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 24, 1998 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 [ ]
7,186,851 shares of no par value Common Stock outstanding as of November 3, 1998
Page 1 of 19
Exhibit Index on Page 19
<PAGE>
DATA I/O CORPORATION
FORM 10-Q
For the Quarter Ended September 24, 1998
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 17
Item 2.Changes in Securities 17
Item 3.Defaults Upon Senior Securities 17
Item 4.Submission of Matters to a Vote of Security Holders 17
Item 5.Other Information 17
Item 6.Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter Ended Nine Months Ended
- ---------------------------------------------------------------------------------------
Sept. Sept. Sept. Sept.
24, 25 24, 25,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $8,028 $11,762 $25,236 $35,027
Cost of goods sold 6,925 5,442 16,948 17,153
-------- -------- -------- --------
Gross margin 1,103 6,320 8,288 17,874
Operating expenses:
Research and development 2,022 1,904 6,833 5,939
Selling, general and administrative 3,526 3,460 10,625 10,522
Restructure Expenses 2,039 2,039
-------- -------- -------- --------
Total operating expenses 7,587 5,364 19,497 16,461
-------- -------- -------- --------
Operating income (loss) (6,484) 956 (11,209) 1,413
Non-operating income (expense):
Interest income 375 240 1,226 438
Interest expense (14) (53) (63) (164)
Foreign currency exchange 2 (13) (1) (27)
Net gain (loss) on dispositions (1) (355) 2,347
-------- -------- -------- --------
Total non-operating income 363 173 807 2,594
Income (loss) from continuing operations
-------- -------- -------- --------
before income taxes (6,121) 1,129 (10,402) 4,007
Income tax expense (benefit) 257 (307) 294 122
-------- -------- -------- --------
Income (loss) from continuing operations (6,378) 1,436 (10,696) 3,885
Income (loss) from discontinued operations, net 158 (452) 865 (1,475)
of taxes
-------- -------- -------- --------
Net income (loss) ($6,220) $984 ($9,831) $2,410
======== ======== ======== ========
Basic earnings (loss) per share:
From continuing operations ($0.89) $0.21 ($1.50) $0.56
From discontinued operations $0.02 ($0.07) $0.12 ($0.21)
-------- -------- -------- --------
Total basic earnings (loss) per share ($0.87) $0.14 ($1.38) $0.35
======== ======== ======== ========
Diluted earnings (loss) per share:
From continuing operations ($0.89) $0.20 ($1.50) $0.55
From discontinued operations $0.02 ($0.06) $0.12 ($0.21)
-------- -------- -------- --------
Total diluted earnings (loss) per share ($0.87) $0.14 ($1.38) $0.34
======== ======== ======== ========
Weighted average shares outstanding 7,174 6,945 7,143 6,880
======== ======== ======== ========
Weighted average and potential shares 7,174 7,186 7,143 7,039
outstanding ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
Sept. 24, Dec. 25,
1998 1997
- ------------------------------------------------------------------------------
(in thousands, except share data) (unaudited) (note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $5,346 $8,113
Marketable securities 20,091 24,855
Trade accounts receivable, less allowance for
doubtful accounts of $412 and $394 4,973 5,678
Inventories 6,513 8,158
Recoverable income taxes 1,603
Deferred income taxes 1,199 1,990
Other current assets 1,300 3,910
---------- ----------
TOTAL CURRENT ASSETS 41,025 52,704
Property, plant and equipment - net 2,511 3,389
Other assets 1,113 532
Deferred income taxes 308 1,111
---------- ----------
TOTAL ASSETS $44,957 $57,736
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,351 $3,760
Accrued compensation 3,072 2,958
Deferred revenue 3,649 4,795
Accrued cost of business restructuring 1,054
Other accrued liabilities 4,474 3,117
Income taxes payable 937 2,848
Notes payable and current maturities of long-term 403 2,000
debt
---------- ----------
TOTAL CURRENT LIABILITIES 15,940 19,478
Long-term other payables 561
Deferred gain on sale of property 2,835 3,083
---------- ----------
TOTAL LIABILITIES 18,775 23,122
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, 7,186,851
and 7,038,786 shares 17,093 16,412
Retained earnings 8,514 18,345
Unrealized loss on marketable securities (732)
Cumulative translation adjustment 575 589
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 26,182 34,614
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,957 $57,736
========== ==========
See notes to consolidated financial statements.
<PAGE>
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
For the nine months ended: September September
24, 25,
1998 1997
- --------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Income (loss) from continuing operations ($10,696) $3,885
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,544 1,797
Deferred income taxes 1,595 (1,205)
Deferred revenue (1,146) (221)
Amortization of deferred gain on sale (248) (130)
Net change in:
Trade accounts receivable 694 (1,530)
Inventories 1,645 850
Recoverable income taxes (1,603) 474
Other current assets 2,610 (71)
Restructure reserve 974 (221)
Accounts payable and accrued liabilities (2,337) 2,874
-------- ------------
Cash provided by (used in) operating activities of (6,969) 6,502
continuing operations
Cash provided by (used in) operating activities of 865 (1,836)
discontinued operations -------- ------------
Net cash provided by (used in) operating activities (6,104) 4,666
INVESTING ACTIVITIES:
Additions to property, plant and equipment (326) (3,936)
Net proceeds on sale of property 13,421
Investment in other assets (979)
Minority interest 73
Purchases of marketable securities (20,321) (15,776)
Proceeds from sales of marketable securities 25,816 1,000
-------- ------------
Cash provided by (used in) investing activities 4,263 (5,291)
FINANCING ACTIVITIES:
Additions to (repayment of) notes payable (1,601) 525
Sale of common stock 259 345
Proceeds from exercise of stock options 423 517
Repurchase of common stock (3)
-------- ------------
Cash provided by (used in) financing activities (919) 1,384
-------- ------------
Increase (decrease) in cash and cash equivalents (2,760) 759
Effects of exchange rate changes on cash (7) 8
Cash and cash equivalents at beginning of year 8,113 4,048
-------- ------------
Cash and cash equivalents at end of year $5,346 $4,815
======== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $60 $124
Income taxes $2,130 $918
See notes to consolidated financial statements.
<PAGE>
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENT PREPARATION
The financial statements as of September 24, 1998 and September 25, 1997, 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 25, 1997 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 ended September 24, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. 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 25, 1997. Certain prior period's balances have been
reclassified to conform to the presentation used in the current period.
As of December 26, 1997, the Company adopted SFAS 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments to be
included in other comprehensive income. During the third quarter of 1998 and
1997, total comprehensive income (loss), which includes net income (loss) and
other comprehensive income, amounted to ($6,222,000) and $996,000, respectively.
During the first nine months of 1998 and 1997, total comprehensive income (loss)
amounted to ($9,844,000) and $2,393,000, respectively.
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in 2000. The Company currently uses only foreign currency hedge
derivative instruments which, at a given date, are not material. Therefore
management does not anticipate that the adoption of SFAS No. 133 will have a
significant effect on earnings or the financial condition of the Company.
NOTE 2 - INVENTORIES
Inventories consisted of the following components (in thousands):
Sept. 24, Dec. 25,
1998 1997
------------ ------------
Raw material $2,084 $2,965
Work-in-process 1,703 2,470
Finished goods 2,726 2,723
============ ============
$6,513 $8,158
============ ============
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Sept. 24, Dec. 25,
1998 1997
------------ ------------
Building and improvements $ 15 $ 83
Equipment 21,679 21,493
------------ ------------
21,794 21,576
Less accumulated 19,283 18,187
depreciation ============ ============
$2,511 $ 3,389
============ ============
<PAGE>
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 to MINC Washington
Incorporated. These transactions discontinue the Semiconductor Equipment
Division and Synario Design Automation Division operations of the Company.
However, the Company is entitled to receive and may realize certain licensing
revenues related to its former Synario, ABEL and ECS products through December
31, 1999, and will recognize revenue in 1998 from source code sales as well as
training and support services provided. Operating results of these discontinued
divisions are classified as discontinued operations in the financial statements.
NOTE 5 - PROVISION FOR BUSINESS RESTRUCTURING
During the third quarter 1998 the Company began implementation of its previously
announced restructuring plan of approximately $3 million related to the
restructure of its operations to a level more in line with the lower sales it is
experiencing. With the implementation of this restructuring plan the Company's
objective is to reduce its corporate overhead and 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.
The $2.0 million restructuring charge for the third quarter consisted primarily
of employee severance costs of approximately $1 million, write-downs of certain
fixed assets of approximately $570,000, facility consolidation costs of
approximately $330,000, and legal and consulting costs of approximately
$100,000. As the Company continues to implement its restructuring plan it will
record further restructuring charges in the fourth quarter and in 1999, related
primarily to the Company's foreign sales and support subsidiaries, manufacturing
changes and remaining workforce reductions.
Related primarily to its restructuring plan the Company recorded inventory
reserves during the quarter of approximately $2.3 million on products that will
be discontinued as a result of the business restructuring. These reserves are
included in cost of goods sold for the third quarter. In addition, the Company
incurred operating expenses of approximately $220,000 related to facility
consolidation restructuring activities that are not included in the
restructuring charge because the spending is deemed to benefit future
operations.
<PAGE>
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):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Third Quarter First Nine Months
------------------ ------------------
1998 1997 1998 1997
-------- -------- --------- -------
Numerator for basic and diluted earnings per share:
Income (loss) from continuing ($6,378) $1,436 ($10,696) $3,885
operations
Income (loss) from discontinued 158 (452) 865 (1,475)
operations
-------- -------- --------- -------
Net income (loss) ($6,220) $984 ($9,831) $2,410
======== ======== ========= =======
Denominator:
Denominator for basic earnings per
share - weighted-average shares 7,174 6,945 7,143 6,880
Employee stock options (1) 241 159
-------- -------- --------- -------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 7,174 7,186 7,143 7,039
======== ======== ========= =======
Basic earnings (loss) per share
From continuing operations ($0.89) $0.21 ($1.50) $0.56
From discontinued operations 0.02 (0.07) 0.12 (0.21)
-------- -------- --------- -------
Total basic earnings (loss) per share ($0.87) ($0.14) ($1.38) $0.35
======== ======== ========= =======
Diluted earnings (loss) per share
From continuing operations ($0.89) $0.20 ($1.50) $0.55
From discontinued operations 0.02 (0.06) 0.12 (0.21)
-------- -------- --------- -------
Total diluted earnings (loss) per ($0.87) $0.14 ($1.38) $0.34
share ======== ======== ========= =======
</TABLE>
(1) Excludes 11,296 and 66,620 employee stock options which were antidilutive
as of September 24, 1998, for the third quarter and the nine months ended
September 24, 1998, respectively.
NOTE 7 - ACCOUNTING FOR INCOME TAXES
The Company's effective tax rate for the third quarter and first nine months of
1998 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 $1,913,000 during the third quarter and $3,125,000 during the
first nine months of 1998. As of September 24, 1998 the Company has valuation
reserves of $3,289,000 that may increase should the Company continue to incur
losses or reverse as the Company records income.
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
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
statements in this report involve, without limitation, completion of a proposed
acquisition, strengthening of Data I/O's product line, synergies and benefits
from the proposed acquisition, development, introduction and shipment of new
products, the pursuit of new technologies, markets or strategic alternatives,
the Company's expectations for future revenue, expenses, profit, cash flow,
balance sheet items, sell-through or backlog, the assessment of the Company's
Year 2000 exposure and completion of remediation efforts 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 or
implied by such forward-looking statements. Although it is not possible to
itemize all the factors and specific events that could affect actual results,
relevant risks and uncertainties include the possible inability to close the SMS
transactions; a variety of difficulties in the integration of acquired
operations and achieving intended economies from combining operations; the
challenges of managing operations located in Germany and of manufacturing
products which the Company has not previously manufactured; customer acceptance
of SMS and other new products; the possible inability of the Company to develop
and produce new products within a time frame which will enable the Company to
offer a competitive product line; production difficulties or delays due to
possible delays or non-deliveries of key components by suppliers or other
factors; uncertainty of market acceptance of new products; product
introductions, technological innovations and pricing practices of competitors;
the effect of global, national and regional economic conditions; the possible
inability to retain key personnel; the possible loss of sales channel partners
due to new product delays or other factors; changes in operating system
platforms of preference; changes in demand; increases in component prices or
other costs; inventory risks due to shifts in market demand, product
obsolescence or other factors and a number of other risks including those
discussed in this report and those identified 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 25, 1997, and other risks identified from time to time in the
Company's filings with the Securities and Exchange Commission, press releases
and other communications. There can be no assurance the Company will not
encounter significant technological, supplier, manufacturing or other problems
which will cause the introduction or production of its new products to be
delayed. All forward-looking statements contained in this report reflect the
Company's expectations at the time of this report only, and the Company
disclaims any responsibility to revise or update any such forward-looking
statement except as may be required by law.
Recent Developments
On November 4, 1998 the Company announced that it had entered into an agreement
in principal to acquire all products and the business of SMS, the largest
European-based programmer company. SMS, a privately-held company headquartered
in Wangen, Germany, with revenues of approximately $5 million in 1997,
specializes in device programmers for engineering and manufacturing. The
acquisition is intended to add to Data I/O's product offerings, especially in
gang logic programmers and automated handlers where the Company has sought to
strengthen its product portfolio. Some of Data I/O's own products, which have
experienced declining sales and low margins as they have aged, will be replaced
in the Data I/O product line by SMS products.
The Company has signed an agreement with Unmanned Solutions, Inc., a California
company, to acquire a license for the technology, manufacturing and worldwide
distribution rights to Unmanned Solution's AH 400 robotic handler. The Unmanned
Solutions handler is used in the SMS fine pitch automated programming system,
and is a high-performance, low-cost handler. These rights were obtained in order
to insure availability of the AH 400 in support of future sales of SMS's fine
pitch automated programmer.
The closing of the transaction with SMS is subject to execution of definitive
agreements with SMS and other closing conditions. Data I/O anticipates that it
will use approximately $5 million in cash to finance these acquisitions. The
company expects that it will be recording charges in the fourth quarter for
in-process R&D relating to the acquisitions and one-time charges relating to the
combination of the businesses and discontinuation of overlapping and end of life
products.
As part of the Company's previously announced strategic planning process,
the Company has been engaged in an assessment of the overall market for device
programming systems, the strength of its product portfolio and product
development programs and the strengths and vulnerabilities of competitors. This
has led to the conclusions that the market for programming systems has become
very fragmented and that the overall market may be declining in size. In
addition, with the increasing emphasis in the market on low-cost, limited
purpose programming solutions, the Company's product portfolio does not appear
to be well matched to the future requirements of the market. Also, the gross
margins for products in this market have eroded and are expected to continue to
erode. As a result of these assessments, continuing delays in development
projects, the high costs associated with supporting aging products, declining
sales and other factors, the Board of Directors determined to commence a
significant restructuring of the Company's operations, discontinue certain
products and development projects and investigate means to improve the Company's
competitive position. The proposed transactions with SMS and Unmanned Solutions,
Inc. are intended to fill gaps in the Company's product lines and provide
replacements for certain aging, low-margin products while it works on
development of a next-generation programming platform. The Company will continue
to look for business relationships or combinations in the programmer market or
in parallel markets and other strategic alternatives to enhance shareholder
value. Also, the Company is continuing efforts to reverse the decline in sales
and to reduce expenses but cannot predict when the Company might return to
profitability. There can be no assurance that these efforts will be successful.
In September 1998, the Company announced the hiring of James Rounds as its new
Vice President of Engineering. Also in September the Company announced that had
obtained a license to the technology and manufacturing rights from AMTI/ESEC
Inc. for the CT 3000 handler used in the Company's ProMaster 970(R) Automated
Fine Pitch Programming System. This became necessary due to the decision of
AMTI/ESEC to discontinue production of the CT 3000 after it has completed a
limited number of units currently in production. The steps taken by AMTI/ESEC
have caused the Company to incur additional expenses and increased the risks
associated with the 970. The Company has been unable to record revenue on most
970 units delivered as these units have not yet been accepted by customers
pending completion of configuration requirements and performance enhancements.
The Company recognized revenue and received payment of approximately $900,000 in
1997 on two 970s and has received payment of $1.5 million on the other delivered
systems. Although progress has been made to meet customer requirements and the
Company is hopeful that it will be able to recognize revenue from some of these
units in 1998, it is possible that the Company will not be able to achieve
customer acceptance on some or all of these units and it may be required to
return some or all payments previously made.
In October 1998 the Company announced the resignation of Frances M. Conley as
chairman of its board of directors. Conley, who had been a member of the Data
I/O board of directors since 1995 and chairman since January 1998, resigned due
to the increased demands of her other business commitments. No new chairman is
being named at this time.
Business Restructuring. During the third quarter the Company began implementing
a $3 million business restructuring plan that included a downsizing of its work
force by approximately one-third, consolidation of Company operations in its
headquarters facility onto two floors, and other steps to reduce operations to a
level more in line with the lower sales it is experiencing. With this
restructuring the Company's objective is to reduce its corporate overhead and
research and development expenses and to focus its on-going development spending
in the segments of the market that show the best potential for growth and return
on investment for the Company. Once this restructuring plan is fully implemented
and completed through staff reductions and reprioritization of research and
development efforts, the Company intends to focus much of its attention on
identifying means to improve the Company's competitive position. The
restructuring plan implementation is expected to be substantially complete by
the first or second quarter of 1999.
As part of the restructuring the Company has focused its research and
development efforts for the remainder of 1998 on the ProMaster 970 and on
sustaining engineering for the Company's existing products, and has discontinued
development of the ProMaster 870 and the application of the DataSite technology
in the general purpose programmer market. The Company will continue development
of DataSite for use with the ProMaster 970. In manufacturing, the Company will
discontinue production of certain of its non-automated programming systems
by the fourth quarter 1998 and is reviewing the consolidation of its family of
handlers.
Operating expenses for the quarter included a restructuring charge of $2.0
million related to these restructuring activities, consisting primarily of
employee severance costs of approximately $1 million, write-downs of certain
assets of approximately $570,000, facility consolidation costs of approximately
$330,000, and legal and consulting costs of approximately $100,000. As the
Company continues to implement its restructuring plan it will record further
restructuring charges in the fourth quarter and in 1999, related primarily to
the Company's foreign sales and support subsidiaries, manufacturing changes and
remaining workforce reductions.
Related primarily to its restructuring plan, the Company recorded inventory
reserves during the quarter of approximately $2.3 million on products that will
be discontinued as a result of the business restructuring. These reserves are
included in cost of goods sold for the third quarter. In addition, the Company
incurred operating expenses of approximately $220,000 related to facility
consolidation restructuring activities that are not included in the
restructuring charge because the spending is deemed to benefit future
operations.
Cash payments related to this restructuring plan are estimated to be in the
range of $2.5 to $3.2 million during the period from the third quarter 1998
through 1999. Approximately 75% of those cash payments are expected to take
place in the third and fourth quarters of 1998, related to employee severance
and benefits, previously accrued vacation, facility consolidation costs and
consulting fees.
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"). Prior quarter's figures have been reclassified
for comparability.
Net Sales
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Third Quarter First Nine Months
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 1998 1997 %Change 1998 1997 % Change
-------------------------------------------------------------------------------------
Non-automated $6,462 $7,550 (14.4%) $19,974 $22,626 (11.7%)
programming systems
Automated programming 1,566 4,212 (62.8%) 5,262 12,401 (57.6%)
systems
--------------------------------------------------------
Total programming systems $8,028 $11,762 (31.7%) $25,236 $35,027 (28.0%)
Third Quarter First Nine Months
--------------------------------------------------------
Net sales by location 1998 1997 % Change 1998 1997 % Change
-------------------------------------------------------------------------------------
United States $3,937 $6,246 (37.0%) $12,365 $17,660 (30.0%)
% of total 49.0% 53.1% 49.0% 50.4%
International 4,091 5,516 (25.8%) 12,871 17,367 (25.9%)
% of total 51.0% 46.9% 51.0% 49.6%
-------------------------------------------------------------------------------------
</TABLE>
Sales and orders decreased for the Company's programming system products in the
third quarter of 1998 compared to the third quarter of 1997. Orders in the third
quarter of 1998 decreased approximately 49% to $7.2 million, compared with $14.1
million in 1997. The sales decline during the first nine months of 1998 are
primarily attributable to automated programming systems, and in particular the
inability to record revenue on units of the Company's new ProMaster 970 Fine
Pitch Programming System that had been delivered to customers in previous
quarters but not yet accepted pending completion of certain configuration
requirements and performance enhancements.
Sales are expected to continue to be soft primarily due to increased competition
in areas where Data I/O products are nearing the end of their product life
cycles. In addition, the decline in non-automated programming system sales
reflects the continuing market shift away from the Company's traditional line of
higher-priced IC programmers for the engineering market, toward lower-priced
programmers. As a result, the Company believes that demand for its programming
systems likely will continue to decline in 1998 and is taking steps to
restructure its organization to reduce operations to a level more in line with
the lower sales it is experiencing. See "Business Restructuring". The Company
expects that during the remaining quarter and for the year ended December 31,
1998, it will continue to experience year over year declines in revenue and that
it will incur losses from operations.
<PAGE>
Gross Margin
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Gross Margin $1,103 $6,320 $8,288 $17,874
Percentage of net sales 13.7% 53.7% 32.8% 51.0%
- --------------------------------------------------------------------------------
Gross margin for the third quarter includes a charge of $2.3 million for
increased inventory reserves related to products that will be discontinued as a
result of the business restructuring (see "Business Restructuring"). In
addition, for both the third quarter and the first nine months of 1998 gross
margins were negatively impacted due to lower sales volumes. The relatively high
fixed component of cost of goods sold causes any shift in total volume to have a
significant impact on gross margin. Also contributing to the decline in gross
margins for the nine months are high costs associated with the ProMaster 970
customer support.
Research and Development
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1998 1997 1998 1997
-------------------------------------------------------------------------------
Research and development $2,022 $1,904 $6,833 $5,939
Percentage of net sales 25.2% 16.2% 27.1% 17.0%
-------------------------------------------------------------------------------
The increase in research and development spending for both the third quarter and
first nine months of 1998 as compared to the same periods in 1997 is primarily
due to increased engineering staff and spending for materials used in product
development related to the Company's continued high investment in new technology
into the third quarter of 1998. However, research and development spending in
the third quarter decreased approximately 16% as compared to the second quarter
1998 due to the business restructuring plan which was implemented during the
third quarter. As part of the business restructuring the Company has shifted its
focus to research and development efforts on the ProMaster 970, and on
sustaining engineering for the Company's existing products, and has discontinued
development of the ProMaster 870 and the application of the DataSite technology
in the general purpose programmer market. The Company expects that this shift in
focus and development will result in decreased spending on research and
development during the fourth quarter 1998 and in 1999. See "Business
Restructuring."
Selling, General and Administrative
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1998 1997 1998 1997
-------------------------------------------------------------------------------
Selling, general & $3,526 $3,460 $10,625 $10,522
administrative
Percentage of net sales 43.9% 29.4% 42.1% 30.0%
-------------------------------------------------------------------------------
Selling, general and administrative expenditures in the third quarter and first
nine months of 1998 were slightly higher as compared with the third quarter and
first nine months of 1997. However, expenditures decreased 7% in the third
quarter as compared to the second quarter 1998 due to the business restructuring
plan which was implemented during the third quarter. The Company expects that
selling general and administrative expenditures will be lower in the fourth
quarter as a result of the restructure. See "Business Restructuring."
<PAGE>
Interest
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1998 1997 1998 1997
-------------------------------------------------------------------------------
Interest income $375 $240 $1,226 $438
Interest expense ($14) ($53) ($63) ($164)
-------------------------------------------------------------------------------
The increases in interest income in 1998 periods as compared to the
corresponding periods of 1997 are due to an increase in cash, cash equivalents
and marketable securities, due primarily to the proceeds received from the
Company's land sale and business dispositions during 1997 (see "Discontinued
Operations").
Income Taxes
Third Quarter First Nine Months
--------------------------------------------------
(in thousands) 1998 1997 1998 1997
-------------------------------------------------------------------------------
Income tax expense (benefit) $257 ($307) $294 $122
Effective tax rate (4.2%) (27.2%) (2.8%) 3.0%
-------------------------------------------------------------------------------
The Company's effective tax rate for the third quarter and first nine months of
1998 differed from the statutory 34% tax rate primarily due to operating losses
for which no tax benefit was recorded. Also, the Company recorded an expense for
foreign and state income taxes for the quarter of $257,000. Tax valuation
reserves increased by approximately $1,913,000 during the third quarter and
$3,125,000 during the first nine months of 1998. As of September 24, 1998 the
Company has valuation reserves of $3,289,000 that may increase should the
Company continue to incur losses or reverse as the Company records income.
Net Income and Earnings Per Share
Third Quarter First Nine Months
------------------------------------------------
(in thousands, except per 1998 1997 1998 1997
share data)
- --------------------------------------------------------------------------------
Income (loss) from continuing ($6,378) $1,436 ($10,696) $3,885
operations
Percentage of net sales (79.4%) 12.2% (42.4%) 11.1%
Basic earnings (loss) per
share from continuing operations ($0.89) $0.21 ($1.50) $0.56
Diluted earnings (loss) per
share from continuing operations ($0.89) $0.20 ($1.50) $0.55
- --------------------------------------------------------------------------------
Net income for the third quarter and first nine months of 1998 decreased as
compared to the third quarter and first nine months of 1997 due primarily to
decreased sales and gross margin in both 1998 periods and the $2.0 million
restructure charge and the $2.3 million inventory reserves recorded in the third
quarter related primarily to the restructure plan. See "Business Restructuring."
<PAGE>
Discontinued Operations
(in thousands) Third Quarter First Nine Months
---------------------- --------------------
1998 1997 1998 1997
- ------------------------------------- ------------------------------------------
Net Sales of discontinued operations $204 $4,932 $1,152 $11,743
====================== ====================
Income (loss) from operations $158 ($144) $865 ($1,525)
before income taxes
Income taxes (312) 50
---------------------- --------- ----------
Total income (loss) on discontinued $158 ($452) $865 ($1,475)
segments
- --------------------------------------------------------------------------------
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc for $15.5 million. Also in
November 1997, the Company entered into a licensing agreement and an agreement
to sell certain assets of its Synario Design Automation Division to MINC
Incorporated. These transactions discontinued the Semiconductor Equipment
Division and Synario Design Automation Division operations of the Company.
However, the Company is entitled to receive and may realize certain licensing
revenues related to its former Synario, ABEL and ECS products through December
31, 1999. Combined operating results of these discontinued divisions are shown
in the table above.
Financial Condition
Liquidity and Capital Resources
September Dec
(in thousands) 24, Change 25,
1998 1997
- ------------------------------------------------------------------------------
Working capital $25,085 ($8,141) $33,226
Total debt $403 ($1,597) $2,000
- ------------------------------------------------------------------------------
Working capital decreased during the first nine months of 1998 primarily due to
cost of restructuring, losses from operations, the early settlement of a
long-term pension obligation, spending on property, plant and equipment and a
minority interest investment in JTAG Technologies in the second quarter of 1998.
Other assets decreased by approximately $2.6 million primarily due to the
collection of trade accounts receivable related to the discontinued Reel-Tech
and Synario Design Automation Divisions (see "Discontinued Operations").
Accrued liabilities increased in the period primarily due to the restructure
reserve, which will be reduced during the fourth quarter as the related expenses
are paid. Other accrued expenses and payables decreased due to the payment of
income taxes of $2.2 million, payment of a note payable of $1.5 million,
payment of an obligation carrying over from the purchase of the now disposed
Reel-Tech Division and payment of accrued compensation related to 1997.
As of September 24, 1998, the Company had total debt of $403,000 or
approximately 1.5% of its $26.2 million in equity. This is current debt
consisting of borrowings on the Company's $1.2 million foreign lines of credit.
No borrowings were outstanding under the Company's $8.0 million U.S. line of
credit. The U.S. line of credit expires in May 1999. The foreign lines of credit
expire in November and August 1999. Historically, these credit lines have been
structured as short-term and have been renewed on their maturity dates.
The Company estimates that capital expenditures for property, plant and
equipment during the remainder of 1998 will be approximately $300,000. Such
expenditures are currently expected to be funded from internally generated funds
or the Company's existing cash and investment balances and, if necessary,
borrowings under the Company's existing credit lines. Although the Company
expects that such expenditures will be made, it has purchase commitments for
only a small portion of this amount.
At September 24, 1998, the Company's material short-term unused sources of
working capital consisted of approximately $25 million in cash, cash equivalents
and marketable securities, available borrowings of $8.0 million under its U.S.
line of credit and available borrowings of approximately $805,000 under its
foreign lines of credit. The Company believes these sources and cash flow from
operations will be sufficient during 1998 to fund working capital needs, service
existing debt, finance planned capital acquisitions and the proposed acquisition
of SMS, and finance the Unmanned Solutions AH 400 rights acquisition. During the
first three quarters of 1998 the Company consumed cash at a rate slightly less
than its loss from operations. During the fourth quarter of 1998, as the
restructuring plan continues to be implemented, the Company will have a
significant cash outflow due to restructure related expenses and continued
operating losses. After the Company's restructuring plan is fully implemented,
operating expenses will be reduced. However, there can be no assurance that the
Company will be able to reduce expenses and achieve sales sufficient to generate
cash from operations. See "Business Restructuring."
In April 1998 the Company signed an agreement for a strategic alliance with JTAG
Technologies, a Netherlands-based manufacturer and developer of boundary scan
test and programming solutions. Under the terms of the agreement, the Company
has purchased a minority interest in JTAG Technologies for approximately
$979,000, and will sell in-system programming products under the Data I/O name.
The Company does not expect material revenue from the sales of these products
during 1998.
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 and May 13, 1997
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) and approximately 14.5% (up to 1,000,000 shares) respectively 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. No repurchases have been made under the program during 1998. As of
September 24, 1998, the Company had repurchased 1,016,200 shares since October
1995 at a total cost of approximately $7.1 million.
General
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 24, 1998, the
Company had incurred and expensed approximately $300,000 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.
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 1998 the Company had received
responses from approximately one-third of such third parties and is currently in
the process of analyzing the responses. The Company is also in the process of
following up with those vendors and service providers who have not responded
that are deemed to be critical suppliers, or who's response was unsatisfactory.
This phase of the Year 2000 project is expected to be completed by the second
quarter of 1999.
The Company is also in the process of evaluating its internal systems with
imbedded technology that are subject to the Year 2000 issue. This evaluation is
expected to be completed by December 31, 1999.
The Company presently believes that the Year 2000 issue 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 by December 31, 1999.
European Monetary Conversion
The Company is aware of issues associated with the forthcoming changes in Europe
aimed at forming a European economic and monetary union (the "EMU"). One of the
changes resulting from this union will require EMU member states to irrevocably
fix their respective currencies to a new currency, the Euro, on January 1, 1999,
at which date the Euro will become a functional legal currency of these
countries. During the next three years, business in the EMU member states will
be conducted in both the existing national currency, such as the franc or
deutsche mark, and the Euro. As a result, companies operating in or conducting
business in the EMU member states will need to ensure that their financial and
other software systems are capable of processing transactions and properly
handling these currencies, including the Euro.
The Company is still assessing the impact the EMU formation will have on both
its internal systems and its products sold. The Company plans to take
appropriate corrective actions based on the results of such assessment. The
costs related to addressing this issue have not been determined, however
management believes that this issue and its related costs will not have a
material adverse effect on the Company's business, financial condition and
operating results.
Shareholder Rights Plan
In March 1998, the Company adopted a Shareholder Rights Plan (the "Rights Plan")
that went into effect simultaneously with the expiration of its previously
existing shareholder rights plan. Under the Rights Plan, a dividend of one Share
Purchase Right (a "Right") was declared for each share of Company Common Stock
outstanding at the close of business on April 4, 1998. In the event that a
person or group (the "Acquirer") acquires 15% or more of the Company's Common
Stock without advance approval by the Company's Board of Directors, each Right
will entitle the holder, other than the Acquirer, to buy Common Stock with a
market value of twice the Right's then current exercise price (initially $30,
subject to adjustment). In addition, if Rights are triggered by such a
non-approved acquisition and the Company is thereafter acquired in a merger or
other transaction in which the shareholders of the Company are not treated
equally, shareholders with unexercised Rights will be entitled to purchase
common stock of the Acquirer with a value of twice the exercise price of the
Rights. The Company's Board of Directors may redeem the Rights for a nominal
amount at any time prior to an event that causes the Rights to become
exercisable. The Rights trade automatically with the underlying Common Stock
(unless and until a distribution event occurs under the Rights Plan) and expire
on April 4, 2008 if not redeemed earlier.
<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
See "Recent Developments" in Item 2 of Part I above.
Item 6. Exhibits and Reports on Form 8-K Page
(a) Exhibits
None
(b) Reports on Form 8-K
None
<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, 1998
By://S//Joel S. Hatlen
Joel S. Hatlen
Vice President - Finance
Chief Financial Officer
Secretary and Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit Number Title Page
Number
- ---------------- ------------------------------------------------- -----------
None
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000351998
<NAME> Data I/O Corporation
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-25-1997
<PERIOD-START> DEC-26-1997 DEC-27-1996
<PERIOD-END> SEP-24-1998 SEP-25-1997
<CASH> 5,346 8,113
<SECURITIES> 20,091 24,855
<RECEIVABLES> 5,385 6,072
<ALLOWANCES> 412 394
<INVENTORY> 6,513 8,158
<CURRENT-ASSETS> 41,025 52,704
<PP&E> 21,794 21,576
<DEPRECIATION> 19,283 18,187
<TOTAL-ASSETS> 44,957 57,736
<CURRENT-LIABILITIES> 15,940 19,478
<BONDS> 0 0
0 0
0 0
<COMMON> 17,093 16,412
<OTHER-SE> 9,089 18,202
<TOTAL-LIABILITY-AND-EQUITY> 44,957 57,736
<SALES> 25,236 35,027
<TOTAL-REVENUES> 25,236 35,027
<CGS> 16,948 17,153
<TOTAL-COSTS> 19,479 16,389
<OTHER-EXPENSES> (870) (2,758)
<LOSS-PROVISION> 18 72
<INTEREST-EXPENSE> 63 164
<INCOME-PRETAX> (10,402) 4,007
<INCOME-TAX> 294 122
<INCOME-CONTINUING> (10,696) 3,885
<DISCONTINUED> 865 (1,475)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,831) 2,410
<EPS-PRIMARY> (1.38) 0.35
<EPS-DILUTED> (1.38) 0.34
</TABLE>
