-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ILP3vCLdZUxI6yuSs6TX/c8Mep5hI7YmkxMWtyn5K1xgC95GuY/xz+Bi59Xj1H7+ K95PxFiCAmzE1r2BfyAWAg== 0000912057-96-025667.txt : 19961113 0000912057-96-025667.hdr.sgml : 19961113 ACCESSION NUMBER: 0000912057-96-025667 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960926 FILED AS OF DATE: 19961112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATA I/O CORP CENTRAL INDEX KEY: 0000351998 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 910864123 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10394 FILM NUMBER: 96659289 BUSINESS ADDRESS: STREET 1: 10525 WILLOWS RD NE STREET 2: P O BOX 97046 CITY: REDMOND STATE: WA ZIP: 98073-9746 BUSINESS PHONE: 2068816444 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended SEPTEMBER 26, 1996 Commission File No. 0-10394 DATA I/O CORPORATION (Exact name of registrant as specified in its charter) Washington 91-0864123 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10525 Willows Road N.E., Redmond, Washington, 98073-9746 (address of principal executive offices, Zip Code) Registrant's telephone number, including area code (206) 881-6444 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 6,774,720 shares of no par value Common Stock outstanding as of November 4, 1996 Page 1 of 17 Exhibit Index on Page 16 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DATA I/O CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 26, 1996 INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements (unaudited) 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Exhibit Index 16 Exhibit 11 17 Page 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- Sept. 26, Dec. 28, 1996 1995 - -------------------------------------------------------------------------------- (in thousands, except share data) (Unaudited) (Note 1) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,877 $ 4,496 Trade accounts receivable, less allowance for doubtful accounts of $401 and $311 9,294 13,115 Inventories 9,042 8,539 Deferred income taxes 1,014 976 Other current assets 530 893 ------------ ------------ TOTAL CURRENT ASSETS 24,757 28,019 Land held for sale 2,185 2,095 Property, plant and equipment - net 10,046 10,240 Other assets 3,444 4,422 ------------ ------------ TOTAL ASSETS $40,432 $44,776 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,880 $ 2,071 Accrued compensation 3,328 3,612 Deferred revenue 5,600 5,436 Other accrued liabilities 3,394 2,672 Accrued costs of business restructuring 465 965 Income taxes payable 489 1,141 Notes payable 109 117 ------------ ------------ TOTAL CURRENT LIABILITIES 15,265 16,014 LONG TERM DEBT 1,500 1,500 LONG TERM OTHER PAYABLES 490 1,117 DEFERRED INCOME TAXES 462 216 STOCKHOLDERS' EQUITY: Preferred stock - Authorized, 5,000,000 shares, including 200,000 shares of Series A Junior Participating Issued and outstanding, none Common stock, at stated value - Authorized, 30,000,000 shares Issued and outstanding, 6,774,470 and 7,083,825 shares, respectively 15,229 17,528 Retained earnings 7,044 7,946 Currency translation adjustments 442 455 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 22,715 25,929 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,432 $44,776 ------------ ------------ ------------ ------------ See notes to consolidated financial statements Page 3 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter Ended Nine Months Ended - ---------------------------------------------------------------------------------------------------------------- Sept. 26, Sept. 28, Sept. 26, Sept. 28, 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) Net sales $14,529 $15,648 $45,493 $47,982 Cost of goods sold 7,344 7,663 23,174 22,357 ---------- ---------- ---------- ---------- Gross margin 7,185 7,985 22,319 25,625 Operating expenses: Research and development 2,815 2,019 7,941 6,749 Selling, general and administrative 4,575 4,870 14,967 14,942 Write-off of acquired in-process R&D 0 825 0 825 ---------- ---------- ---------- ---------- Total operating expenses 7,390 7,714 22,908 22,516 ---------- ---------- ---------- ---------- Operating income (loss) (205) 271 (589) 3,109 Non-operating (income) expense: Interest income (46) (112) (147) (323) Interest expense 61 65 194 207 Foreign currency exchange 1 6 5 7 ---------- ---------- ---------- ---------- Total non-operating (income) expense 16 (41) 52 (109) ---------- ---------- ---------- ---------- Income (loss) before taxes (221) 312 (641) 3,218 Income tax expense 37 68 261 644 ---------- ---------- ---------- ---------- Net income (loss) ($258) $244 ($902) $2,574 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings per share: Net income (loss) ($0.04) $0.03 ($0.13) $0.32 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average shares outstanding 6,773 8,045 6,884 7,947 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements. Page 4 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------- For the nine months ended: Sept. 26, Sept. 28, 1996 1995 - -------------------------------------------------------------------------------- (in thousands) OPERATING ACTIVITIES: Net income (loss) ($902) $2,574 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,031 3,240 Write-off of acquired in-process R&D 0 825 Deferred income taxes and tax refunds (443) (83) Deferred revenue 154 100 Changes in current items other than cash and cash equivalents: Trade accounts receivable 3,786 (497) Inventories (503) (1,393) Other current assets 361 788 Accounts payable and accrued liabilities (320) (111) Business restructure (564) (449) ---------- ---------- Net cash provided by operating activities 4,600 4,994 INVESTING ACTIVITIES: Additions to property, plant and equipment (1,899) (1,771) Investment in assets of acquired business 0 (2,055) Additions to other assets 0 (198) ---------- ---------- Cash used for investing activities (1,899) (4,024) FINANCING ACTIVITIES: Additions to/(repayment of) notes payable (9) (616) Sale of common stock 154 333 Repurchase of common stock (3,026) 0 Proceeds from exercise of stock options 574 501 ---------- ---------- Cash provided by/(used for) financing activities (2,307) 218 ---------- ---------- Increase in cash and cash equivalents 394 1,188 Effects of exchange rate changes on cash (13) 21 Cash and cash equivalents - Beginning of period 4,496 7,279 ---------- ---------- Cash and cash equivalents - End of period $4,877 $8,488 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $89 $104 Income taxes $517 $888 See notes to consolidated financial statements. Page 5 DATA I/O CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - FINANCIAL STATEMENT PREPARATION The financial statements as of September 26, 1996 and September 28, 1995, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented. The balance sheet at December 28, 1995 has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the quarter and nine months ended September 26, 1996 are not necessarily indicative of the results that may be expected for the year ending December 26, 1996. These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in the Company's Form 10-K for the year ended December 28, 1995. NOTE 2 - CLASSIFICATIONS Certain prior period's balances have been reclassified to conform to the presentation used in the current period. NOTE 3 - INVENTORIES Inventories consisted of the following components (in thousands): Sept. 26, Dec. 28, 1996 1995 ------------ ------------ Raw material $4,978 $4,839 Work-in-process 2,466 2,125 Finished goods 1,598 1,575 ------------ ------------ $9,042 $8,539 ------------ ------------ ------------ ------------ NOTE 4 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following components (in thousands): Sept. 26, Dec. 28, 1996 1995 ------------ ------------ Land $ 910 $ 910 Building and improvements 7,627 7,539 Equipment 22,359 22,329 ------------ ------------ 30,896 30,778 Less accumulated depreciation 20,850 20,538 ------------ ------------ $10,046 $10,240 ------------ ------------ ------------ ------------ Page 6 NOTE 5 - ACCOUNTING FOR INCOME TAXES Statement of Financial Accounting Standards ("SFAS") 109 requires the establishment of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using currently enacted tax rates which are expected to be in effect during the years in which the differences are anticipated to reverse. The Company was unable to record a benefit for its pre-tax losses, or offset its foreign taxes for the quarter ended September 26, 1996. The Company recorded deferred tax asset valuation allowances due to the Company's loss generated in the current period and the inability to utilize foreign tax credits. The valuation allowance for deferred tax assets increased by approximately $100,000 during the third quarter and $500,000 for the first nine months of 1996 to $3.1 million as of September 26, 1996. Page 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL AGREEMENT TO PURCHASE MINORITY INTEREST IN BUSINESS On April 25, 1996 the Company announced it had reached an agreement in principle to purchase a minority interest in Needham's Electronics and to enter into a worldwide distribution agreement for Needham's Electronics' programmer products. Completion of the minority investment and creation of the distribution rights are subject to negotiation of definitive agreements and satisfaction of certain conditions. The Company continues to negotiate the definitive agreement. Due to the complexity of the transaction and certain conditions which must be satisfied, there is no assurance that this transaction will be completed. SHARE REPURCHASE PROGRAM The Company announced on October 27, 1995 a share repurchase program which authorized the Company to repurchase up to 7.5% (approximately 570,000 shares) of its outstanding shares of common stock. On February 21, 1996 the Company announced an extension of the share repurchase program which authorized the Company to repurchase up to an additional 8% (approximately 570,000 shares) of its outstanding common stock. These purchases may be executed through open market purchases at prevailing market prices, through block purchases or in privately negotiated transactions. Purchases may commence or be discontinued at any time. At September 26, 1996 the Company had repurchased an aggregate of 1,015,700 shares at a total cost of approximately $7.1 million since inception of the share repurchase program. SALE OF HEADQUARTERS PROPERTY The Company announced on July 18, 1996 that it had reached an agreement to sell the land and building comprising its Redmond, Washington headquarters campus for approximately $14.0 million to a major real estate company. The transaction would include a lease back of the building by Data I/O for ten years with options for an additional ten years. Data I/O's corporate headquarters campus includes the Company's 96,000 square foot building and approximately 79 acres of land. The Company had been marketing a portion of the land on its headquarters campus for the past five years and in 1995 decided to market the building to enhance the value of the entire property. Closing of the sale is subject to the buyer's due diligence and a number of conditions and contingencies, including a zoning variance and other governmental approvals, which are not currently expected to be resolved until late this year or early 1997. As closing of the sale is subject to a number of conditions and government approvals, there can be no assurance that the sale will be consummated. If consummated, this sale is expected to result in a pre-tax gain of approximately $5.8 million. Approximately $2.0 million of this gain would be recognized upon the closing of the sale, with the balance amortized over the initial ten-year lease term. The Company expects to realize approximately $12.0 million in cash after payment of transaction fees and income taxes. RESTRUCTURE PROGRESS During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1 million related to the restructure of its sales and distribution channels, downsizing its operations to a level consistent with anticipated lower sales and product margins, and to consolidate and outsource certain manufacturing processes. The purpose of the restructure was primarily to reduce expenses and significantly lower the Company's break-even point in reaction to reduced sales and gross margins in 1993. Additionally, the Company made several strategic changes to its sales and distribution channels to better align distribution of the Company's current and anticipated future products to their markets and customers. The general downsizing of operations and restructure of the sales and distribution system were substantially completed in 1994. The Company began implementation of the planned changes to its manufacturing processes in 1994 for completion in 1997. The manufacturing consolidation and relocation project was completed in the first quarter of 1996, and the outsourcing of certain manufacturing processes is scheduled to be completed in 1997. Of the total $6.1 million restructuring charge, approximately $965,000 remained as an accrued liability at December 28, 1995. At September 26, 1996, the remaining accrued liability was approximately $465,000. The reduction during the first nine months of 1996 related primarily to implementation of changes in manufacturing processes, facility consolidation and office space lease payments. Page 8 As of September 26, 1996, the Company's restructuring has proceeded as planned. No significant changes were made to the Company's restructuring plans during the third quarter of 1996. FORWARD-LOOKING STATEMENTS Although most of the information contained in this report is historical, certain of the statements contain forward-looking information. To the extent these statements express or imply, without limitation, product development and introduction plans, the Company's expectations for growth, estimates of future revenue, expenses, profit, cash flow, balance sheet items, sell-through or backlog, forecasts of demand or market trends for the Company's various product categories and for the industries in which the Company operates or any other guidance on future periods, these statements are forward-looking and involve matters which are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Readers of this report should consider, along with other relevant information, the risk factors identified by the Company under the caption "Risk Factors" in Item 1 and elsewhere in the Company's Annual Report on Form 10-K for the year ended December 28, 1995, and other risks identified from time to time in the Company's filings with the Securities and Exchange Commission, press releases and other communications. RESULTS OF OPERATIONS NET SALES
- ------------------------------------------------------------------------------------------------------------------------------- Third Quarter First Nine Months ---------------------------------------- ----------------------------------------- Net sales by division (in thousands) 1996 1995 % Change 1996 1995 % Change - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- Programming Systems Division: Non-automated programming systems $9,138 $9,919 (7.9%) $26,793 $31,684 (15.4%) Automated programming systems 3,310 4,596 (28.0%) 12,067 12,955 (6.9%) ---------- ---------- ---------- ---------- ---------- ---------- Total Programming Systems Division 12,448 14,515 (14.2%) 38,860 44,639 (12.9%) Synario Design Automation Division 1,385 1,133 22.2% 3,853 3,343 15.2% Semiconductor Equip. Div. (Reel-Tech) 696 2,780 ---------- ---------- ---------- ---------- ---------- ---------- Net sales $14,529 $15,648 (7.2%) $45,493 $47,982 (5.2%) ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------------------------------------------------------------------------------------------------------------- Third Quarter First Nine Months ---------------------------------------- ----------------------------------------- Net sales by location (in thousands) 1996 1995 % Change 1996 1995 % Change - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- United States $7,889 $8,374 (5.8%) $22,687 $25,839 (12.2%) % of total 54.3% 53.5% 49.9% 53.9% International $6,640 $7,274 (8.7%) $22,806 $22,143 3.0% % of total 45.7% 46.5% 50.1% 46.1% - --------------------------------------------------------------------------------------------------------------------------------
The Company experienced an overall decline in sales and orders for the Company's products during the third quarter of 1996. Orders declined approximately 12% to $13.7 million in the third quarter of 1996, compared with $15.6 million in the third quarter of 1995. Based on normal seasonality, current order rates and current plans for introduction of enhanced or new products, the Company currently expects fourth quarter sales to be somewhat higher than the third quarter of 1996, but lower than the fourth quarter of 1995. Page 9 The Company believes the declines in overall Programming Systems Division sales and orders were primarily due to a slowdown in capital spending by electronics manufacturing companies in the United States and Europe which reduced the demand for the Division's products. The Company believes that the economic slowdown in capital spending for electronics manufacturing equipment has bottomed out. The Company believes that increased competition, in areas where new Data I/O product introductions will not occur until 1997, is also affecting sales. The Company's current expectations are that most of these new products will not be available in production quantities until the second half of 1997. In addition, the Company believes the declines in non-automated programming systems also reflect the continuing market shift away from the Company's traditional line of higher- priced IC programmers for the engineering market, toward lower-priced programmers. The Company believes the market shift toward lower-priced IC programmers has been caused in part by advances in semiconductor processing technology that have lowered the barriers to entry in the programmer business over the last several years. This has caused new market entrants to appear regularly, each trying to carve out a niche. New entrants cause downward price pressure, and each cycle of new competitors lowers the acceptable price of a conventional IC programmer in the customer's view. In addition, the Company believes that technological improvements in personal computers and design software tools have caused a shift in the demand for IC design tools by engineering design teams away from hardware tools in favor of increased software design tools. These industry changes had, and are continuing to have, an adverse effect on the Company's IC programmer sales and gross margins, especially since the Company's products historically have been oriented toward hardware tools and, within hardware tools, toward higher-priced IC programmers. However, the Company believes that recent changes in programmable IC technology, such as increasingly complex logic ICs and higher pin counts, and the increasing need for higher quality and high volume programming by users of programmable ICs means that there is a significant market need for more sophisticated programmers and automated programming systems. The Company currently has development projects underway for new programmer and automation technology to attempt to better meet the needs created by these technology changes. The Company believes the declines in overall automated handling systems sales and orders in the third quarter and first nine months of 1996 were primarily due to the slowdown in capital spending by electronics manufacturing companies. The Company believes that in the electronic manufacturing market, the expanded use of programmable integrated circuits in the mid- to high-volume manufacturing environment and the proliferation of hard-to-handle surface-mount packages in a variety of types is causing a worldwide trend toward automation and integration of manufacturing processes. The Company continues to believe that its product line, as well as the products under development, will keep the Company in a position to capitalize on the trend toward automation and integration of manufacturing processes. Sales of Reel-Tech's semiconductor equipment products were primarily from backlog. The Company believes there is a slowdown in capital spending due to overcapacity and price competition by DRAM semiconductor manufacturers, among Reel-Tech's primary customers, and that this has slowed the growth of Reel-Tech in recent periods. The Company experienced a decrease in international sales during the third quarter due to the slowdown in capital spending by electronics manufacturing companies in Europe and the negative impact of foreign currency exchange rate changes. Partially offsetting the European sales decrease were increased sales in Asia. The foreign currency exchange rate changes reduced sales by approximately $400,000 during the third quarter and $1.4 million during the first nine months of 1996 compared to the same periods in 1995. These declines were due primarily to rate changes for the German Mark and the Japanese Yen. GROSS MARGIN Third Quarter First Nine Months ------------- ----------------- (in thousands) 1996 1995 1996 1995 - -------------------------------------------------------------------------- Gross Margin $7,185 $7,985 $22,319 $25,625 Percentage of net sales 49.5% 51.0% 49.1% 53.4% - -------------------------------------------------------------------------- Gross margins for the third quarter and the first nine months of 1996 declined both in amount and as a percentage of sales compared to the same periods in the prior year due primarily to lower volumes, lower product margins and increases in Page 10 inventory reserves. The relatively high fixed component of cost of goods sold causes any swing in total volume to have a significant impact on gross margin. The shift in mix of product revenues from software to hardware and from higher- priced and higher-margin non-automated programming systems to the lower-priced alternatives has lowered the overall product gross margins. Also contributing to the decline of gross margin was the strengthening of the U.S. Dollar in relation to the Japanese Yen and the German Mark, in which approximately 20% of the Company's sales are denominated. RESEARCH AND DEVELOPMENT Third Quarter First Nine Months ------------- ----------------- (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------ Research and development $2,815 $2,019 $7,941 $6,749 Percentage of net sales 19.4% 12.9% 17.5% 14.1% - ------------------------------------------------------------------------------ The increase in research and development spending compared to the third quarter and the first nine months of 1995 is primarily due to the inclusion of expenses for the Company's Reel-Tech subsidiary acquired in August of 1995, additional product development projects, including those related to products slated for introduction in 1997, and increased compensation costs. The Company expects to continue its significant investment in research and development. The Company believes it is essential to invest in research and development to support its existing products and to create new products as markets develop and technologies change. The Company is focusing its research and development efforts in its strategic growth markets, namely new programming technology, automated handling systems for the manufacturing environment, Windows-based EDA software design tools and semiconductor handling equipment. SELLING, GENERAL AND ADMINISTRATIVE Third Quarter First Nine Months ------------- ----------------- (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------ Selling, general & administrative $4,575 $4,870 $14,967 $14,942 Percentage of net sales 31.5% 31.1% 32.9% 31.1% - ------------------------------------------------------------------------------ The decrease in selling, general and administrative expenditures during the third quarter of 1996 relative to 1995 is primarily due to decreased incentive compensation and decreased expenses in the Company's foreign offices, due to currency rate changes. The increase in selling, general and administrative expenditures during the first nine months of 1996 relative to 1995 is due primarily to the inclusion of expenses for the Company's Reel-Tech subsidiary acquired in August of 1995. Partially offsetting these expense increases were decreased incentive compensation and decreased expenses in the Company's foreign offices, due to currency rate changes. Page 11 INTEREST Third Quarter First Nine Months ------------- ----------------- (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------ Interest income $46 $112 $147 $323 Interest expense $61 $65 $194 $207 - ------------------------------------------------------------------------------ Interest income decreased during the third quarter and first nine months of 1996 compared with 1995, primarily due to a decrease in the average level of funds available for investment and a decrease in the average investment interest rates. INCOME TAXES Third Quarter First Nine Months ------------- ----------------- (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------ Income taxes $37 $68 $261 $644 Effective tax rate N/A 22% N/A 20% - ------------------------------------------------------------------------------ The Company's effective tax rate for the third quarter and the first nine months of 1996 differed from the statutory 34% tax rate primarily due to recording additional deferred tax valuation reserves. The valuation reserves increased primarily due to the Company's inability to record a benefit for its net operating loss and foreign tax credits. The Company has valuation reserves of approximately $3.1 million that may increase should the Company continue to experience losses or reverse as the Company records income. NET INCOME AND EARNINGS PER SHARE Third Quarter First Nine Months ------------- ----------------- (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------ Net income ($258) $244 ($902) $2,574 Earnings per share ($0.04) $0.03 ($0.13) $0.32 - ------------------------------------------------------------------------------ The decrease in net income and earnings per share compared with the third quarter and first nine months of 1995 is primarily due to a combination of decreased sales volume, a lower gross margin percentage, increased costs and operating expenses resulting from the Company's acquisition of Reel-Tech as well as spending on new development projects and recording of deferred tax valuation reserves. INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES Historically, the Company has been able to offset the impact of inflation through efficiency increases and price adjustments. Increasing price competition, especially in IC programmers, is currently diminishing and may continue to diminish the Company's ability to offset the impacts of inflation in the future. Sales and expenses incurred by foreign subsidiaries are denominated in the subsidiary's local currency and translated into U.S. dollar amounts at average rates of exchange during the year. Exchange rates impact absolute U.S. dollar amounts but do not have a significant impact on the percentage of net sales ratios. Because only approximately one-third of the Company's sales are made by foreign subsidiaries and independent currency fluctuations tend to minimize the effect of any individual currency exchange, fluctuations to date in foreign currency rates have not significantly impacted the Company's overall financial results. Page 12 FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Sept. 26, Dec. 28, (in thousands) 1996 Change 1995 - ------------------------------------------------------------------------------ Working capital $9,492 ($2,513) $12,005 Total debt $1,609 ($8) $1,617 - ------------------------------------------------------------------------------ Working capital decreased during the third quarter and first nine months of 1996 primarily due to funds used to repurchase common stock as discussed above. This decrease was partially offset by funds provided by operations. The Company's trade accounts receivable decreased by approximately $2.5 and $3.8 million during the third quarter and first nine months of 1996 respectively. This decrease was primarily due to decreased sales volume during the first nine months of 1996. The Company decreased its inventory level by $755,000 during the third quarter partially offsetting increases in previous quarters resulting in an overall net increase in inventory of approximately $503,000 for the first nine months of 1996. The inventory increase during the first half of 1996 was primarily due to having purchased inventory in anticipation of a higher sales volume than occurred, to support anticipated growth in the Semiconductor Equipment products as well as to provide a level of safety stock during the Anaheim factory relocation which was completed in March 1996. The Company expects to continue to reduce its inventory during the next quarter to better align inventory levels to the sales volume. As of September 26, 1996, the Company had total debt of $1.6 million or approximately 7% of its $22.7 million in equity. Of this debt, $1.5 million is a note payable due in 1998 for the balance of the purchase price of the CAD/CAM Group. The remaining $109,000 is current debt, consisting entirely of borrowings on the Company's $1.4 million foreign line of credit. No borrowings were outstanding under the Company's $8.0 million U.S. line of credit. The Company's U.S. line of credit was renewed in May of 1996 and matures in May of 1997. The foreign line of credit matures in November of 1996. Historically, these credit lines have been structured as short-term and have been renewed on their maturity dates. The Company currently expects to be able to renew these lines of credit on maturity under substantially the same terms as those presently in place. No assurances can be made however, in regard to the renewal of these agreements if the Company continues to experience losses. The Company estimates that capital expenditures for property, plant and equipment during the remainder of 1996 will be approximately $500,000. Such expenditures are currently expected to be funded from internally generated funds and, if necessary, borrowings under the Company's existing credit lines. Although the Company fully expects that such expenditures will be made, it has purchase commitments for only a small portion of this amount. At September 26, 1996, the Company's material short-term unused sources of liquidity consisted of approximately $4.9 million in cash and cash equivalents, available borrowings of $8.0 million under its U.S. line of credit and available borrowings of approximately $1.3 million under its foreign line of credit. The Company believes that cash, cash flow from operations and borrowings available under its U.S. and foreign lines of credit will be sufficient to fund anticipated working capital needs, service existing debt, finance planned capital expenditures, fund the Company's share repurchase program, fund its remaining restructure accrued liabilities, fund the minority investment in Needham's Electronics and fund the Reel-Tech contingent payment obligations. In addition, if the Company is successful in completing the sale of its property held for sale, additional capital will be available. Page 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Page (a) Exhibits 11. Statement Regarding Computation of Earnings Per Share 17 (b) Reports on Form 8K None Page 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATA I/O CORPORATION (REGISTRANT) DATED: November 6, 1996 By: /S/ Steven M. Gordon --------------------- Steven M. Gordon Vice President Finance and Administration Chief Financial Officer Chief Accounting Officer Secretary and Treasurer Page 15 EXHIBIT INDEX Exhibit Number Title Page Number - ------- ------------------------------------------------------ ----------- 11 Statement Regarding Computation of Earnings per Share 17 Page 16 EX-11 2 EXHIBIT 11 EXHIBIT 11 DATA I/O CORPORATION COMPUTATION OF EARNINGS PER SHARE Earnings per share reported in Form 10-Q for the quarters ended September 26, 1996, and September 28, 1995 are based on the following (in thousands):
Quarter Ended Nine Months Ended ------------- ----------------- Sept. 26, Sept. 28, Sept. 26, Sept. 28, Primary and fully diluted: 1996 1995 1996 1995 -------------------------- --------- ---------- ---------- ---------- Weighted Average Shares Outstanding 6,773 7,613 6,884 7,539 Dilutive Effect of Stock Options 432 408 --------- ---------- ---------- ---------- Weighted Average Common and Equivalent Shares Outstanding 6,773 8,045 6,884 7,947 --------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Page 17 EX-27 3 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 0000351998 DATA I/O CORPORATION 1,000 9-MOS DEC-26-1996 DEC-29-1995 SEP-26-1996 4,877 0 9,695 401 9,042 24,757 30,896 20,850 40,432 15,265 1,500 0 0 15,229 7,486 40,432 45,493 45,493 23,174 22,822 (142) 86 194 (641) 261 (902) 0 0 0 (902) .13 .13
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