-----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, JI2yHyJWDKKq/cD3My5h7urKs4x1MytR7TtL3bqcn1GeLBBU1ml/2c8KbipYWVHe 4NDUhklGQ0h1oqar55v+WQ== 0001047469-98-018936.txt : 19980511 0001047469-98-018936.hdr.sgml : 19980511 ACCESSION NUMBER: 0001047469-98-018936 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980326 FILED AS OF DATE: 19980508 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: SEC FILE NUMBER: 000-10394 FILM NUMBER: 98614432 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 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 MARCH 26, 1998 Commission File No. 0-10394 DATA I/O CORPORATION (Exact name of registrant as specified in its charter) Washington 91-0864123 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10525 Willows Road N.E., Redmond, Washington, 98052 (address of principal executive offices, Zip Code) (425) 881-6444 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- 7,148,657 shares of no par value Common Stock outstanding as of April 30, 1998 Page 1 of 16 Exhibit Index on Page 16 - -------------------------------------------------------------------------------- DATA I/O CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 26, 1998 INDEX PART I - FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (unaudited) 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 Page 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------- Mar. 26, Mar. 27, For the quarters ended 1998 1997 - -------------------------------------------------------------------------------- (in thousands, except per share data) Net sales $8,426 $11,867 Cost of goods sold 4,770 5,909 --------- -------- Gross margin 3,656 5,958 Operating expenses: Research and development 2,414 2,072 Selling, general and administrative 3,339 3,295 --------- -------- Total operating expenses 5,753 5,367 --------- -------- Operating income (loss) (2,097) 591 Non-operating income (expense): Interest income 470 60 Interest expense (33) (51) Foreign currency exchange (1) 15 Net gain on dispositions (3) --------- -------- Total non-operating income (expense) 433 24 --------- -------- Income (loss) from continuing operations before income taxes (1,664) 615 Income tax expense 29 183 --------- -------- Income (loss) from continuing operations (1,693) 432 Income (loss) from discontinued operations, net of taxes 180 (384) --------- -------- Net income (loss) ($1,513) $48 --------- -------- --------- -------- Basic and diluted earnings (loss) per share: From continuing operations ($0.24) $0.06 From discontinued operations .03 (0.05) --------- -------- Total basic and diluted earnings (loss) per share ($0.21) $0.01 --------- -------- --------- -------- Weighted average shares outstanding 7,107 6,817 --------- -------- --------- -------- Weighted average and potential shares outstanding 7,107 6,914 --------- -------- --------- --------
See notes to consolidated financial statements. Page 3 DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------- Mar. 26 Dec. 25, 1998 1997 - -------------------------------------------------------------------------------- (in thousands, except share data) (unaudited) (note 1) ASSETS CURRENT ASSETS: Cash and cash equivalents $1,850 $8,113 Marketable securities 26,228 24,855 Trade accounts receivable, less allowance for doubtful accounts of $404 and $394 4,498 5,678 Inventories 8,330 8,158 Recoverable income taxes 700 Deferred income taxes 1,668 1,990 Other current assets 2,443 3,910 ---------- ---------- TOTAL CURRENT ASSETS 45,717 52,704 Property, plant and equipment - net 3,935 3,389 Other assets 418 532 Deferred income taxes 731 1,111 ---------- ---------- TOTAL ASSETS $50,801 $57,736 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $3,420 $3,760 Accrued compensation 2,837 2,958 Deferred revenue 4,231 4,795 Other accrued liabilities 2,173 3,117 Income taxes payable 661 2,848 Notes payable and current maturities of long-term debt 662 2,000 ---------- ---------- TOTAL CURRENT LIABILITIES 13,984 19,478 Long-term other payables 561 Deferred gain on sale of property 3,002 3,083 ---------- ---------- TOTAL LIABILITIES 16,986 23,122 COMMITMENTS STOCKHOLDERS' EQUITY: Preferred stock - Authorized, 5,000,000 shares, including 200,000 shares of Series A Junior Participating Issued and outstanding, none Common stock, at stated value - Authorized, 30,000,000 shares Issued and outstanding, 7,145,532 and 7,038,786 shares 16,921 16,412 Retained earnings 16,832 18,345 Unrealized loss on marketable securities (535) (732) Cumulative translation adjustment 597 589 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 33,815 34,614 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 50,801 $57,736 ---------- ---------- ---------- ----------
See notes to consolidated financial statements. Page 4 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------- Mar. 26, Mar. 27, For the quarters ended 1998 1997 - -------------------------------------------------------------------------------- (in thousands) OPERATING ACTIVITIES: Income (loss) from continuing operations ($1,693) $432 Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 519 629 Deferred income taxes 702 180 Deferred revenue (564) 236 Amortization of deferred gain on sale (81) Net change in: Trade accounts receivable 1,182 (1,238) Inventories (172) 595 Recoverable income taxes (700) (123) Other current assets 1,464 259 Business restructure (168) Accounts payable and accrued liabilities (4,152) 130 ---------- --------- Cash provided by (used in) operating activities of continuing operations (3,495) 932 Cash provided by (used in) operating activities of discontinued operations 180 (43) ---------- --------- Net cash provided by (used in) operating activities (3,315) 889 INVESTING ACTIVITIES: Additions to property, plant and equipment (948) (338) Additions to other assets 3 Purchases of marketable securities (8,813) Proceeds from sales of marketable securities 7,637 Net investing activities of discontinued operations (36) ---------- --------- Cash used in investing activities (2,121) (374) FINANCING ACTIVITIES: Additions to (repayment of) notes payable (1,338) 397 Sale of common stock 149 178 Proceeds from exercise of stock options 361 103 ---------- --------- Cash provided by (used in) financing activities (828) 678 ---------- --------- Increase (decrease) in cash and cash equivalents (6,264) 1,193 Effects of exchange rate changes on cash 1 1 Cash and cash equivalents at beginning of year 8,113 4,048 ---------- --------- Cash and cash equivalents at end of year $1,850 $5,242 ---------- --------- ---------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $37 $58 Income taxes $2,163 $83
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 March 26, 1998 and March 27, 1997, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented. The balance sheet at December 25, 1997 has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the quarter ended March 26, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in the Company's Form 10-K for the year ended December 25, 1997. Certain prior period's balances have been reclassified to conform to the presentation used in the current period. As of December 26, 1997, the Company adopted SFAS 130, REPORTING COMPREHENSIVE INCOME. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments to be included in other comprehensive income. During the first quarter of 1998 and 1997, total comprehensive income (loss), which includes net income and other comprehensive income, amounted to ($1,309,000) and $12,000, respectively. NOTE 2 - INVENTORIES Inventories consisted of the following components (in thousands):
Mar. 26, Dec. 25, 1998 1997 ----------- ------------ Raw material $3,006 $2,965 Work-in-process 2,335 2,470 Finished goods 2,989 2,723 ----------- ------------ $8,330 $8,158 ----------- ------------ ----------- ------------
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following components (in thousands):
Mar. 26, Dec. 25, 1998 1997 ----------- ------------ Building and improvements $ 88 $ 83 Equipment 22,106 21,493 ----------- ------------ 22,194 21,576 Less accumulated depreciation 18,259 18,187 ----------- ------------ $ 3,935 $ 3,389 ----------- ------------ ----------- ------------
Page 6 NOTE 4 - DISCONTINUED OPERATIONS In November 1997, the Company sold the assets of its Semiconductor Equipment Division, Reel-Tech-TM- Inc., to General Scanning Inc. Also in November 1997, the Company entered into a licensing agreement and an agreement to sell certain assets of its Synario Design Automation Division to MINC Washington Incorporated. These transactions discontinue the Semiconductor Equipment Division and Synario Design Automation Division operations of the Company. However, the Company is entitled to receive and may realize certain licensing revenues related to its Synario, ABEL and ECS products through December 31, 1999, and will recognize revenue in 1998 from source code sales as well as training and support services provided. Operating results of these discontinued divisions are classified as discontinued operations in the financial statements. NOTE 5 - 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 1998 1997 ---------- ---------- Numerator for basic and diluted earnings per share: Income from continuing operations ($1,693) $432 Income (loss) from discontinued operations 180 (384) ---------- ---------- Net income (loss) ($1,513) $48 ---------- ---------- ---------- ---------- Denominator: Denominator for basic earnings per share - weighted-average shares 7,107 6,817 Employee stock options (1) 97 ---------- ---------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 7,107 6,914 ---------- ---------- ---------- ---------- Basic earnings (loss) per share From continuing operations ($0.24) $0.06 From discontinued operations 0.03 (0.05) ---------- ---------- Total basic earnings per share ($0.21) $0.01 ---------- ---------- ---------- ---------- Diluted earnings (loss) per share From continuing operations ($0.24) $0.06 From discontinued operations 0.03 (0.05) ---------- ---------- Total diluted earnings per share ($0.21) $0.01 ---------- ---------- ---------- ----------
(1) Excludes 410,000 employee stock options which were antidilutive in the first quarter of 1997. NOTE 6 - ACCOUNTING FOR INCOME TAXES The Company's effective tax rate for the first quarter of 1998 differed from the statutory 34% tax rate primarily due to operating losses for which no tax benefit was recorded. Tax valuation reserves increased by approximately $453,000 during the quarter. As of March 26, 1998 the Company has valuation reserves of $617,000 that may increase should the Company continue to incur losses or reverse as the Company records income. Page 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL FORWARD-LOOKING STATEMENTS Although most of the information contained in this report is historical, certain of the statements contain forward-looking information. To the extent statements in this report involve, without limitation, development, introduction and shipment of new products, the Company's expectations for future revenue, expenses, profit, cash flow, balance sheet items, sell-through or backlog, forecasts of demand or market trends for the Company's products 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 risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such forward-looking statements. These risks and uncertainties include the possible inability of the Company to overcome technical challenges in the development of new products; production difficulties or delays due to supplier delays or other factors; uncertainty of market acceptance of new products; product introductions, technological innovations and pricing practices of competitors; the effect of global, national and regional economic conditions; the possible inability to retain key personnel; changes in operating system platforms of preference; changes in demand; increases in component prices or other costs; inventory risks due to shifts in market demand, product obsolescence or other factors and a number of other risks including those 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 25, 1997, and other risks identified from time to time in the Company's filings with the Securities and Exchange Commission, press releases and other communications. There can be no assurance the Company will not encounter significant technological, supplier, manufacturing or other problems which will cause the introduction or production of its new products to be delayed. All forward-looking statements contained in this report reflect the Company's expectations at the time of this report only, and the Company disclaims any responsibility to revise or update any such forward-looking statement except as may be required by law. RESULTS OF CONTINUING OPERATIONS For all periods presented in this section, results of operations have been reclassified to reflect the classification of the Company's Semiconductor Equipment and Synario Design Automation Divisions as discontinued operations (see "Discontinued Operations"). Prior quarter's figures have been reclassified for comparability.
NET SALES (in thousands) - -------------------------------------------------------------------------------- First Quarter ----------------------------------------- Net sales 1998 1997 % Change - -------------------------------------------------------------------------------- Non-automated programming systems $6,909 $7,950 (13.1%) Automated programming systems 1,517 3,917 (61.3%) ----------------------------------------- Total programming systems $8,426 $11,867 (29.0%) First Quarter ----------------------------------------- Net sales by location 1998 1997 % Change - -------------------------------------------------------------------------------- United States $3,997 $5,667 (29.5%) % of total 47.4% 47.8% International $4,429 $6,200 (28.6%) % of total 52.6% 52.2% - --------------------------------------------------------------------------------
Page 8 Sales and orders decreased for the Company's programming system products in the first quarter of 1998 compared to the first quarter of 1997. Orders in the first quarter of 1998 decreased approximately 30% to $8.1 million, compared with $11.6 million in 1997. The sales decline is primarily attributable to automated programming systems and in particular the inability to record revenue in the first quarter on units of the Company's new ProMaster 970 Fine Pitch Programming System that had been delivered to customers but not yet accepted pending completion of certain configuration options and performance enhancements. While the Company believes that it will satisfy the customers' requirements and will be able to recognize revenue on these systems in the second quarter, there can be no assurance that either of these objectives will occur. The strengthening U.S. Dollar versus the Japanese Yen and the German Mark also contributed to the decline in sales for the first quarter. Sales are expected to continue to be soft primarily due to delays in new product introductions by the Company. The Company believes that increased competition in the areas where new Data I/O product introductions are not scheduled to occur or will not be available in production volumes until later in 1998, or where products are nearing the end of their product life cycles, are contributing to this trend. In addition, the decline in non-automated programming system sales also reflects the continuing market shift away from the Company's traditional line of higher-priced IC programmers for the engineering market, toward lower-priced programmers. As a result, the Company believes that until its new products are released and shipping in production quantities, overall demand for its programming systems will likely decline in 1998 and the Company will continue to incur losses from operations. Recent changes in programmable IC technology, such as increasingly complex logic ICs, lower voltage requirements 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 with new programming technology and automated programming systems. The Company currently has development projects underway for new programmer and automation technology designed to address the needs perceived by the Company to be created by these technology changes. There can be no assurance that the Company will complete development of planned new products as scheduled or that new products will generate significant sales. See "Risk Factors" in Item 1 of Part I of the Company's Annual Report on Form 10-K for the year ended December 25, 1997. GROSS MARGIN
(in thousands) First First Quarter Quarter 1998 Change 1997 - ----------------------------------------------------------------------- Gross Margin $3,656 (38.6%) $5,958 Percentage of net sales 43.4% 50.2% - -----------------------------------------------------------------------
Gross margin for the first quarter of 1998 decreased compared to the first quarter of 1997 due primarily to the lower sales volume during the first quarter 1998. The relatively high fixed component of cost of goods sold causes any shift in total volume to have a significant impact on gross margin. RESEARCH AND DEVELOPMENT
(in thousands) First First Quarter Change Quarter 1998 1997 - ------------------------------------------------------------------------------- Research and development $2,414 16.5% $2,072 Percentage of net sales 28.7% 17.5% - -------------------------------------------------------------------------------
The increase in research and development spending for the first quarter of 1998 as compared to the first quarter of 1997 is primarily due to increased spending for materials used in product development related to the Company's continued aggressive investment in new technology. The Company expects to continue its significant investment in research and development activities through 1998. Page 9 SELLING, GENERAL AND ADMINISTRATIVE
(in thousands) First First Quarter Change Quarter 1998 1997 - ------------------------------------------------------------------------------- Selling, general & administrative $3,339 1.3% $3,295 Percentage of net sales 39.6% 27.8% - -------------------------------------------------------------------------------
The slight increase in selling, general and administrative expenditures in the first quarter of 1998 as compared with the first quarter of 1997 is due primarily to additional spending in marketing related to new products and promotions, and to expenses related to the search for a new Chief Executive Officer. This additional spending was partially offset by lower sales commissions due to the lower sales volume during the quarter. INTEREST
(in thousands) First First Quarter Change Quarter 1998 1997 - ------------------------------------------------------------------------------- Interest income $470 683.3% $60 Interest expense $33 (35.3%) $51 - -------------------------------------------------------------------------------
The increase in interest income for the first quarter of 1998 as compared to the first quarter of 1997 is due to the increase in cash, cash equivalents and marketable securities, due primarily to the proceeds received from the Company's land sale and business dispositions during 1997 (see "Discontinued Operations"). INCOME TAXES
(in thousands) First First Quarter Quarter 1998 1997 - ------------------------------------------------------------------------------- Income tax expense $29 $183 Effective tax rate (1.7%) 29.8% - -------------------------------------------------------------------------------
The Company's effective tax rate for the first quarter of 1998 differed from the statutory 34% tax rate primarily due to operating losses for which no tax benefit was recorded. Tax valuation reserves increased by approximately $453,000 during the quarter. The Company has valuation reserves of $617,000 that may increase should the Company continue to incur losses or reverse as the Company records income. Page 10 NET INCOME AND EARNINGS PER SHARE
(in thousands, except per share data) First First Quarter Quarter 1998 1997 - ------------------------------------------------------------------------------- Income (loss) from continuing operations ($1,693) $432 Percentage of net sales (20.1%) 3.6% Basic and diluted earnings (loss) per share from continuing operations ($0.24) $0.06 - -------------------------------------------------------------------------------
Net income for the first quarter of 1998 decreased as compared to the first quarter of 1997 due primarily to decreased sales and gross margin, and to a lesser extent due to increases in research and development expenses, offset partially by an increase in non-operating income. DISCONTINUED OPERATIONS In November 1997, the Company sold the assets of its Semiconductor Equipment Division, Reel-Tech-TM- Inc., to General Scanning Inc. Also in November 1997, the Company entered into a licensing agreement and an agreement to sell certain assets of its Synario Design Automation Division to MINC Incorporated. These transactions discontinue the Semiconductor Equipment Division and Synario Design Automation Division operations of the Company. However, the Company is entitled to receive and may realize certain licensing revenues related to its Synario, ABEL and ECS products through December 31, 1999. Combined operating results of these discontinued divisions are as follows:
For the first quarter --------------------- (in thousands) 1998 1997 --------- --------- Net Sales $391 $3,208 --------- --------- --------- --------- Income (loss) from operations before $180 ($535) income taxes Income taxes 151 --------- --------- Total income (loss) on discontinued segments $180 ($384) --------- --------- --------- ---------
FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES
(in thousands) March 26, Dec 25, 1998 Change 1997 - -------------------------------------------------------------------------------- Working capital $31,733 ($1,493) $33,226 Total debt $662 ($1,338) $2,000 - --------------------------------------------------------------------------------
Working capital decreased during the first quarter of 1998 primarily due to the early settlement of a long-term pension obligation, spending on property, plant and equipment and the loss from operations. Also, the Company's trade accounts receivable decreased by approximately $1.2 million during the first quarter due to the decrease in sales during the quarter, and other assets decreased by approximately $1.5 million due to the collection of trade accounts receivable related to the discontinued Reel-Tech and Synario Design Automation Divisions (see "Discontinued Operations"). Accrued expenses decreased primarily due to the payment of income taxes of $2.2 million, repayment of a note payable of $1.5 million, payment of an obligation carrying over from the purchase of the now disposed Reel-Tech Division and payment of accrued compensation related to 1997. As of March 26, 1998, the Company had total debt of $662,000 or approximately 2% of its $33.8 million in equity. This is current debt consisting of borrowings on the Company's $1.3 million foreign lines of credit. No borrowings were outstanding under the Company's $8.0 million U.S. line of credit. The U.S. line of credit matures in May 1998. The foreign lines of credit mature in August and November 1998. Historically, these credit lines have been structured as short-term and have been Page 11 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. The Company estimates that capital expenditures for property, plant and equipment during the remainder of 1998 will be approximately $1.5 million. 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 expects that such expenditures will be made, it has purchase commitments for only a small portion of this amount. At March 26, 1998, the Company's material short-term unused sources of liquidity consisted of approximately $28 million in cash, cash equivalents and marketable securities, available borrowings of $8.0 million under its U.S. line of credit and available borrowings of approximately $623,000 under its foreign line of credit. The Company believes these sources and cash flow from operations will be sufficient during 1998 to fund working capital needs, service existing debt and finance planned capital acquisitions. In April 1998 the Company signed an agreement for a strategic alliance with JTAG Technologies, a Netherlands-based manufacturer and developer of boundary scan test and programming solutions. Under the terms of the agreement, the Company has purchased a minority interest in JTAG Technologies for approximately $1 million, and will sell in-system programming products under the Data I/O name. The Company does not expect material revenue from the sales of these products during 1998. SHARE REPURCHASE PROGRAM The Company announced on October 27, 1995 a share repurchase program which authorized the Company to repurchase up to 7.5% (approximately 570,000 shares) of its outstanding shares of common stock. On February 21, 1996 and May 13, 1997 the Company announced an extension of the share repurchase program which authorized the Company to repurchase up to an additional 8% (approximately 570,000 shares) and approximately 14.5% (up to 1,000,000 shares) respectively of its outstanding common stock. These purchases may be executed through open market purchases at prevailing market prices, through block purchases or in privately negotiated transactions. Purchases may commence or be discontinued at any time. As of March 26, 1998, the Company had repurchased 1,016,200 shares since October 1995 at a total cost of approximately $7.1 million. GENERAL IMPACT OF YEAR 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed an assessment of its data processing systems and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at approximately $1 million, which includes approximately $200,000 for new hardware that will be capitalized and approximately $800,000 that will be expensed as incurred. As of March 26, 1998, the Company had incurred and expensed approximately $300,000 related to this project. The Company believes that the most significant portion of this project should be completed by approximately June 30, 1998, which is prior to any anticipated impact on its operating systems. The Company believes, based on its current understanding of its systems, that with modifications to the existing software and conversions to new software, the Year 2000 issue should not pose significant operational problems for its computer systems. However, if such modifications and conversions are not properly made, or are not completed timely, the Year 2000 issue could have a material adverse impact on the operations of the Company. The cost of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, cooperation of vendors and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in the area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Page 12 SHAREHOLDER RIGHTS PLAN In March 1998, the Company adopted a Shareholder Rights Plan (the "Rights Plan") that went into effect simultaneously with the expiration of its previously existing shareholder rights plan. Under the Rights Plan, a dividend of one Share Purchase Right (a "Right") was declared for each share of Company Common Stock outstanding at the close of business on April 4, 1998. In the event that a person or group (the "Acquirer") acquires 15% or more of the Company's Common Stock without advance approval by the Company's Board of Directors, each Right will entitle the holder, other than the Acquirer, to buy Common Stock with a market value of twice the Right's then current exercise price (initially $30, subject to adjustment). In addition, if Rights are triggered by such a non-approved acquisition and the Company is thereafter acquired in a merger or other transaction in which the shareholders of the Company are not treated equally, shareholders with unexercised Rights will be entitled to purchase common stock of the Acquirer with a value of twice the exercise price of the Rights. The Company's Board of Directors may redeem the Rights for a nominal amount at any time prior to an event that causes the Rights to become exercisable. The Rights trade automatically with the underlying Common Stock (unless and until a distribution event occurs under the Rights Plan) and expire on April 4, 2008 if not redeemed earlier. Page 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 (a) EXHIBITS None (b) REPORTS ON FORM 8-K A report on Form 8-K dated January 9, 1998 was filed relating to the resignation of William C. Erxleben as President and Chief Executive Officer, the appointment of Milton F. Zeutschel as acting President and Chief Executive Officer, the service of Frances M. Conley as Acting Chairman of the Board of Directors, and the promotion of Joel S. Hatlen to Vice President of Finance and Chief Financial Officer. A report on Form 8-K dated March 13, 1998 was filed relating to the adoption of a new Shareholders' Rights Plan. A report on Form 8-K dated April 7, 1998 was filed relating to the selection of David C. Bullis as President and Chief Executive Officer as of May 1, 1998. 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: May 7, 1998 By: /s/ Joel S. Hatlen ------------------- Joel S. Hatlen Vice President - Finance Chief Financial Officer Secretary and Treasurer Page 15 EXHIBIT INDEX Exhibit Number Title Page Number - ---------------- -------------------------------------- ----------- None EX-27 2 EXHIBIT 27
5 1,000 3-MOS 3-MOS DEC-31-1998 DEC-25-1997 DEC-26-1997 DEC-27-1996 MAR-26-1998 MAR-27-1997 1,850 8,113 26,228 24,855 4,902 6,072 404 394 8,330 8,158 45,717 52,704 22,194 21,576 18,259 18,187 50,801 57,736 13,984 19,478 0 0 0 0 0 0 16,921 16,412 16,894 18,202 50,801 57,736 8,426 11,867 8,426 11,867 4,770 5,909 5,746 5,358 (466) (75) 7 9 33 51 (1,664) 615 29 183 (1,693) 432 180 (384) 0 0 0 0 (1,513) 48 (0.21) 0.01 (0.21) 0.01
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