be no assurance that the sale will be
consummated. If consummated, this sale is expected to result in a pre-tax gain
of approximately $5.8 million. Approximately $2.0 million of this gain would be
recognized upon the closing of the sale, with the balance amortized over the
initial ten-year lease term. The Company expects to realize approximately $12.0
million in cash after payment of transaction fees and income taxes.
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 reduced sales
and gross margins 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 in 1994. The Company began
implementation of the planned changes to its manufacturing processes in 1994 for
completion in 1997. The manufacturing consolidation and relocation project was
completed in the first quarter of 1996, and the outsourcing of certain
manufacturing processes is scheduled to be completed in 1997.
Of the total $6.1 million restructuring charge, approximately $965,000 remained
as an accrued liability at December 28, 1995. At September 26, 1996, the
remaining accrued liability was approximately $465,000. The reduction during
the first nine months of 1996 related primarily to implementation of changes in
manufacturing processes, facility consolidation and office space lease payments.
Page 8
<PAGE>
As of September 26, 1996, the Company's restructuring has proceeded as planned.
No significant changes were made to the Company's restructuring plans during the
third quarter of 1996.
FORWARD-LOOKING STATEMENTS
Although most of the information contained in this report is historical, certain
of the statements contain forward-looking information. To the extent these
statements express or imply, without limitation, product development and
introduction plans, the Company's expectations for growth, estimates of future
revenue, expenses, profit, cash flow, balance sheet items, sell-through or
backlog, forecasts of demand or market trends for the Company's various product
categories and for the industries in which the Company operates or any other
guidance on future periods, these statements are forward-looking and involve
matters which are subject to a number of known and unknown risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. Readers of this report should
consider, along with other relevant information, the risk factors identified by
the Company under the caption "Risk Factors" in Item 1 and elsewhere in the
Company's Annual Report on Form 10-K for the year ended December 28, 1995, and
other risks identified from time to time in the Company's filings with the
Securities and Exchange Commission, press releases and other communications.
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Third Quarter First Nine Months
---------------------------------------- -----------------------------------------
Net sales by division (in thousands) 1996 1995 % Change 1996 1995 % Change
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Programming Systems Division:
Non-automated programming systems $9,138 $9,919 (7.9%) $26,793 $31,684 (15.4%)
Automated programming systems 3,310 4,596 (28.0%) 12,067 12,955 (6.9%)
---------- ---------- ---------- ---------- ---------- ----------
Total Programming Systems Division 12,448 14,515 (14.2%) 38,860 44,639 (12.9%)
Synario Design Automation Division 1,385 1,133 22.2% 3,853 3,343 15.2%
Semiconductor Equip. Div. (Reel-Tech) 696 2,780
---------- ---------- ---------- ---------- ---------- ----------
Net sales $14,529 $15,648 (7.2%) $45,493 $47,982 (5.2%)
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Third Quarter First Nine Months
---------------------------------------- -----------------------------------------
Net sales by location (in thousands) 1996 1995 % Change 1996 1995 % Change
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States $7,889 $8,374 (5.8%) $22,687 $25,839 (12.2%)
% of total 54.3% 53.5% 49.9% 53.9%
International $6,640 $7,274 (8.7%) $22,806 $22,143 3.0%
% of total 45.7% 46.5% 50.1% 46.1%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company experienced an overall decline in sales and orders for the Company's
products during the third quarter of 1996. Orders declined approximately 12% to
$13.7 million in the third quarter of 1996, compared with $15.6 million in the
third quarter of 1995. Based on normal seasonality, current order rates and
current plans for introduction of enhanced or new products, the Company
currently expects fourth quarter sales to be somewhat higher than the third
quarter of 1996, but lower than the fourth quarter of 1995.
Page 9
<PAGE>
The Company believes the declines in overall Programming Systems Division sales
and orders were primarily due to a slowdown in capital spending by electronics
manufacturing companies in the United States and Europe which reduced the demand
for the Division's products. The Company believes that the economic slowdown in
capital spending for electronics manufacturing equipment has bottomed out. The
Company believes that increased competition, in areas where new Data I/O product
introductions will not occur until 1997, is also affecting sales. The Company's
current expectations are that most of these new products will not be available
in production quantities until the second half of 1997. In addition, the
Company believes the declines in non-automated programming systems also reflect
the continuing market shift away from the Company's traditional line of higher-
priced IC programmers for the engineering market, toward lower-priced
programmers.
The Company believes the market shift toward 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 technological
improvements in personal computers and design software tools have caused a shift
in the demand for IC design tools by engineering design teams away from hardware
tools 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 that recent changes in programmable IC technology,
such as increasingly complex logic ICs and higher pin counts, and the increasing
need for higher quality and high volume programming by users of programmable ICs
means that there is a significant market need for more sophisticated programmers
and automated programming systems. The Company currently has development
projects underway for new programmer and automation technology to attempt to
better meet the needs created by these technology changes.
The Company believes the declines in overall automated handling systems sales
and orders in the third quarter and first nine months of 1996 were primarily due
to the slowdown in capital spending by electronics manufacturing companies. The
Company believes that in the electronic manufacturing market, the expanded use
of programmable integrated circuits in the mid- to high-volume manufacturing
environment and 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 continues to believe that its product
line, as well as the products under development, will keep the Company in a
position to capitalize on the trend toward automation and integration of
manufacturing processes.
Sales of Reel-Tech's semiconductor equipment products were primarily from
backlog. The Company believes there is a slowdown in capital spending due to
overcapacity and price competition by DRAM semiconductor manufacturers, among
Reel-Tech's primary customers, and that this has slowed the growth of Reel-Tech
in recent periods.
The Company experienced a decrease in international sales during the third
quarter due to the slowdown in capital spending by electronics manufacturing
companies in Europe and the negative impact of foreign currency exchange rate
changes. Partially offsetting the European sales decrease were increased sales
in Asia. The foreign currency exchange rate changes reduced sales by
approximately $400,000 during the third quarter and $1.4 million during the
first nine months of 1996 compared to the same periods in 1995. These declines
were due primarily to rate changes for the German Mark and the Japanese Yen.
GROSS MARGIN
Third Quarter First Nine Months
------------- -----------------
(in thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------------
Gross Margin $7,185 $7,985 $22,319 $25,625
Percentage of net sales 49.5% 51.0% 49.1% 53.4%
- --------------------------------------------------------------------------
Gross margins for the third quarter and the first nine months of 1996 declined
both in amount and as a percentage of sales compared to the same periods in the
prior year due primarily to lower volumes, lower product margins and increases
in
Page 10
<PAGE>
inventory reserves. The relatively high fixed component of cost of goods sold
causes any swing in total volume to have a significant impact on gross margin.
The shift in mix of product revenues from software to hardware and from higher-
priced and higher-margin non-automated programming systems to the lower-priced
alternatives has lowered the overall product gross margins. Also contributing to
the decline of gross margin was the strengthening of the U.S. Dollar in relation
to the Japanese Yen and the German Mark, in which approximately 20% of the
Company's sales are denominated.
RESEARCH AND DEVELOPMENT
Third Quarter First Nine Months
------------- -----------------
(in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Research and development $2,815 $2,019 $7,941 $6,749
Percentage of net sales 19.4% 12.9% 17.5% 14.1%
- ------------------------------------------------------------------------------
The increase in research and development spending compared to the third quarter
and the first nine months of 1995 is primarily due to the inclusion of expenses
for the Company's Reel-Tech subsidiary acquired in August of 1995, additional
product development projects, including those related to products slated for
introduction in 1997, and increased compensation costs. 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 new programming technology,
automated handling systems for the manufacturing environment, Windows-based EDA
software design tools and semiconductor handling equipment.
SELLING, GENERAL AND ADMINISTRATIVE
Third Quarter First Nine Months
------------- -----------------
(in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Selling, general & administrative $4,575 $4,870 $14,967 $14,942
Percentage of net sales 31.5% 31.1% 32.9% 31.1%
- ------------------------------------------------------------------------------
The decrease in selling, general and administrative expenditures during the
third quarter of 1996 relative to 1995 is primarily due to decreased incentive
compensation and decreased expenses in the Company's foreign offices, due to
currency rate changes.
The increase in selling, general and administrative expenditures during the
first nine months of 1996 relative to 1995 is due primarily to the inclusion of
expenses for the Company's Reel-Tech subsidiary acquired in August of 1995.
Partially offsetting these expense increases were decreased incentive
compensation and decreased expenses in the Company's foreign offices, due to
currency rate changes.
Page 11
<PAGE>
INTEREST
Third Quarter First Nine Months
------------- -----------------
(in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Interest income $46 $112 $147 $323
Interest expense $61 $65 $194 $207
- ------------------------------------------------------------------------------
Interest income decreased during the third quarter and first nine months of 1996
compared with 1995, primarily due to a decrease in the average level of funds
available for investment and a decrease in the average investment interest
rates.
INCOME TAXES
Third Quarter First Nine Months
------------- -----------------
(in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Income taxes $37 $68 $261 $644
Effective tax rate N/A 22% N/A 20%
- ------------------------------------------------------------------------------
The Company's effective tax rate for the third quarter and the first nine months
of 1996 differed from the statutory 34% tax rate primarily due to recording
additional deferred tax valuation reserves. The valuation reserves increased
primarily due to the Company's inability to record a benefit for its net
operating loss and foreign tax credits. The Company has valuation reserves of
approximately $3.1 million that may increase should the Company continue to
experience losses or reverse as the Company records income.
NET INCOME AND EARNINGS PER SHARE
Third Quarter First Nine Months
------------- -----------------
(in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Net income ($258) $244 ($902) $2,574
Earnings per share ($0.04) $0.03 ($0.13) $0.32
- ------------------------------------------------------------------------------
The decrease in net income and earnings per share compared with the third
quarter and first nine months of 1995 is primarily due to a combination of
decreased sales volume, a lower gross margin percentage, increased costs and
operating expenses resulting from the Company's acquisition of Reel-Tech as well
as spending on new development projects and recording of deferred tax valuation
reserves.
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.
Page 12
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Sept. 26, Dec. 28,
(in thousands) 1996 Change 1995
- ------------------------------------------------------------------------------
Working capital $9,492 ($2,513) $12,005
Total debt $1,609 ($8) $1,617
- ------------------------------------------------------------------------------
Working capital decreased during the third quarter and first nine months of 1996
primarily due to funds used to repurchase common stock as discussed above. This
decrease was partially offset by funds provided by operations.
The Company's trade accounts receivable decreased by approximately $2.5 and $3.8
million during the third quarter and first nine months of 1996 respectively.
This decrease was primarily due to decreased sales volume during the first nine
months of 1996. The Company decreased its inventory level by $755,000 during
the third quarter partially offsetting increases in previous quarters resulting
in an overall net increase in inventory of approximately $503,000 for the first
nine months of 1996. The inventory increase during the first half of 1996 was
primarily due to having purchased inventory in anticipation of a higher sales
volume than occurred, to support anticipated growth in the Semiconductor
Equipment products as well as to provide a level of safety stock during the
Anaheim factory relocation which was completed in March 1996. The Company
expects to continue to reduce its inventory during the next quarter to better
align inventory levels to the sales volume.
As of September 26, 1996, the Company had total debt of $1.6 million or
approximately 7% of its $22.7 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 $109,000 is current debt, consisting entirely of
borrowings on the Company's $1.4 million foreign line of credit. No borrowings
were outstanding under the Company's $8.0 million U.S. line of credit.
The Company's U.S. line of credit was renewed in May of 1996 and matures in May
of 1997. The foreign line of credit matures in November of 1996. 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. No assurances can be made however, in regard to the renewal
of these agreements if the Company continues to experience losses.
The Company estimates that capital expenditures for property, plant and
equipment during the remainder of 1996 will be approximately $500,000. 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 this amount.
At September 26, 1996, the Company's material short-term unused sources of
liquidity consisted of approximately $4.9 million in cash and cash equivalents,
available borrowings of $8.0 million under its U.S. line of credit and available
borrowings of approximately $1.3 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
anticipated working capital needs, service existing debt, finance planned
capital expenditures, fund the Company's share repurchase program, fund its
remaining restructure accrued liabilities, fund the minority investment in
Needham's Electronics and fund the Reel-Tech contingent payment obligations. In
addition, if the Company is successful in completing the sale of its property
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) Reports on Form 8K
None
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, 1996
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
Exhibit
Number Title Page Number
- ------- ------------------------------------------------------ -----------
11 Statement Regarding Computation of Earnings per Share 17
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 26,
1996, and September 28, 1995 are based on the following (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
Primary and fully diluted: 1996 1995 1996 1995
-------------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding 6,773 7,613 6,884 7,539
Dilutive Effect of Stock Options 432 408
--------- ---------- ---------- ----------
Weighted Average Common and
Equivalent Shares Outstanding 6,773 8,045 6,884 7,947
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
Page 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000351998
<NAME> DATA I/O CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1996
<PERIOD-START> DEC-29-1995
<PERIOD-END> SEP-26-1996
<CASH> 4,877
<SECURITIES> 0
<RECEIVABLES> 9,695
<ALLOWANCES> 401
<INVENTORY> 9,042
<CURRENT-ASSETS> 24,757
<PP&E> 30,896
<DEPRECIATION> 20,850
<TOTAL-ASSETS> 40,432
<CURRENT-LIABILITIES> 15,265
<BONDS> 1,500
0
0
<COMMON> 15,229
<OTHER-SE> 7,486
<TOTAL-LIABILITY-AND-EQUITY> 40,432
<SALES> 45,493
<TOTAL-REVENUES> 45,493
<CGS> 23,174
<TOTAL-COSTS> 22,822
<OTHER-EXPENSES> (142)
<LOSS-PROVISION> 86
<INTEREST-EXPENSE> 194
<INCOME-PRETAX> (641)
<INCOME-TAX> 261
<INCOME-CONTINUING> (902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (902)
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
