| DATA I/O CORP Item 1A Risk Factors |
| 10 ITEM 1A RISK FACTORS - ----------------------- CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS Data I/Oapstas 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/Oapstas 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 handing 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/Oapstas 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 |
| 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 10 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 &apos budgets o adverse movements in exchange rates, interest rates or tax rates o cyclical nature of demand for our customers &apos 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/Oapstas 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 three of the last five 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 |
| 11 OUR PRIOR 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 underestimate 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 |
| 12 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 INTERNATIONAL OPERATIONS MAY EXPOSE US TO ADDITIONAL RISKS THAT MAY ADVERSELY AFFECT OUR BUSINESS International sales represented 78prca of our net revenue for the fiscal year ended December 31, 2005 and 80prca for the fiscal year ended December 31, 2004 |
| 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 unexpected 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 ( "e EU "e ) has established certain electronic emission and product safety requirements ( "e CE "e ) |
| 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 ( "e RoHS "e ) from which Data I/O is relying on an exemption for test and measurement companies |
| Failure to meet applicable directives or qualifying exemption may prevent us from marketing certain products in Europe or other territories with similar requirements |
| We operate subsidiaries in Germany, China, Canada and 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 managementapstas attention, and an adverse determination could adversely affect our reputation, preclude us from offering certain products, and subject us to substantial liability |
| 13 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 managementapstas 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/Oapstas 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 |
| 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 |
| 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 "e Our prior restructuring activities may have a negative impact on our future operations "e above |
| FAILURE TO COMPLY WITH REGULATORY REQUIREMENTS MAY ADVERSELY AFFECT OUR STOCK PRICE AND BUSINESS As a public company, we are subject to numerous governmental and stock exchange requirements, with which we believe we are in compliance |
| The Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission (SEC) have requirements that we may fail to meet by the 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, with which we are not yet required to comply as we are not an accelerated filer |
| The compliance date for non-accelerated filers has been extended to the first fiscal year ending on or after July 15, 2007 |
| 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 |
| We may also incur additional costs in order to comply with 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 stockapstas 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/Oapstas 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/Oapstas Common Stock |
| 14 FAILURE TO SUCCESSFULLY IMPLEMENT A NEW WORLDWIDE INFORMATION SYSTEM MAY ADVERSELY AFFECT OUR OPERATIONS AND SALES We have recently acquired and are currently implementing a new worldwide information system |
| Our corporate office began use of the new system in February 2006 |
| We are now in the process of implementing the new system at our subsidiary locations |
| Our operations and financial results could be adversely affected if we are unable to complete the system implement 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 and liquidity |
| 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 |
| MOVING OUR HEADQUARTERS AND MANUFACTURING OPERATION MAY ADVERSELY AFFECT OUR OPERATIONS AND SALES We anticipate moving our Redmond headquarters and manufacturing operation in mid-year 2006 from our current location to a smaller location in Redmond, Washington |
| If we are not able to timely and successfully complete the move, our short-term ability to manufacture and ship products and our sales could be adversely affected |