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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Or the transition period from ___________ to ______________
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, including 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
8,202,178 shares of no par value of the Registrant's Common Stock were issued
and outstanding as of May 12, 2005.
DATA I/O CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 2005
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
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Item 4. Controls and Procedures 15
Part II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
Signatures 19
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------------
Mar. 31, Dec. 31,
2005 2004
------------------------------------------------
(in thousands, except share data) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,801 $5,534
Marketable securities 1,330 1,037
Trade accounts receivable, less allowance for
doubtful accounts of $179 and $155 5,366 4,489
Inventories 3,807 4,139
Other current assets 495 652
--------------------- ----------------
TOTAL CURRENT ASSETS 14,799 15,851
Property and equipment - net 1,880 1,970
Other assets 23 26
--------------------- ----------------
TOTAL ASSETS $16,702 $17,847
===================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,270 $1,688
Accrued compensation 840 991
Deferred revenue 1,297 1,706
Other accrued liabilities 1,083 1,126
Accrued costs of business restructuring 18 86
Income taxes payable 3 4
--------------------- ----------------
TOTAL CURRENT LIABILITIES 4,511 5,601
Deferred gain on sale of property 679 776
--------------------- ----------------
TOTAL LIABILITIES 5,190 6,377
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, 8,199,678
and 8,064,696 shares 19,092 19,001
Accumulated deficit (7,979) (8,018)
Accumulated other comprehensive income 399 487
--------------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 11,512 11,470
--------------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,702 $17,847
===================== ================
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Mar. 31, Mar 31,
For the three months ended 2005 2004
- -------------------------------------------------------------------------------------- ------------------ ---------------------
(in thousands, except per share data)
Net sales $6,737 $6,834
Cost of goods sold 2,723 3,121
------------------ ---------------------
Gross margin 4,014 3,713
Operating expenses:
Research and development 1,337 1,204
Selling, general and administrative 2,631 2,172
------------------ ---------------------
Total operating expenses 3,968 3,376
------------------ ---------------------
Operating income 46 337
Non-operating income (expense):
Interest income 23 35
Interest expense (3) (1)
Foreign currency exchange (21) (14)
------------------ ---------------------
Total non-operating income (expense) (1) 20
------------------ ---------------------
Income before income taxes 45 357
Income tax expense 6 61
------------------ ---------------------
Net income $39 $296
================== =====================
Basic and diluted earnings per share $0.00 $0.04
================== =====================
Weighted average shares outstanding 8,154 7,998
================== =====================
Weighted average and potential shares outstanding 8,550 8,414
================== =====================
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
Mar 31, Mar 31,
For the three months ended 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net income $39 $296
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 262 192
Write-off of assets 9 -
Equipment transferred to cost of goods sold 162 54
Amortization of deferred gain on sale (97) (82)
Net change in:
Deferred revenue (427) (19)
Trade accounts receivable (941) (571)
Inventories 166 548
Other current assets 145 18
Accrued costs of business restructuring (68) -
Accounts payable and accrued liabilities (697) (598)
----------- --------------
Net cash provided by (used in) operating activities (1,447) (162)
INVESTING ACTIVITIES:
Purchases of property and equipment (287) (554)
Purchases of marketable securities (290) (876)
Proceeds from sales of marketable securities - 861
----------- --------------
Net cash provided by (used in) investing activities (577) (569)
FINANCING ACTIVITIES:
Sale of common stock 70 81
Proceeds from exercise of stock options 22 8
----------- --------------
Net cash provided by (used in) financing activities 92 89
----------- --------------
Increase/(decrease) in cash and cash equivalents (1,932) (642)
Effects of exchange rate changes on cash 199 (32)
Cash and cash equivalents at beginning of year 5,534 4,380
----------- --------------
Cash and cash equivalents at end of quarter $3,801 $3,706
=========== ==============
See accompanying notes to consolidated financial statements.
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENT PREPARATION
Data I/O prepared the financial statements as of March 31, 2005 and March 31,
2004, according 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, 2004 has been derived from the audited
financial statements at that date. We have condensed or omitted certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America according to such SEC rules and regulations. Operating
results for the three months ended March 31, 2005 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2005. 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, 2004.
Stock-Based Compensation
Data I/O has stock-based employee compensation plans. We apply APB Opinion 25,
Accounting for Stock Issued to Employees, and related Interpretations in
accounting for our plans. The following table illustrates the effect on net
income and earnings per share if Data I/O had applied the fair value recognition
provisions of FASB Statement 123, Accounting for Stock-Based Compensation.
Data I/O's pro forma information follows (in thousands, except per share data):
Mar. 31, Mar. 31,
2005 2004
---------------- --------------
Net income - as reported $39 $296
Deduct: Total stock-based employee compensation expense determined under fair
value based method for awards granted, modified, or settled, net of related tax
effects (91) (68)
---------------- --------------
Net income (loss) - pro forma ($52) $228
================ ==============
Basic and diluted income per share - as reported $0.00 $0.04
Basic and diluted income (loss) per share - pro forma ($0.01) $0.03
NOTE 2 - RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
presentation used in the current period.
NOTE 3 - INVENTORIES
Inventories consisted of the following components (in thousands):
Mar. 31, Dec. 31,
2005 2004
------------------ ----------------
Raw material $2,198 $2,381
Work-in-process 969 899
Finished goods 640 859
------------------ ----------------
$3,807 $4,139
================== ================
We continued to reduce the overall level of inventory based upon the level of
sales we have been experiencing and are forecasting. During the quarter, we did
not significantly change the net carrying values of our inventory.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following components (in thousands):
Mar. 31, Dec. 31,
2005 2004
------------------ ----------------
Leasehold improvements $291 $291
Equipment 10,155 10,065
------------------ ----------------
10,446 10,356
Less accumulated depreciation 8,566 8,386
------------------ ----------------
Property and equipment - net $1,880 $1,970
================== ================
NOTE 5 - BUSINESS RESTRUCTURING PROGRESS
During 2004, we took restructuring related charges of $562,000 primarily related
to severance and a small office closure. These actions were taken to lower
production and operating costs to reduce the level of revenue required for our
net income breakeven point, particularly in view of the reduced margins in the
second quarter of 2004; the continued need to control costs in North America and
Europe; and the need to build staff serving China and Eastern Europe. At
December 31, 2004, $86,000 remained accrued as restructure charges.
During the first quarter of 2005, we paid out approximately $68,000 of the
remaining 2004 previously accrued restructure charges as outlined above. As of
March 31, 2005, restructuring charges of $18,000 remain accrued, which are
expected to be paid in 2005.
NOTE 6 - OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following components (in thousands):
Mar. 31, Dec. 31,
2005 2004
------------------- -----------------
Product warranty liability $490 $494
Sales return reserve 225 250
Other 368 382
------------------- -----------------
Other accrued liabilities $1,083 $1,126
=================== =================
The changes in Data I/O's product warranty liability are as follows (in
thousands):
Mar. 31,
2005
------------------
Liability, beginning balance $494
Net expenses 199
Warranty claims (199)
Accrual revisions (4)
------------------
Liability, ending balance $490
==================
NOTE 7 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
For the first quarter
----------------------------
2005 2004
----------- -------------
Numerator for basic and diluted earnings per share:
Net income $39 $296
----------- -------------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 8,154 7,998
Employee stock options 396 416
----------- -------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions of stock options 8,550 8,414
----------- -------------
Basic and diluted earnings per share
Total basic and diluted earnings per share $0.00 $0.04
=========== =============
At March 31, 2005 and 2004 there were 1,163,072 and 1,325,522, respectively, of
outstanding options potentially issueable as common stock.
NOTE 8 - ACCOUNTING FOR INCOME TAXES
Taxes due for the first quarter of 2005 relate to foreign and state tax
obligations. The Company's effective tax rate for the first three months of 2005
differed from the statutory 34% tax rate primarily due to utilization of net
operating loss carryforwards. The tax valuation allowance decreased by
approximately $4,000 during the quarter ended March 31, 2005. As of March 31,
2005, the Company has a valuation allowance of $9,803,000.
NOTE 9 - COMPREHENSIVE INCOME
During the first quarter of 2005 and 2004 total comprehensive income (loss) was
comprised of the following (in thousands):
For the first quarter
------------------------------
2005 2004
------------- -------------
Net income $39 $296
Foreign currency translation loss (91) (56)
Unrealized gain on marketable securities 3 -
------------- -------------
Total comprehensive income (loss) ($49) $240
============= =============
NOTE 10 - FOREIGN CURRENCY TRANSLATION AND DERIVATIVES
Data I/O translates assets and liabilities of foreign subsidiaries at the
exchange rate on the balance sheet date. We translate revenues, costs and
expenses of foreign subsidiaries at average rates of exchange prevailing during
the year. We charge or credit translation adjustments resulting from this
process to other comprehensive income (a component of stockholders' equity), net
of taxes. Realized and unrealized gains and losses resulting from the effects of
changes in exchange rates on assets and liabilities denominated in foreign
currencies are included in non-operating expense as foreign currency transaction
gains and losses.
Data I/O accounts for its hedging activities in accordance with SFAS No. 133,
Accounting for Derivatives and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and requires
recognition of derivatives as assets or liabilities in the statement of
financial position and measurement of those instruments at fair value.
Data I/O utilizes forward foreign exchange contracts to reduce the impact of
foreign currency exchange rate risks where natural hedging strategies cannot be
effectively employed. All hedging instruments held by us are fair value hedges.
Generally, these contracts have maturities less than one year and require us to
exchange foreign currencies for U.S. dollars at maturity. The change in fair
value of the open hedge contracts as of March 31, 2005 is an unrealized loss of
$2,000 and is included in accounts payable on the balance sheet.
Data I/O does not hold or issue derivative financial instruments for trading
purposes. The purpose of our hedging activities is to reduce the risk that the
valuation of the underlying assets, liabilities and firm commitments will be
adversely affected by changes in exchange rates. Our derivative activities do
not create foreign currency exchange rate risk because fluctuations in the value
of the instruments used for hedging purposes are offset by fluctuations in the
value of the underlying exposures being hedged.
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payments." SFAS
No. 123R requires employee stock options and rights to purchase shares under
stock participation plans to be accounted for under the fair value method, and
eliminates the ability to account for these instruments under the intrinsic
value method prescribed by APB Opinion No. 25, and allowed under the original
provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing
model for estimating fair value, which is amortized to expense over the service
periods. As amended on April 14, 2005, the requirements of SFAS No. 123R are
effective for fiscal years beginning after June 15, 2005. The Company,
therefore, is required to adopt SFAS No. 123R on January 1, 2006. In March 2005,
the SEC issued SAB 107, "Share-Based Payments," which gives guidance on the
application of FAS 123R. The adoption of SFAS No. 123R is expected to have a
significant effect on the consolidated financial statements of Data I/O. See
Note 1 for the pro forma impact on net earnings (loss) and earnings (loss) per
share from calculating stock-related compensation costs under the fair value
alternative of SFAS No. 123. However, the calculation of compensation cost for
share-based payment transactions after the effective date of SFAS No. 123R and
under SAB 107 may be different from the calculation of compensation cost under
SFAS No. 123. Such potential differences have not yet been quantified. Also,
past usage of option plans and stock purchase plans may not reflect our
practices in future periods.
In March 2005, the Securities and Exchange Commission announced that the
compliance date for non-accelerated filers and foreign private issuers pursuant
to Section 404 of the Sarbanes-Oxley Act has been extended. Under the latest
extension, a company that is not required to file its annual and quarterly
reports on an accelerated basis must begin to comply with the requirements for
the assessment and the reporting on internal control over financial reporting
for its first fiscal year ending on or after July 15, 2006. This is a one-year
extension from the previously established July 15, 2005 compliance date. Data
I/O expects that it will continue to be a non-accelerated filer and that it
will, therefore, be required to comply with Section 404 of the Sarbanes-Oxley
Act as of December 31, 2006.
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 or trends; expected level of
expense; future results of operations or financial position; changes in gross
margin; integration of acquired products and operations; market acceptance of
our newly introduced or upgraded products; development, introduction and
shipment of new products; and any other guidance on future periods are
forward-looking statements. Forward-looking statements reflect management's
current expectations and are inherently uncertain. Although Data I/O believes
that the expectations reflected in these forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
achievements, or other future events. Moreover, neither Data I/O nor anyone else
assumes responsibility for the accuracy and completeness of these
forward-looking statements. Data I/O is under no duty to update any of these
forward-looking statements after the date of this report. The reader should not
place undue reliance on these forward-looking statements. The discussions in the
section entitled "Business - Cautionary 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, 2004, and in Exhibit 99.1 of this report describe some, but not
all, of the factors that could cause these differences.
OVERVIEW
Our goal is to continue to focus on managing the business to achieve profitable
operations, while developing and enhancing products to drive revenue and
earnings growth. Our challenge continues to be operating in the uncertain
economic environment, while positioning Data I/O to take advantage of an
anticipated recovery in capital spending. We expect that demand for programming
capacity should improve, in part based on third party forecasted increased 2005
unit sales for the semiconductor industry, which should provide improved
business opportunities for Data I/O.
We are continuing our efforts to balance increasing costs and strategic
investments in our business with the level of demand and mix of business we
expect. We are focusing our research and development efforts in our strategic
growth markets, namely new programming technology, in-system programming ("ISP")
ImageWriter technology, and automated programming systems for the manufacturing
environment, particularly extending the capabilities and support for our
FlashCORE architecture and the ProLINE-RoadRunner and PS families. To better
support our customers in their geographic areas and time zones, we are investing
in tools and device support operations in Germany, India and Shanghai, China.
Our customer focus has been on strategic high volume manufacturers and
programming centers and supporting NAND Flash and microcontrollers on our newer
products to gain new accounts and break into new markets, such as
microcontrollers for the automotive market. We are finalizing the operational
set up for our new subsidiaries in China and Brazil. We expanded our China
operations to take advantage of the growth of manufacturing in China and are
establishing a service operation in Brazil. We also increased our efforts to
recapture the Japanese market and are considering establishing a subsidiary in
Japan. We continue our efforts to partner with the semiconductor manufacturers
to better serve our mutual customers.
BUSINESS RESTRUCTURING PROGRESS
During 2004, we accrued restructuring charges that totaled $562,000 with a
remaining balance of $86,000 at December 31, 2004. The restructuring charges
related primarily to severance and a small office closure. These actions were
taken to lower production and operating costs to reduce the level of revenue
required for our net income breakeven point, particularly in view of our reduced
margins during 2004; the continued need to control costs in North America and
Europe; and the need to build staff serving China and Eastern Europe. During the
first quarter of 2005, approximately $68,000 was paid out and no additional
amounts were accrued. The balance at March 31, 2005 is $18,000. The remaining
balance is expected to be paid out in 2005.
CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that we make
estimates and judgments, which affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, Data I/O evaluates our estimates,
including those related to sales returns, bad debts, inventories, investments,
intangible assets, income taxes, warranty obligations, restructuring charges,
contingencies such as litigation, and contract terms that have multiple elements
and other complexities typical in the telecommunications equipment industry. We
base our estimates on historical experience and other assumptions that we
believe are reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements.
Revenue Recognition: Sales of our semiconductor programming equipment products
requiring installation by us that is other than perfunctory are recorded when
installation is complete, or at the later of customer acceptance or
installation, if an acceptance clause is specified in the sales terms.
Installation that is considered perfunctory includes any installation that can
be performed by other parties, such as distributors, other vendors, or in most
cases customers themselves. This takes into account the complexity, skill, and
training needed as well as customer expectations regarding installation. The
revenue related to these products is recognized at the time of shipment. We
record revenue from the sale of service and update contracts as deferred revenue
and we recognize it on a straight-line basis over the contractual period, which
is typically one year. We establish a reserve for sales returns based on
historical trends in product returns and estimates for new items. If the actual
future returns differ from historical levels, our revenue could be adversely
affected.
Allowance for Doubtful Accounts: We base the allowance for doubtful accounts
receivable on our assessment of the collectibility of specific customer accounts
and the aging of accounts receivable. If there is deterioration of a major
customer's credit worthiness or actual defaults are higher than historical
experience, our estimates of the recoverability of amounts due us could be
adversely affected.
Inventory Provisions: We base inventory purchases and commitments upon future
demand forecasts and historic usage. If there is a significant decrease in
demand for our products or there is a higher risk of inventory obsolescence
because of rapidly changing technology and customer requirements, we may be
required to increase our inventory provision adjustments and our gross margin
could be adversely affected.
Warranty Accruals: We accrue for warranty costs based on the expected material
and labor costs to fulfill our warranty obligations. If we experience an
increase in warranty claims, which are higher than our historical experience,
our gross margin could be adversely affected.
Tax Valuation Allowances: Given the uncertainty created by our loss history,
Data I/O expects to continue to limit the recognition of net deferred tax assets
and maintain the tax valuation allowances. We expect, therefore, that reversals
of the tax valuation allowance will take place for the next few years only as we
are able to take advantage of the underlying tax loss or other attributes in
carry forward. The transfer pricing and expense or cost sharing arrangements are
complex areas where judgments, such as the determination of arms-length
arrangements, can be subject to challenges by different tax jurisdictions.
Results of Operations
NET SALES
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
First Quarter
-------------------------------------------------------
Net sales by product line 2005 % Change 2004
--------------------------------------------------------------------------------------------------------------------
Automated programming systems $4,017 (5.5%) $4,252
Non-automated programming systems 2,720 5.3% 2,582
-------------------------------------------------------
Total programming systems $6,737 (1.4%) $6,834
=======================================================
First Quarter
-------------------------------------------------------
Net sales by location 2005 % Change 2004
--------------------------------------------------------------------------------------------------------------------
United States $2,236 60.9% $1,390
% of total 33.2% 20.3%
International $4,501 (17.3%) $5,444
% of total 66.8% 79.7%
- --------------------------------------------------------------------------------------------------------------------
Revenues for the first quarter of 2005 increased approximately 16% compared to
the fourth quarter of 2004, but decreased by 1% from the first quarter of 2004.
The revenue decrease from the first quarter of 2004 relates primarily to the
decrease in sales to the wireless handset manufactures, generally our largest
customer segment, reflecting an overall decrease in capacity demand by wireless
handset manufacturers. We expect sales from the wireless industry to increase
during the second quarter. Our revenue growth of approximately $925,000, or 16%,
from the fourth quarter of 2004 primarily results from an increase in sales to
the automotive electronics manufacturers. During the first quarter of 2005, we
reduced our backlog of orders from $1.5 million to $781,000.
Domestic sales increased approximately 61%, in the first quarter of 2005
compared to the first quarter of 2004, primarily as a result of the increase in
automotive electronics sales, while international sales decreased approximately
17% primarily as a result of the decrease in wireless handset segment sales. The
U.S. dollar continued to weaken in the first quarter of 2005 compared to the
first quarter of 2004, and in particular against the Euro, offsetting the
overall decrease in international sales by $119,000. The weakened U.S. dollar,
especially compared to the Euro, is expected to continue to assist our export
sales.
In 2004, we introduced the PS 588 and PS 288 FlashCORE automated programming
systems, ImageWriter, our ISP solution, eDSS tool suite for device support, and
a version of our ProLINE-RoadRunner designed for Panasonic CM402 machines. We
began shipping Beta units in 2004 of our ImageWriter and are in the process of
the full product launch including delivering demonstration units to the field in
the second quarter of 2005. We expect these products to increase our revenues;
however, partially offsetting this expected increase is the continued trend of
declining sales of our older non-automated product lines.
GROSS MARGIN
First Quarter
-----------------------------------------------------
(in thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
Gross Margin $4,014 $3,713
Percentage of net sales 59.6% 54.3%
- ---------------------------------------------------------------------------------------------------------------------
Gross margins increased in both dollars and as a percentage of sales compared to
the first quarter of 2004. The overall gross margin increase primarily relates
to the product and channel mix, a favorable operations overhead spending
variance of $139,000, and favorable domestic and international service cost
variances of $51,000 and $88,000, respectively. Improved aftermarket margins and
reduced labor and support costs, especially related to the restructuring actions
taken in the third quarter of 2004, also contributed to the increase in gross
margins. Gross margins were unfavorably impacted by lower sales volume and by
the export and currency translation effects of the weaker U.S. Dollar compared
to the Euro. We continue to forecast margin percentages at approximately the
current quarter's level.
RESEARCH AND DEVELOPMENT
First Quarter
------------------------------------------
(in thousands) 2005 2004
---------------------------------------------------------------------------------------------------------
Research and development $1,337 $1,204
Percentage of net sales 19.8% 17.6%
---------------------------------------------------------------------------------------------------------
Research and development ("R&D") spending for the first quarter 2005 compared to
the first quarter 2004 increased in both dollars and a percentage of sales. This
increase in spending was primarily related to our new product initiatives,
particularly the ImageWriter, our new in-system programming solution, and the
start of engineering operations in China.
SELLING, GENERAL AND ADMINISTRATIVE
First Quarter
------------------------------------------
(in thousands) 2005 2004
---------------------------------------------------------------------------------------------------------
Selling, general & administrative $2,631 $2,172
Percentage of net sales 39.1% 31.8%
---------------------------------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses increased by $459,000, or
21%, for the first quarter of 2005 compared to the first quarter of 2004. The
increase relates primarily to the hiring of additional key personnel totaling
$100,000, higher commission costs of $76,000 and a reduction of allocated
facility costs totaling $95,000. In addition, we incurred internal control
related costs associated with the Sarbanes Oxley requirements of $38,000,
increased marketing costs associated with our in system programming of $36,000,
higher public relation costs of $26,000 and higher travel and entertainment
costs of $20,000 as well as an unfavorable currency translation impact of
$23,000. We also incurred an additional $15,000 in administration costs related
to the new Shanghai office.
INTEREST
First Quarter
------------------------------------------
(in thousands) 2005 2004
---------------------------------------------------------------------------------------------------------
Interest income $23 $35
Interest expense ($3) ($1)
---------------------------------------------------------------------------------------------------------
Interest income decreased in the first quarter of 2005 compared to the same
period in 2004 due to a decrease in funds invested. The marketable securities
balance decreased approximately $1 million from March 31, 2004 compared to March
31, 2005.
INCOME TAXES
First Quarter
------------------------------------------
(in thousands) 2005 2004
---------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $6 $61
---------------------------------------------------------------------------------------------------------
Tax expense recorded for the first quarter of 2005 was due to foreign and state
taxes. The tax effective rate differed from the statutory tax rate primarily due
to utilization of net operating loss carryforwards. The tax valuation allowance
decreased by approximately $4,000 during the quarter. Data I/O has a valuation
allowance of $9,803,000 as of March 31, 2005.
Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
Mar. 31, Dec. 31,
(in thousands) 2005 Change 2004
- ---------------------------------------------------------------- ------------------ -------------------- -------------------
Working capital $10,289 $39 $10,250
- ---------------------------------------------------------------- ------------------ -------------------- -------------------
At March 31, 2005, Data I/O's principal sources of liquidity consisted of
existing cash, cash equivalents and marketable securities. Our working capital
increased by $39,000 and our current ratio increased from 2.8 at December 31,
2004 to 3.3 at March 31, 2005.
Our cash and cash equivalents decreased by $1.7 million during the first quarter
of 2005 primarily due to the increase in cash used for operating activities
totaling $1.4 million. The $1.4 million of cash used for operations primarily
included a $697,000 decrease in accounts payable and accrued liabilities, a
$941,000 increase in accounts receivable, and a $427,000 decrease in deferred
revenue partially offset by a $166,000 decrease in inventory, $162,000 of
demonstration equipment transferred to cost of goods sold, and $262,000 of
depreciation and amortization. The increase in account receivable results from
increased sales especially late in the quarter. The decrease in accounts payable
and accrued expenses results primarily from a timing difference of approximately
$200,000, decrease in inventory purchases of approximately $300,000, the payout
of the 401(k) employer match of $133,000, and the payment of $68,000 related to
the restructure, partially offset by an increase in commissions payable of
$107,000.
We used $577,000 of cash in investing activities during the first quarter of
2005, with $290,000 used to purchase marketable securities and $287,000 used to
purchase property, plant and equipment. We expect that we will continue to make
capital expenditures to support our business and we anticipate that present
working capital will be sufficient to meet our operating requirements. Capital
expenditures for property, plant and equipment during 2005 are planned to be
approximately $1 million. Although we expect to make such expenditures, we had
no significant outstanding purchase commitments at March 31, 2005. We are
investigating the acquisition of a new information system during 2005 which is
excluded from the capital spending estimate. Capital expenditures are expected
to be funded by existing and internally generated funds or lease financing.
As a result of our significant product development, customer support,
international expansion and selling and marketing efforts, we have required
substantial working capital to fund our operations. Over the last few years, we
restructured our operations to lower our costs and operating expenditures in
geographic regions and to lower the level of revenue required for our net income
breakeven point, to preserve our cash position and to focus on profitable
operations. We believe that we have sufficient working capital available under
our operating plan to fund our operations and capital requirements through at
least December 31, 2005. Any substantial inability to achieve our current
business plan could have a material adverse impact on our financial position,
liquidity, or results of operations and may require us to reduce expenditures
and/or seek additional financing.
Aggregate Contractual Obligations and Commitments
We have purchase obligations for inventory and production costs as well as other
obligations such as capital expenditures, service contracts, marketing, and
development agreements. Arrangements are considered purchase obligations if a
contract specifies all significant terms, including fixed or minimum quantities
to be purchased, a pricing structure and approximate timing of the transaction.
Most arrangements are cancelable without a significant penalty, and with short
notice, typically less than 90 days. Any amounts reflected on the balance sheet
as accounts payable and accrued liabilities are excluded from the below table.
We have no long-term debt. We have commitments under non-cancelable operating
leases and other agreements, primarily for factory and office space, with
initial or remaining terms of one year or more as follows:
As of March 31, (in thousands):
Purchase Operating
obligations leases
---------------- ----------------
2005 $1,402 $1,168
2006 7 1,459
2007 - 188
2008 - 138
2009 and thereafter - 149
---------------- ----------------
Total $1,409 $3,102
================ ================
RECENT ACCOUNTING PRONOUCEMENTS
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payments." SFAS
No. 123R requires employee stock options and rights to purchase shares under
stock participation plans to be accounted for under the fair value method, and
eliminates the ability to account for these instruments under the intrinsic
value method prescribed by APB Opinion No. 25, and allowed under the original
provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing
model for estimating fair value, which is amortized to expense over the service
periods. The requirements of SFAS No. 123R are effective for fiscal year
beginning after June 15, 2005, as amended on April 14, 2005. The Company,
therefore, is required to adopt SFAS No. 123R on January 1, 2006. In March 2005,
the SEC issued SAB 107, "Share-Based Payments," which gives guidance on the
application of FAS 123R. The adoption of SFAS No. 123R is expected to have a
significant effect on the consolidated financial statements of Data I/O. See
Note 1 for the pro forma impact on net earnings (loss) and earnings (loss) per
share from calculating stock-related compensation costs under the fair value
alternative of SFAS No. 123. However, the calculation of compensation cost for
share-based payment transactions after the effective date of SFAS No. 123R and
under SAB 107 may be different from the calculation of compensation cost under
SFAS No. 123. Such potential differences have not yet been quantified. Also,
past usage of option plans and stock purchase plans may not reflect our
practices in future periods.
In March 2005, the Securities and Exchange Commission announced that the
compliance date for non-accelerated filers and foreign private issuers pursuant
to Section 404 of the Sarbanes-Oxley Act has been extended. Under the latest
extension, a company that is not required to file its annual and quarterly
reports on an accelerated basis must begin to comply with the requirements for
the assessment and the reporting on internal control over financial reporting
for its first fiscal year ending on or after July 15, 2006. This is a one-year
extension from the previously established July 15, 2005 compliance date. Data
I/O expects that it will continue to be a non-accelerated filer and that it
will, therefore, be required to comply with Section 404 of the Sarbanes-Oxley
Act as of December 31, 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including fluctuations in foreign
exchange rates and interest rates.
INTEREST RATE RISK
We invest our cash in a variety of short-term financial instruments, including
government bonds, commercial paper and money market instruments, which are
classified as available-for-sale. Our investments are made in accordance with an
investment policy approved by our board of directors. Our portfolio is
diversified and consists primarily of investment grade securities to minimize
credit risk. Cash balances in foreign currencies are operating balances and are
invested in demand or short-term deposits of the local operating bank.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted because of a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations because of changes in interest rates or we may suffer losses in
principal if forced to sell securities that have seen a decline in market value
because of changes in interest rates. We do not attempt to reduce or eliminate
our exposure to interest rate risk through the use of derivative financial
instruments due to the short-term nature of the investments.
The table below provides information about our marketable securities, including
principal cash flows and the related weighted average interest rates (in
thousands):
Estimated Fair Principal Estimated Fair
Principal Value at Cash Flows Value at
Cash Flows March 31, 2005 to March 31, December 31,
For Q2 2005 2005 2004
---------------- ------------------ -------------- ----------------
Corporate Bonds $780 $780 $787 $787
1.559% 1.559%
Taxable Auction Securities 550 550 250 250
3.012% 2.352%
---------------- ------------------ -------------- ----------------
Total portfolio value $1,330 $1,330 $1,037 $1,037
================ ================== ============== ================
FOREIGN CURRENCY RISK
We have operations in Germany, Canada, and China and are setting up operations
in Brazil. Therefore, we are subject to risks typical of an international
business including, but not limited to, differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely affected by changes in these or other
factors.
Our sales and corresponding receivables are substantially in U.S. dollars other
than sales made in our subsidiaries in Germany, Canada, and China. Through our
operations in Germany, Canada, and China and soon in Brazil, we incur certain
product costs; research and development; customer service and support costs;
selling, general and administrative expenses in local currencies. We are
exposed, in the normal course of business, to foreign currency risks on these
expenditures and on related foreign currency denominated monetary assets and
liabilities. We have evaluated our exposure to these risks and believe that our
only significant exposure to foreign currencies at the present time is primarily
related to Euro-based receivables. We use forward contracts to hedge and thereby
minimize the currency risks associated with certain transactions denominated in
Euros.
If our actual currency requirement or timing in the period forecasted differs
materially from the notional amount of our forward contracts and/or the natural
balancing of receivables and payables in foreign currencies during a period of
currency volatility or if we do not continue to manage our exposure to foreign
currency through forward contracts or other means, we could experience
unanticipated foreign currency gains or losses. In addition, our foreign
currency risk management policy subjects us to risks relating to the
creditworthiness of the commercial banks with which we enter into forward
contracts. If one of these banks cannot honor its obligations, we may suffer a
loss. We also invest in our international operations, which will likely result
in increased future operating expenses denominated in those local currencies. In
the future, our exposure to foreign currency risks from these other foreign
currencies may increase and if not managed appropriately, we could experience
unanticipated foreign currency gains and losses.
The purpose of our foreign currency risk management policy is to reduce the
effect of exchange rate fluctuation on our results of operations. Therefore,
while our foreign currency risk management policy may reduce our exposure to
losses resulting from unfavorable changes in currency exchange rates, it also
reduces or eliminates our ability to profit from favorable changes in currency
exchange rates.
At March 31, 2005, we had two forward contracts to sell Euros in exchange for
$218,000 with rates ranging from 1.2929 to 1.2805 all scheduled to be due within
the next quarter and the value at that date of $216,100.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, Data I/O evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report (the "Evaluation Date").
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to Data I/O (or its consolidated subsidiaries) required to be included
in our periodic SEC filings and Form 8-K reports.
(b) Changes in internal controls.
There were no changes made in our internal controls during the period covered by
this report that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting except as described below.
During the preparation of our 2004 year-end financial statements, we identified
a calculation error that had resulted in the understatement of inter-company
expense eliminations on foreign subsidiary demonstration inventory equipment
depreciation, with a corresponding overstatement of demonstration inventory
equipment accumulated depreciation. While we believe the impacts of this
calculation error are not material to any previously issued financial statement,
we determined that this calculation error was most appropriately corrected
through restatement of previously issued financial statements. We have restated
the annual report on Form 10-K for the fiscal year ended December 31, 2003.
Process changes have been instituted to appropriately eliminate the
inter-company foreign subsidiary demonstration inventory equipment depreciation
amounts.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity 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
(a) Exhibits
The following list is a subset of the list of exhibits described below and
contains all compensatory plans, contracts or arrangements in which any director
or executive officer of Data I/O is a participant, unless the method of
allocation of benefits thereunder is the same for management and non-management
participants:
(1) Amended and Restated 1982 Employee Stock Purchase Plan. See Exhibit 10.18.
(2) Amended and Restated Retirement Plan and Trust Agreement. See Exhibit 10.2,
10.3, 10.4, 10.8, 10.11, 10.12, and 10.13.
(3) Summary of Amended and Restated Management Incentive Compensation Plan. See
Exhibit 10.9.
(4) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1.
(5) Amended and Restated 1986 Stock Option Plan. See Exhibit 10.15.
(6) Change in Control Agreements. See Exhibit 10.22 and 10.23.
(7) 1996 Director Fee Plan. See Exhibit 10.14.
(8) Letter Agreement with Frederick R. Hume. See Exhibit 10.17.
(9) Amended and Restated 2000 Stock Compensation Incentive Plan.
See Exhibit 10.19.
(10) Form of Option Agreement. See Exhibit 10.21.
(11) Data I/O Corporation Tax Deferral Retirement Plan. See Exhibit 10.20.
3 Articles of Incorporation:
3.1 Data I/O's restated Articles of Incorporation filed November 2,
1987 (Incorporated by reference to Exhibit 3.1 of Data I/O's 1987
Annual Report on Form 10-K (File No. 0-10394)).
3.2 Data I/O's Bylaws as amended and restated as of October 2003
(Incorporated by reference to Data I/O's 2003 Annual Report on Form
10-K (File No. 0-10394)).
3.3 Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock (Incorporated by reference to
Exhibit 1 of Data I/O's Registration Statement on Form 8-A filed
March 13, 1998 (File No. 0-10394)).
4 Instruments Defining the Rights of Security Holders, Including
Indentures:
4.1 Rights Agreement, dated as of April 4, 1998, between Data I/O
Corporation and ChaseMellon Shareholder Services, L.L.C. as Rights
Agent, which includes: as Exhibit A thereto, the Form of Right
Certificate; and, as Exhibit B thereto, the Summary of Rights to
Purchase Series A Junior Participating Preferred Stock (Incorporated
by reference to Data I/O's Current Report on Form 8-K filed on
March 13, 1998).
4.2 Rights Agreement, dated as of March 31, 1988, between Data I/O
Corporation and First Jersey National Bank, as Rights Agents, as
amended by Amendment No. 1 thereto, dated as of May 28, 1992 and
Amendment No. 2 thereto, dated as of July 16, 1997 (Incorporated by
reference to Data I/O's Report on Form 8-K filed on March 13, 1998).
4.3 Amendment No. 1, dated as of February 10, 1999, to Rights Agreement,
dated as of April 4, 1998, between Data I/O Corporation and
ChaseMellon Shareholder Services, L.L.C. as Rights Agent
(Incorporated by reference to Exhibit 4.1 of Data I/O's Form 8-A/A
dated February 10, 1999).
10 Material Contracts:
10.1 Amended and Restated 1983 Stock Appreciation Rights Plan dated
February 3, 1993 (Incorporated by reference to Exhibit 10.23 of
Data I/O's 1992 Annual Report on Form 10-K (File No. 0-10394)).
10.2 Amended and Restated Retirement Plan and Trust Agreement
(Incorporated by reference to Exhibit 10.26 of Data I/O's 1993
Annual Report on Form 10-K (File No. 0-10394)).
10.3 First Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.21 of Data I/O's 1994
Annual Report on Form 10-K (File No. 0-10394)).
10.4 Second Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.26 of Data I/O's 1995
Annual Report on Form 10-K (File No. 0-10394)).
10.5 Purchase and Sale Agreement dated as of July 9, 1996 (Relating to
the sale of Data I/O Corporation's headquarters property in
Redmond, Washington consisting of approximately 79 acres of land
and an approximately 96,000 square foot building. (Portions of this
exhibit have been omitted pursuant to an application for an order
granting confidential treatment. The omitted portions have been
separately filed with the Commission) (Incorporated by reference to
Exhibit 10.32 of Data I/O's 1996 Annual Report on Form 10-K
(File No. 0-10394)).
10.6 Letter dated as of December 20, 1996, First Amendment and
extension of the Closing Date under that certain Purchase and Sale
Agreement dated as of July 9, 1996 (Portions of this exhibit have
been omitted pursuant to an application for an order granting
confidential treatment. The omitted portions have been separately
filed with the Commission)(Incorporated by reference to Exhibit
10.33 of Data I/O's 1996 Annual Report on Form 10-K
(File No. 0-10394)).
10.7 Letter dated as of February 17, 1997, Second Amendment and
extension of the Closing Date under that certain Purchase and Sale
Agreement dated as of July 9, 1996 (Portions of this exhibit have
been omitted pursuant to an application for an order granting
confidential treatment. The omitted portions have been separately
filed with the Commission)(Incorporated by reference to
Exhibit 10.34 of Data I/O's 1996 Annual Report on Form 10-K
(File No. 0-10394)).
10.8 Third Amendment to the Data I/O Tax Deferred Retirement Plane
(Incorporated by reference to Exhibit 10.35 of Data I/O's 1996
Annual Report on Form 10-K (File No. 0-10394)).
10.9 Amended and Restated Management Incentive Compensation Plan dated
January 1, 1997 (Incorporated by reference to Exhibit 10.25 of
Data I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).
10.10 Amended and Restated Performance Bonus Plan dated January 1, 1997
(Incorporated by reference to Exhibit 10.26 of Data I/O's 1997
Annual Report on Form 10-K (File No. 0-10394)).
10.11 Fourth Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.27 of Data I/O's 1997
Annual Report on Form 10-K (File No. 0-10394)).
10.12 Fifth Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.28 of Data I/O's 1997
Annual Report on Form 10-K (File No. 0-10394)).
10.13 Sixth Amendment to the Data I/O Tax Deferred Retirement Plan
(Incorporated by reference to Exhibit 10.29 of Data I/O's 1997
Annual Report on Form 10-K (File No. 0-10394)).
10.14 Amended and Restated Data I/O Corporation 1996 Director Fee Plan
(Incorporated by reference to Exhibit 10.32 of Data I/O's 1997
Annual Report on Form 10-K (File No. 0-10394.
10.15 Amended and Restated 1986 Stock Option Plan dated May 12, 1998
(Incorporated by reference to Exhibit 10.37 of Data I/O's 1998
Annual Report on Form 10-K (File No. 0-10394)).
10.16 Sublease dated December 22, 1999 between Data I/O Corporation and
Imandi.com, Inc. (Incorporated by reference to Exhibit 10.34 of
Data I/O's 1999 Annual Report on Form 10-K (File No. 0-10394)).
10.17 Letter Agreement with Fred R. Hume dated January 29, 1999
(Incorporated by reference to Exhibit 10.35 of Data I/O's 1999
Annual Report on Form 10-K (File No. 0-10394)).
10.18 Amended and Restated 1982 Employee Stock Purchase Plan dated
May 16, 2003 (Incorporated by reference to Data I/O's 2003 Proxy
Statement dated March 31, 2003).
10.19 Amended and Restated 2000 Stock Compensation Incentive Plan dated
May 20, 2004 (Incorporated by reference to Data I/O's 2004 Proxy
Statement dated April 12, 2004).
10.20 Data I/O Corporation Tax Deferred Retirement Plan, as amended
(Incorporated by reference to Exhibit 10.20 of Data I/O's 2004
Annual Report on Form 10-K (File No. 0-10394)).
10.21 Form of Option Agreement (Incorporated by reference to Exhibit
10.21 of Data I/O's 2004 Annual Report on Form 10-K (File No.
0-10394)).
10.22 Change in Control Agreement with Fred R. Hume dated April 22, 2004
(Incorporated by reference to Exhibit 10.22 of Data I/O's 2004
Annual Report on Form 10-K (File No. 0-10394)).
10.23 Change in Control Agreement with Joel S. Hatlen dated
April 22, 2004 (Incorporated by reference to Exhibit 10.23 of Data
I/O's 2004 Annual Report on Form 10-K (File No. 0-10394)).
31 Certification - Section 302:
31.1 Chief Executive Officer Certification 20
31.2 Chief Financial Officer Certification 21
32 Certification - Section 906:
32.1 Chief Executive Officer Certification 22
32.2 Chief Financial Officer Certification 23
99 Other Exhibits
99.1 Risk Factors 24
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 13, 2005
By://S//Joel S. Hatlen
Joel S. Hatlen
Vice President - Finance
Chief Financial Officer
Secretary and Treasurer
(Principal Financial Officer and Duly Authorized Officer)
By://S//Frederick R. Hume
Frederick R. Hume
President
Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)
Exhibit 31.1
Section 302 Certification I, Frederick R. Hume, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over a financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date May 13, 2005 /s/FREDERICK R. HUME
Frederick R. Hume
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Section 302 Certification I, Joel S. Hatlen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over a financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date May 13, 2005 /s/ Joel S. Hatlen
Joel S. Hatlen
(Vice President and Chief Financial Officer
Principal Financial Officer)
Exhibit 32.1
Certification by Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the quarterly Report of Data I/O Corporation (the "Company")
on Form 10-Q for the period ended March 31, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Frederick R. Hume,
Chief Executive Officer of the Company, certify, that pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Frederick R. Hume
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)
May 13, 2005
Exhibit 32.2
Certification by Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the quarterly Report of Data I/O Corporation (the "Company")
on Form 10-Q for the period ended March 31, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Joel S. Hatlen,
Chief Financial Officer of the Company, certify, that pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
May 13, 2005
Exhibit 99.1
Cautionary Factors That May Affect Future Results
- --------------------------------------------------------------------------------
Data I/O's disclosure and analysis in this Annual Report contains some
forward-looking statements. Forward-looking statements include our current
expectations or forecasts of future events. The reader can identify these
statements by the fact that they do not relate strictly to historical or current
facts. In particular, these include statements relating to future action,
prospective products, new technologies, establishing foreign operations, future
performance or results of current and anticipated products, sales efforts,
expenses, outsourcing of functions, outcome of contingencies, impact of
regulatory requirements, restructure actions and financial results.
Any or all of the forward-looking statements in this Annual Report or in any
other public statement made may turn out to be wrong. They can be affected by
inaccurate assumptions we might make, or known or unknown risks and
uncertainties can affect these forward-looking statements. Many factors -- for
example, product competition and product development -- will be important in
determining future results. Moreover, neither Data I/O nor anyone else assumes
responsibility for the accuracy and completeness of these forward-looking
statements. Actual future results may materially vary.
We undertake no obligation to publicly update any forward-looking statements
after the date of this Annual Report, whether as a result of new information,
future events or otherwise. The reader should not place undue reliance on such
forward-looking statements. The reader is advised, however, to consult any
future disclosures Data I/O makes on related subjects in our 10-Q, 8-K and 10-K
reports to the SEC and press releases. Also, note that Data I/O provides the
following cautionary discussion of risks, uncertainties and possible inaccurate
assumptions relevant to our business. These are factors that we think could
cause Data I/O's actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect Data I/O. This discussion is permitted by the Private Securities
Litigation Reform Act of 1995.
RISK FACTORS
DELAYS IN DEVELOPMENT, INTRODUCTION AND SHIPMENT OF NEW PRODUCTS MAY RESULT IN A
DECLINE IN SALES.
Data I/O currently is developing new engineering and automated programming
systems. Significant technological, supplier, manufacturing or other problems
may delay the development, introduction or production of these products.
For example, we may encounter these problems:
o technical problems in the development of a new programming system platform or
the robotics for new automated handling systems
o inability to hire qualified personnel
o delays or failures to perform by third parties involved in our development
projects
Delays in the development, completion and shipment of new products, or failure
of customers to accept new products, may result in a decline in sales.
QUARTERLY FLUCTUATIONS IN OUR OPERATING RESULTS MAY ADVERSELY AFFECT OUR STOCK
PRICE.
Data I/O's operating results tend to vary from quarter to quarter. Our revenue
in each quarter substantially depends upon orders received within that quarter.
Conversely, our expenditures are based on investment plans and estimates of
future revenues. We may, therefore, be unable to quickly reduce our spending if
our revenues decline in a given quarter. As a result, operating results for that
quarter will suffer. Our results of operations for any one quarter are not
necessarily indicative of results for any future periods.
Other factors, which may cause our quarterly operating results to fluctuate,
include:
o increased competition
o timing of new product announcements
o product releases and pricing changes by us or our competitors
o market acceptance or delays in the introduction of new products
o production constraints
o labor or material shortages
o the timing of significant orders
o the sales channel mix of direct vs. indirect distribution
o war or terrorism
o health issues (such as SARS)
o customers' budgets
o adverse movements in exchange rates, interest rates or tax rates
o cyclical nature of demand for our customers' products
o general economic conditions in the countries where we sell products
o expenses and obtaining authorizations in setting up new operations or
locations
Due to all of the foregoing factors, it is possible that in some future
quarters, our operating results will be below expectations of analysts and
investors.
FAILURE TO ADAPT TO TECHNOLOGY TRENDS IN OUR INDUSTRY MAY HINDER OUR
COMPETITIVENESS AND FINANCIAL RESULTS.
Product technology in Data I/O's industry evolves rapidly, making timely product
innovation essential to success in the marketplace. Introducing products with
improved technologies or features may render our existing products obsolete and
unmarketable. Technological advances that may negatively impact our business
include:
o new device package types, densities, and technologies requiring hardware and
software changes in order to be programmed by our products
o electronics equipment manufacturing practices, such as widespread use of
in-circuit programming
o customer software platform preferences different from those on which our
products operate
o more rigid industry standards, which would decrease the value-added element of
our products and support services
If we cannot develop products in a timely manner in response to industry
changes, or if our products do not perform well, our business and financial
condition may be adversely affected. Also, our new products may contain defects
or errors that give rise to product liability claims against us or cause our
products to fail to gain market acceptance. Our future success depends on our
ability to successfully compete with other technology firms in attracting and
retaining key technical personnel.
A DECLINE IN ECONOMIC AND MARKET CONDITIONS MAY RESULT IN DECREASED CAPITAL
SPENDING BY OUR CUSTOMERS.
Our business is highly impacted by capital spending plans and other economic
cycles that affect the users and manufacturers of ICs. These industries are
highly cyclical and are characterized by rapid technological change, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. As we experienced in recent years, our operations may in
the future reflect substantial fluctuations from period-to-period as a
consequence of these industry patterns, general economic conditions affecting
the timing of orders from major customers, and other factors affecting capital
spending. These factors could have a material adverse effect on our business and
financial condition.
WE HAVE A HISTORY OF RECENT OPERATING LOSSES AND MAY BE UNABLE TO GENERATE
ENOUGH REVENUE TO ACHIEVE AND MAINTAIN PROFITABILITY.
We have incurred net losses in two of our last three fiscal years. We will
continue to examine our level of operating expense based upon our projected
revenues. Any planned increases in operating expenses may result in larger
losses in future periods if projected revenues are not achieved. As a result, we
may need to generate greater revenues than we have recently to achieve and
maintain profitability. However, we cannot provide assurance that our revenues
will increase and our strategy may not be successful, resulting in future
losses.
OUR RECENT RESTRUCTURING ACTIVITIES MAY HAVE A NEGATIVE IMPACT ON OUR FUTURE
OPERATIONS.
Our restructuring plans may yield unanticipated consequences, such as increased
burden on our administrative, operational, and financial resources and increased
responsibilities for our management personnel. As a result, our ability to
respond to unexpected challenges may be impaired and we may be unable to take
advantage of new opportunities.
In addition, many of the employees that were terminated as a part of our
restructuring possessed specific knowledge or expertise, and that knowledge or
expertise may prove to have been important to our operations. In that case,
their absence may create significant difficulties, particularly if our business
experiences significant growth. Also, the reduction in workforce related to our
restructuring may subject us to the risk of litigation, which could result in
substantial cost. Any failure by us to properly manage this rapid change in
workforce could impair our ability to efficiently manage our business, to
maintain and develop important relationships with third-parties, and to attract
and retain customers. It could also cause us to incur higher operating cost and
delays in the execution of our business plan or in the reporting or tracking of
our financial results.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL AND OUR FUTURE ACCESS TO CAPITAL IS
UNCERTAIN.
Our past revenues have been and our future revenues may continue to be
insufficient to support the expense of our operations and any expansion of our
business. We may therefore need additional equity or debt capital to finance our
operations. If we are unable to generate sufficient cash flows from operations
or to obtain funds through additional debt or equity financing, we may have to
reduce some or all of our development and sales and marketing efforts and limit
the expansion of our business.
We believe our existing cash and cash equivalents will be sufficient to meet our
working capital requirements for at least the next twelve months. Thereafter,
depending on the development of our business, we may need to raise additional
cash for working capital or other expenses. We may also encounter opportunities
for acquisitions or other business initiatives that require significant cash
commitments, or unanticipated problems or expenses that could result in a
requirement for additional cash before that time.
Therefore, we may seek additional funding through public or private debt or
equity financing or from other sources. We have no commitments for additional
financing, and we may experience difficulty in obtaining funding on favorable
terms, if at all. Any financing we obtain may contain covenants that restrict
our freedom to operate our business or may require us to issue securities that
have rights, preferences or privileges senior to our Common Stock and may dilute
your ownership interest.
WE MAY FACE INCREASED COMPETITION AND MAY NOT BE ABLE TO COMPETE SUCCESSFULLY
WITH CURRENT AND FUTURE COMPETITORS.
Technological advances have reduced the barriers of entry into the programming
systems market. We expect competition to increase from both established and
emerging companies. If we fail to compete successfully against current and
future sources of competition, our profitability and financial performance will
be adversely impacted.
IF OUR RELATIONSHIP WITH SEMICONDUCTOR MANUFACTURERS DETERIORATES, OUR BUSINESS
MAY BE ADVERSELY AFFECTED.
We work closely with most semiconductor manufacturers to ensure that our
programming systems comply with their requirements. In addition, many
semiconductor manufacturers recommend our programming systems for use by users
of their programmable devices. These working relationships enable us to keep our
programming systems product lines up to date and provide end-users with broad
and current programmable device support. Our business may be adversely affected
if our relationships with semiconductor manufacturers deteriorate.
OUR RELIANCE ON A SMALL NUMBER OF SUPPLIERS MAY RESULT IN A SHORTAGE OF KEY
COMPONENTS, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
Certain parts used in our products are currently available from either a single
supplier or from a limited number of suppliers. If we cannot develop alternative
sources of these components, if sales of parts are discontinued by the supplier
or we experience deterioration in our relationship with these suppliers, there
may be delays or reductions in product introductions or shipments, which may
materially adversely affect our operating results.
Because we rely on a small number of suppliers for certain parts, we are subject
to possible price increases by these suppliers. Also, we may be unable to
accurately forecast our production schedule. If we under estimate our production
schedule, suppliers may be unable to meet our demand for components. This delay
in the supply of key components may materially adversely affect our business.
Over estimation of demand will lead to excess inventories that may become
obsolete.
The non-automated programming system products we acquired when we acquired SMS
in November 1998 are currently manufactured to our specifications by a
third-party foreign contract manufacturer. We may not be able to obtain a
sufficient quantity of these products if and when needed, which may result in
lost sales.
IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED THIRD-PARTY DISTRIBUTORS, OUR
BUSINESS MAY BE ADVERSELY AFFECTED.
Data I/O has an internal sales force and also utilizes third-party
representatives, and distributors. Therefore, the financial stability of these
representatives and distributors is important. Highly skilled professional
engineers use most of our products. To be effective, third-party distributors
must possess significant technical, marketing and sales resources and must
devote their resources to sales efforts, customer education, training and
support. These required qualities limit the number of potential third-party
distributors. Our business will suffer if we cannot attract and retain a
sufficient number of qualified third-party distributors to market our products.
In addition, global customers require coordination between these various sales
channels and a lack of responsiveness or coordination could adversely affect our
business with these increasingly global customers.
OUR INTERNATIONAL OPERATIONS MAY EXPOSE US TO ADDITIONAL RISKS THAT MAY
ADVERSELY AFFECT OUR BUSINESS.
International sales represented 80% of our net revenue for the fiscal year ended
December 31, 2004 and 67% for the quarter ended March 31, 2005. We expect that
international sales will continue to be a significant portion of our net
revenue. International sales may fluctuate due to various factors, including:
o migration of manufacturing to low cost geographies
o changes in regulatory requirements
o tariffs and taxes
o difficulties in establishing, staffing and managing foreign operations
o longer average payment cycles and difficulty in collecting accounts receivable
o fluctuations in foreign currency exchange rates
o compliance with applicable export licensing requirements
o product safety and other certification requirements
o difficulties in integrating foreign and outsourced operations
o political and economic instability
The European Community and European Free Trade Association ("EU") has
established certain electronic emission and product safety requirements ("CE").
Although our products currently meet these requirements, failure to obtain
either a CE certification or a waiver for any product may prevent us from
marketing that product in Europe. The EU also has directives concerning the
Reduction of Hazardous Substances ("RoHS") and the reduction of wasteful
consumption of natural resources including waste of electrical and electronic
equipment ("WEEE") which becomes effective later in 2005 and 2006. Failure to
meet the directives may prevent us from marketing certain products in Europe.
We operate subsidiaries in Germany, China and Canada and soon in Brazil. Our
business and financial condition is sensitive to currency exchange rates or any
other restrictions imposed on their currencies. Currency exchange fluctuations
in Canada, China, Brazil and Germany may adversely affect our investment in our
subsidiaries.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY OR OPERATE PROFITABLY.
Data I/O relies on patents, copyrights, trade secrets and trademarks to protect
our intellectual property, as well as product development and marketing skill to
establish and protect our market position. We attempt to protect our rights in
proprietary software products, including TaskLink and other software products,
by retaining the title to and copyright of the software and documentation, by
including appropriate contractual restrictions on use and disclosure in our
licenses, and by requiring our employees to execute non-disclosure agreements.
Because of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, portions of our products might possibly
infringe upon existing patents or copyrights, and we may, therefore, be required
to obtain licenses or discontinue the use of the infringing technology. We
believe that any exposure we may have regarding possible infringement claims is
a reasonable business risk similar to that assumed by other companies in the
electronic equipment and software industries. However, any claim of
infringement, with or without merit, could be costly and a diversion of
management's attention, and an adverse determination could adversely affect our
reputation, preclude us from offering certain products, and subject us to
substantial liability.
WE MAY PURSUE BUSINESS ACQUISITIONS THAT COULD IMPAIR OUR FINANCIAL POSITION AND
PROFITABILITY.
We may pursue acquisitions of complementary technologies, product lines or
businesses. Future acquisitions may include risks, such as:
o burdening management and our operating teams during the integration of the
acquired entity
o diverting management's attention from other business concerns
o failing to successfully integrate the acquired products
o lack of acceptance of the acquired products by our sales channels or customers
o entering markets where we have no or limited prior experience
o potential loss of key employees of the acquired company
o additional burden of support for an acquired programmer architecture
Future acquisitions may also impact Data I/O's financial position. For example,
we may use significant cash or incur additional debt, which would weaken our
balance sheet. We may also capitalize goodwill and intangible assets acquired,
the impairment of which would reduce our profitability. We cannot guarantee that
future acquisitions will improve our business or operating results.
THE LOSS OF KEY EMPLOYEES MAY ADVERSELY AFFECT OUR OPERATIONS.
We have employees located in the U.S., Germany, Canada and China. We also
utilize independent contractors for specialty work, primarily in research and
development and in our Brazilian operation, and utilize temporary workers to
adjust capacity to fluctuating demand. Many of our employees are highly skilled
and our continued success will depend in part upon our ability to attract and
retain employees who can be in great demand within the industry. None of our
employees are represented by a collective bargaining unit and we believe
relations with our employees are favorable though no assurance can be made that
this will be the case in the future. Refer to the section captioned "Our recent
restructuring activities may have a negative impact on our future operations"
above.
FAILURE TO COMPLY WITH REGULATORY REQUIREMENTS MAY ADVERSELY AFFECT OUR STOCK
PRICE AND BUSINESS.
We are subject to numerous governmental and stock exchange requirements as a
public company, which we believe we are in compliance with. The Sarbanes-Oxley
Act of 2002, the Securities and Exchange Commission (SEC) and the Public Company
Oversight Accounting Board (PCOAB) have requirements that we may fail to meet by
required deadlines or we may fall out of compliance with, such as the internal
controls assessment, reporting and auditor attestation required under Section
404 of the Sarbanes-Oxley Act of 2002 for which we are relying on not being an
accelerated filer. We are in the process of documenting and testing our internal
control procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our Independent Auditors addressing these assessments. The compliance date for
non-accelerated filers has been extended to the first fiscal year ending on or
after July 15, 2006. This is a one-year extension from the previously
established July 15, 2005 compliance date. Data I/O assumes it will continue to
have the status of a non-accelerated filer based on the aggregate market value
of the voting and non-voting shares held as of June 30, 2005. During the course
of our testing we may identify deficiencies which we may not be able to
remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002
for compliance with the requirements of Section 404. In addition, if we fail to
achieve and maintain the adequacy of our internal controls, as such standards
are modified, supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002. Moreover, effective internal controls, particularly
those related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to help prevent financial fraud. If we
cannot provide reliable financial reports or prevent fraud, our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop
significantly. Our failure to meet regulatory requirements and exchange listing
standards may result in actions such as the delisting of our stock impacting our
stock's liquidity; SEC enforcement actions; and securities claims and
litigation.
OUR STOCK PRICE MAY BE VOLATILE AND, AS A RESULT, YOU MAY LOSE SOME OR ALL OF
YOUR INVESTMENT.
The stock prices of technology companies tend to fluctuate significantly. We
believe factors such as announcements of new products by us or our competitors
and quarterly variations in financial results may cause the market price of Data
I/O's Common Stock to fluctuate substantially. In addition, overall volatility
in the stock market, particularly in the technology company sector, is often
unrelated to the operating performance of companies. If these market
fluctuations continue in the future, they may adversely affect the price of Data
I/O's Common Stock.
FAILURE TO SUCCESSFULLY IMPLEMENT A NEW ENTERPRISE RESOURCE PLANNING ("ERP")
SYSTEM MAY ADVERSELY AFFECT OUR OPERATIONS AND SALES.
We are currently investigating the acquisition and implementation of a new
worldwide information system. Our operations and financial results could be
adversely affected if we are unable to implement the system without significant
interruptions in accounting systems, order entry, billing, manufacturing and
other customer support functions. In addition, the costs associated with the
implementation and training could exceed budgeted amounts and adversely affect
our profitability. System implementation delays could cause difficulties in our
complying with the internal controls assessment, reporting and auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.