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 APRIL 1, 1999 Commission File No. 0-10394
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0864123
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10525 Willows Road N.E., Redmond, Washington, 98052
(address of principal executive offices, Zip Code)
(425) 881-6444
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
7,238,311 shares of no par value Common Stock outstanding as of April 29, 1999
Page 1 of 17
Exhibit Index on Page 17
<PAGE>
DATA I/O CORPORATION
FORM 10-Q
For the Quarter Ended April 1, 1999
INDEX
Part I - Financial Information Page
Item 1. Financial Statements (unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
Page 2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Apr. 1, Dec. 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) (unaudited) (note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,331 $4,008
Marketable securities 10,794 14,894
Trade accounts receivable, less allowance for
doubtful accounts of $431 and $445 4,952 5,352
Inventories 6,519 4,442
Recoverable income taxes 3,444 3,366
Deferred income taxes 239 331
Other current assets 782 1,117
----------- ------------
TOTAL CURRENT ASSETS 28,061 33,510
Property, plant and equipment - net 2,074 2,174
Other assets 3,882 4,345
Deferred income taxes 354 60
----------- ------------
TOTAL ASSETS $34,371 $40,089
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,509 $3,781
Accrued compensation 1,689 2,926
Deferred revenue 3,091 3,895
Other accrued liabilities 3,005 3,328
Accrued costs of business restructuring 1,447 2,339
Income taxes payable 1,201 1,593
Notes payable and current maturities of long-term debt - 564
----------- ------------
TOTAL CURRENT LIABILITIES 12,942 18,426
Deferred gain on sale of property 2,671 2,754
----------- ------------
TOTAL LIABILITIES 15,613 21,180
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 7,238,311
and 7,186,851 shares 17,741 17,637
Retained earnings 1,079 715
Accumulated other comprehensive income (loss) (62) 557
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 18,758 18,909
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,371 $40,089
=========== ============
See notes to consolidated financial statements.
</TABLE>
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DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Apr. 1, Mar. 26,
For the quarters ended 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $7,758 $8,426
Cost of goods sold 4,101 4,770
------------ ------------
Gross margin 3,657 3,656
Operating expenses:
Research and development 2,008 2,414
Selling, general and administrative 2,968 3,879
------------ ------------
Total operating expenses 4,976 6,293
------------ ------------
Operating loss (1,319) (2,637)
Non-operating income (expense):
Interest income 269 470
Interest expense (10) (33)
Foreign currency exchange (1) (1)
Net gain on dispositions 1,113 (3)
------------ ------------
Total non-operating income (expense) 1,371 433
------------ ------------
Income (loss) from continuing operations before income taxes 52 (2,204)
Income tax expense 14 29
------------ ------------
Income (loss) from continuing operations 38 (2,233)
Income from discontinued operations, net of taxes 326 180
------------ ------------
Net income (loss) $364 ($2,053)
============ ============
Basic and diluted earnings (loss) per share:
From continuing operations $0.01 ($0.32)
From discontinued operations 0.04 0.03
------------ ------------
Total basic and diluted earnings (loss) per share $0.05 ($0.29)
============ ============
Weighted average shares outstanding 7,221 7,107
============ ============
Weighted average and potential shares outstanding 7,248 7,107
============ ============
See notes to consolidated financial statements.
</TABLE>
Page 4
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DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Apr. 1, Mar. 26,
For the quarters ended 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Income (loss) from continuing operations $38 ($2,233)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 533 519
Net (gain) loss on dispositions (1,113) -
Equity earnings from investee (42) -
Deferred income taxes (202) 702
Deferred revenue (321) (564)
Amortization of deferred gain on sale (83) (81)
Non-cash stock-based compensation expense - 540
Net change in:
Trade accounts receivable 55 1,182
Inventories (2,201) (172)
Recoverable income taxes (79) (700)
Other current assets 296 1,464
Business restructure (892) -
Accounts payable and accrued liabilities (2,877) (4,152)
------------ --------------
Cash provided by (used in) operating activities of continuing operations (6,888) (3,495)
Cash provided by (used in) operating activities of discontinued operations 326 180
------------ --------------
Net cash provided by (used in) operating activities (6,562) (3,315)
INVESTING ACTIVITIES:
Additions to property, plant and equipment (284) (948)
Additions to other assets - 3
Proceeds on sale of subsidiary 72 -
Purchases of marketable securities (588) (8,813)
Proceeds from sales of marketable securities 4,688 7,637
------------ --------------
Cash used in investing activities 3,888 (2,121)
FINANCING ACTIVITIES:
Repayment of notes payable - (1,338)
Sale of common stock 106 149
Proceeds from exercise of stock options - 361
------------ --------------
Cash provided by (used in) financing activities 106 (828)
------------ --------------
Increase (decrease) in cash and cash equivalents (2,568) (6,264)
Effects of exchange rate changes on cash (109) 1
Cash and cash equivalents at beginning of year 4,008 8,113
------------ --------------
Cash and cash equivalents at end of year $1,331 $1,850
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $88 $37
Income taxes $50 $2,163
See notes to consolidated financial statements.
</TABLE>
Page 5
<PAGE>
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENT PREPARATION
The financial statements as of April 1, 1999 and March 26, 1998, have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). These statements are unaudited but, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments and accruals) necessary to present fairly the results for the
periods presented. The balance sheet at December 31, 1998 has been derived from
the audited financial statements at that date. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. Operating results for the quarter
ended April 1, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 30, 1999. These financial statements
should be read in conjunction with the annual audited financial statements and
the accompanying notes included in the Company's Form 10-K for the year ended
December 31, 1998.
NOTE 2 - INVENTORIES
Inventories consisted of the following components (in thousands):
Apr. 1, Dec. 31,
1999 1998
---------------- ----------------
Raw material $1,810 $1,357
Work-in-process 2,179 877
Finished goods 2,530 2,208
---------------- ----------------
$6,519 $4,442
================ ================
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Apr. 1, Dec. 31,
1999 1998
---------------- ----------------
Building and improvements $ 127 $ 181
Equipment 14,220 15,155
---------------- ----------------
14,347 15,336
Less accumulated depreciation 12,273 13,162
---------------- ----------------
$ 2,074 $ 2,174
================ ================
NOTE 4 - DISCONTINUED OPERATIONS
In November 1997, the Company sold the assets of its Semiconductor Equipment
Division, Reel-Tech(TM) Inc., to General Scanning Inc. Also in November 1997,
the Company entered into a licensing agreement and an agreement to sell certain
assets of its Synario Design Automation Division to MINC Washington
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 Synario, ABEL and ECS products through December 31,
1999. The Company has recognized net earnings of $326,000 and $180,000 from
source code sales and training and support services provided during 1999 and
1998, respectively. Operating results of these discontinued divisions are
classified as discontinued operations in the financial statements.
Page 6
<PAGE>
NOTE 5 - BUSINESS RESTRUCTURING PROGRESS
During the third and fourth quarters of 1998 the Company recorded a pretax
charge of $4.4 million related to the restructure of its Redmond operations and
certain of its international subsidiaries. With the implementation of the
restructuring initiatives during 1998 and continuing into 1999, the Company has
four objectives: (1) to reduce its corporate overhead costs; (2) to reduce
research and development expenses and to focus its on-going research and
development spending in the segments of the market that show the best potential
for growth and return on investment for the Company; (3) to create a more
variable cost operating structure including the out-sourcing of certain of its
manufacturing operations during 1999; and (4) to eliminate redundant products
and operations after the acquisition of SMS GmbH in November 1998.
The implementation of the restructuring plan continued during the first quarter
of 1999. By the end of the first quarter the majority of the planned headcount
reductions had been made. The Company is evaluating the outsourcing of certain
portions of the Company's manufacturing operations and has scheduled reductions
relating to outsourcing during the remaining quarters of 1999.
Of the total $4.4 million restructuring charge taken in 1998, approximately $2.3
million remained as an accrued liability at December 31, 1998. At April 1, 1999,
the remaining accrued liability was approximately $1.4 million. The reduction
during the quarter related primarily to severances and related payments to
terminated employees.
As of April 1, 1999, the Company's restructuring has proceeded as planned. No
significant changes were made to the Company's restructuring plans during the
first quarter of 1999. However, included in the Company's original restructuring
plans was its expectation to outsource manufacturing operations by the second
half of 1999. As a result of internal readiness and outsourcing vendor issues,
this process will be delayed and the Company is currently reassessing the extent
of its outsourcing and manufacturing restructure changes.
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>
For the first quarter
1999 1998
------------- -------------
Numerator for basic and diluted earnings per share:
Income from continuing operations $38 ($2,233)
Income from discontinued operations 326 180
------------- -------------
Net income (loss) $364 ($2,053)
============= =============
Denominator:
Denominator for basic earnings per share -
weighted-average shares 7,221 7,107
Employee stock options (1) 27 -
------------- -------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 7,248 7,107
============= =============
Basic earnings (loss) per share
From continuing operations $0.01 ($0.32)
From discontinued operations 0.04 0.03
------------- -------------
Total basic earnings per share $0.05 ($0.29)
============= =============
Diluted earnings (loss) per share
From continuing operations $0.01 ($0.32)
From discontinued operations 0.04 0.03
------------- -------------
Total diluted earnings per share $0.05 ($0.29)
============= =============
(1) Excludes 130,160 employee stock options which were antidilutive in the first quarter of 1998.
</TABLE>
Page 7
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NOTE 7 - ACCOUNTING FOR INCOME TAXES
The Company's effective tax rate for the first quarter of 1999 differed from the
statutory 34% tax rate primarily due to operating losses for which no tax
benefit was recorded. Tax valuation reserves decreased by approximately $184,000
during the quarter. As of April 1, 1999 the Company has valuation reserves of
$5,761,000 that may increase should the Company continue to incur losses or
reverse as the Company records income.
NOTE 8 - COMPREHENSIVE INCOME
During the first quarter of 1999 and 1998 total comprehensive income (loss) was
comprised of the following (in thousands):
For the First Quarter
1999 1998
------------ -------------
Net income (loss) $ 364 $ (2,053)
Unrealized gain on marketable securities - 197
Foreign currency translation gain 22 7
------------ -------------
Total comprehensive income (loss) $ 386 $ (1,849)
============ =============
Page 8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves as long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Quarterly Report on Form 10-Q are forward looking. In particular,
statements herein regarding industry prospects; future results of operations or
financial position; integration of acquired products and operations; market
acceptance of the Company's reconstituted products; development, introduction
and shipment of new products; completion of outsourcing of manufacturing and
certain sustaining engineering functions on favorable terms and without
significant disruption and achievement of cost savings from such outsourcing;
the assessment of the Company's year 2000 exposure and completion of remediation
efforts; and any other guidance on future periods are forward-looking
statements. Forward-looking statements reflect management's current expectations
and are inherently uncertain. The Company's actual results may differ
significantly from management's expectations. The following discussions and
discussions under the caption "Business - Additional Factors That May Affect
Future Results" in Item 1 in the Company's Annual report on Form 10-K for the
year ended December 31, 1998, describe some, but not all, of the factors that
could cause these differences.
BUSINESS RESTRUCTURING
During the first quarter of 1999 the Company continued to implement the
restructuring of its Redmond operations and certain of its international
subsidiaries. This restructuring plan was initiated in the second half of 1998
and is expected to be completed in the second half of 1999. During the first
quarter of 1999, approximately $900,000 in accrued restructuring costs,
primarily severance related, were paid out. The remaining restructuring reserves
are expected to be utilized during the second, third and fourth quarters of
1999. The Company expects this restructuring to lower and make more variable its
operating costs, thus leading to a more flexible operating structure. These
expectations have been partially realized during the first quarter (see
discussions below). Included in the Company's original restructuring plans was
its expectation to outsource manufacturing operations by the second half of
1999. However, as a result of internal readiness and outsourcing vendor issues,
this process will be delayed and the Company is currently reassessing the extent
of its outsourcing and manufacturing restructure changes.
Regarding the Company's international subsidiaries, in February 1999 the
Company sold its Japan sales and service subsidiary for a gain of $1,113,000,
which was primarily non-cash, to a former sub-distributor who will now continue
to distribute the Company's products in Japan (see "Net Gain on Dispositions -
Sale of Japan Subsidiary" below). Additionally, the Company continues to realign
its operations in Germany whereby SMS, which was acquired in November 1998 and
is located in Wangen, Germany, will become the German headquarters and the
Company's Munich office will continue as a sales and service center.
Page 9
<PAGE>
Results of Continuing Operations
For all periods presented, results of operations reflect the classification of
the Company's Semiconductor Equipment and Synario Design Automation Divisions as
discontinued operations (see "Discontinued Operations").
NET SALES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(in thousands) First Quarter First Quarter
Net Sales by Product Line: 1999 Change 1998
----------------------------------------------------------------------------- ------------------- -------------------
Non-automated programming systems $5,516 (20.2%) $6,909
Automated programming systems 2,242 47.8% 1,517
------------------ ------------------- -------------------
Total Programming Systems Division $7,758 (7.9%) $8,426
================== =================== ===================
Net Sales by location:
United States $3,462 (13.4%) $3,997
% of total 44.6% 47.4%
International $4,296 (3.0%) $4,429
% of total 55.4% 52.6%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sales decreased but orders increased for the Company's programming system
products in the first quarter of 1999 compared to the first quarter of 1998.
Orders in the first quarter of 1999 increased approximately 15% to $9.3 million,
compared with $8.1 million in 1998. The increase in orders and sales during the
first quarter of 1999 is primarily due to orders for the PP100 automated
programming system which was part of the SMS and Unmanned Solutions technology
license acquisition. The company is in the process of transitioning the
manufacturing of this automated system to its Redmond facility, which may cause
delays in production and sales of this product. The sales decline in
non-automated programming systems is attributable to a decline in certain of the
Company's older non-automated products, some of which have been discontinued,
offset partially by the introduction of the SMS Sprint non-automated products
which were integrated into the Data I/O product line during the first quarter of
1999 following the acquisition of SMS in November 1998.
Sales for certain of the older Data I/O products are expected to decline
during the year as they are replaced by certain Sprint programming system
products that target the same customer needs. Sales of the Sprint products are
expected to increase during the year as the products are fully integrated into
the Data I/O product lines and sales channels. However, there can be no
assurance that the Sprint products will be accepted in the market or that sales
of Sprint products will fully offset the decline in sales of those older Data
I/O products that are being replaced.
GROSS MARGIN
(in thousands) First Quarter First Quarter
1999 Change 1998
- --------------------------------------------------------------------------------
Gross Margin $3,657 0.0% $3,656
Percentage of net sales 47.1% 43.4%
- --------------------------------------------------------------------------------
Gross margin percentage for the first quarter of 1999 increased compared to the
first quarter of 1998 due primarily to the ability of the Company to reduce the
fixed component of its cost of goods as a result of the Company's restructuring
plan which was initiated in the second half of 1998. See "Business
Restructuring" above. Also contributing to the improved gross margin in 1999 was
the reduced PM970 support costs incurred in the quarter.
Page 10
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RESEARCH AND DEVELOPMENT
(in thousands) First Quarter First Quarter
1999 Change 1998
------------------------------------------------------------------------------
Research and development $2,008 (16.8%) $2,414
Percentage of net sales 25.9% 28.7%
------------------------------------------------------------------------------
The decrease in research and development spending for the first quarter of 1999
as compared to the first quarter of 1998 is primarily due to the Company's
restructuring which was initiated in the second half of 1998. This restructuring
resulted in significant layoffs in the Redmond headquarters engineering staff in
the second half of 1998 and in the first quarter 1999, and has resulted in a
more focused research and development effort in strategic growth markets.
Partially offsetting the reduced spending in Redmond is spending for research
and development at SMS, which was acquired in November 1998.
SELLING, GENERAL AND ADMINISTRATIVE
(in thousands) First Quarter First Quarter
1999 Change 1998
------------------------------------------------------------------------------
Selling, general & administrative $2,968 (23.5%) $3,879
Percentage of net sales 38.2% 46.0%
------------------------------------------------------------------------------
The decrease in selling, general and administrative expenditures in the first
quarter of 1999 as compared with the first quarter of 1998 is due primarily to a
reduction in headcount across most SG&A departments as a result of the Company's
restructuring which was initiated in the second half of 1998. Also, the sale of
the Company's Japan subsidiary in February 1999 resulted in lower spending in
selling, general and administrative expenses as compared to the prior year.
Furthermore, first quarter 1998 spending included a non-cash charge in the
amount of $540,000 related to the modification of stock options of a former CEO
of the Company and expenses related to the search for a new Chief Executive
Officer. Partially offsetting the reduced spending is SG&A spending at SMS,
which was acquired in November 1998.
INTEREST
(in thousands) First Quarter First Quarter
1999 Change 1998
----------------------------------------------------------------------------
Interest income $269 (42.8%) $470
Interest expense $10 (66.7%) $33
----------------------------------------------------------------------------
The decrease in interest income for the first quarter of 1999 as compared to the
first quarter of 1998 is due to the decrease in cash, cash equivalents and
marketable securities, due primarily to the funding of operating losses during
the past four quarters and the purchase of SMS in the fourth quarter of 1998.
NET GAIN ON DISPOSITIONS - SALE OF JAPAN SUBSIDIARY
In connection with the Company's restructuring, during the first quarter of 1999
the Company sold its Japan sales subsidiary to Synchro-Work Corporation, one of
its sub-distributors in Japan, for total consideration of approximately
$100,000. The sale resulted in a gain before taxes of approximately $1,113,000
primarily due to previously unrecognized accumulated currency translations. In
connection with this sale, the Company and Synchro-Work also entered into a new
distribution agreement for sales into Japan. See "Business Restructuring" above.
Page 11
<PAGE>
INCOME TAXES
(in thousands) First Quarter First Quarter
1999 1998
----------------------------------------------------------------------
Income tax expense $14 $29
Effective tax rate 26.9% (1.3%)
----------------------------------------------------------------------
Tax expense recorded for the first quarter of 1999 was due to foreign taxes. Tax
valuation reserves decreased by approximately $184,000 during the quarter. As of
April 1, 1999 the Company had valuation reserves of $5,761,000 that may increase
should the Company continue to incur losses or reverse as the Company records
income.
NET INCOME AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
<S> <C> <C>
(in thousands, except per share data) First Quarter First Quarter
1999 1998
- -----------------------------------------------------------------------------------------
Income (loss) from continuing operations $38 ($2,233)
Percentage of net sales 0.5% (26.5%)
Basic and diluted earnings (loss) per share
from continuing operations $0.01 ($0.32)
- -----------------------------------------------------------------------------------------
</TABLE>
Income from continuing operations for the first quarter of 1999 increased as
compared to the first quarter of 1998 due primarily to the gain on the sale of
the Company's Japan subsidiary as well as lower operating costs due to the
Company's restructuring initiated in the second half of 1998, offset partially
by decreased sales for the quarter.
The Company expects that during 1999, it is likely to incur losses from
operations due to many factors, including: (1) continued efforts to integrate
and support the Sprint product line, which was acquired in November 1998; (2)
costs related to the transition of manufacturing of the automated handling
system and accessories acquired from Unmanned Solutions to its Redmond plant;
(3) further restructuring of operations; work on the outsourcing of
manufacturing; and (4) the transition of sales to the Sprint products.
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 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
Synario, ABEL and ECS products through December 31, 1999. The Company has
recognized net earnings of $326,000 and $180,000 from source code sales and
training and support services provided during 1999 and 1998, respectively.
Operating results of these discontinued divisions are classified as discontinued
operations in the financial statements.
Page 12
<PAGE>
Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
(in thousands) Apr. 1, Change Dec 31,
1999 1998
- -------------------------------------------- ---------------- ----------------
Working capital $15,119 $35 $15,084
Total debt $0 ($564) $564
- -------------------------------------------- ---------------- ----------------
Working capital was unchanged during the first quarter of 1999. Cash, cash
equivalents and marketable securities, which decreased approximately $6.8
million during the quarter, were used to: pay accrued liabilities of $2.5
million, primarily related to the Company's restructuring, an earnout payment
related to the 1997 Reel-Tech disposition and accrued employee benefits;
increase inventory by approximately $2.2 million; and fund operations losses in
the quarter. In addition, the sale of the Company's Japan subsidiary lowered
working capital by approximately $400,000.
As of April 1, 1999, the Company had no debt outstanding. Borrowings as of
December 31, 1998 consisted of borrowings under the Japan subsidiary line of
credit. This subsidiary was sold during the first quarter 1999. No borrowings
were outstanding under the German subsidiary line of credit and the $4.0 million
U.S. line of credit which matures in May 1999.
The Company estimates that capital expenditures for property, plant and
equipment during the remainder of 1999 will be less than $1.5 million. The
Company believes that cash, cash equivalents and marketable securities and cash
flows generated from operations are sufficient to meet current and anticipated
future capital expenditures. Although the Company expects that such expenditures
will be made, it has purchase commitments for only a small portion of this
amount.
At April 1, 1999, the Company's material short-term unused sources of liquidity
consisted of approximately $12.1 million in cash, cash equivalents and
marketable securities and available borrowings of $240,000 under its German
subsidiary line of credit and $4.0 million under its U.S. line of credit. The
Company believes these sources and cash flow from operations will be sufficient
during 1999 to fund working capital needs, service existing debt and finance
planned capital acquisitions.
SHARE REPURCHASE PROGRAM
Under a previously announced share repurchase program, the Company is authorized
to repurchase up to 1,123,800 shares (approximately 15.6%) of its outstanding
common stock. These purchases may be executed through open market purchases at
prevailing market prices, through block purchases or in privately negotiated
transactions, and may commence or be discontinued at any time. As of April 1,
1999, the Company has repurchased 1,016,200 shares under this repurchase program
at a total cost of approximately $7.1 million. The Company has not repurchased
shares under this plan since the second quarter of 1997 although it still has
the authority to do so.
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 April 1, 1999, the Company
has incurred and expensed approximately $300,000 and capitalized approximately
$213,000 related to this project.
Page 13
<PAGE>
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 March 1999 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 which have not responded
that are deemed to be critical suppliers, or whose 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 and
any required remediation are 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
On January 1, 1999, the European Economic and Monetary Union (the "EMU")
introduced the Euro, which became a functional legal currency of the EMU
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.
Page 14
<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
(a) Exhibits
None
(b) Reports on Form 8-K
A report on Form 8-K dated February 8, 1999 was filed related
to the selection of Fred R. Hume as President and Chief
Executive Officer as of February 23, 1999, and his addition to
the Board of Directors effective January 29, 1999.
A report on Form 8-K dated February 12, 1999 was filed
relating to a press release that the Company issued reporting,
among other things, that (1) on February 10, 1999 the Company
entered into a Standstill Agreement with Bisco Industries,
Inc., Bisco Industries, Inc. Profit Sharing and Savings Plan
and Glen F. Ceiley (the "Bisco Parties"); (2) Mr. Ceiley has
been added to the Board of Directors of Data I/O; and (3) the
Bisco Parties will be permitted to increase their ownership of
Data I/O's Common Stock from approximately 14% to up to 19.99%
pursuant to an amendment to the Company's Shareholder Rights
Plan, a copy of which amendment has been filed with the
Securities and Exchange Commission.
Page 15
<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: May 11, 1999
By://S//Joel S. Hatlen
-------------------
Joel S. Hatlen
Vice President - Finance
Chief Financial Officer
Secretary and Treasurer
Page 16
<PAGE>
EXHIBIT INDEX
Exhibit Number Title Page Number
None
Page 17
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