<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 1997, or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from ___________ to _________
Commission file number: 0-13459
DH Technology, Inc.
xact name of registrant as specified in its charter)
California 94-2917470
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15070 Avenue of Science, San Diego, California 92128
(Address of principal executive office)
Registrant's telephone number, including area code: (619) 451-3485
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 XXX No____
As of March 31, 1997 there were 7,975,777 shares of the registrant's Common
Stock outstanding.
<PAGE>
DH TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheets 1
March 31, 1997, and December 31, 1996
Condensed Consolidated Statements of Income 2
Three months ended March 31, 1997,
and March 31, 1996
Condensed Consolidated Statements of Cash Flows 3
Three months ended March 31, 1997,
and March 31, 1996
Notes to Condensed Consolidated Financial Statements 4
ITEM 2 -
Management's Discussion and Analysis of 5
Financial Conditions and Results of Operations
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 9
SIGNATURES 10
EXHIBITS INDEX 11
<PAGE>
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
DH TECHNOLOGY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<S> <C> <C>
March 31 December 31
1997 1996
(Unaudited)
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $34,727 $30,943
Short-term investment securities held to maturity 14,085 13,835
Accounts receivable, net 12,534 16,006
Inventories 13,101 11,582
Prepaid expenses and other current assets 3,108 2,881
------------------ ------------------
Total current assets 77,555 75,247
------------------ ------------------
Fixed assets 23,428 22,524
Less accumulated depreciation and
amortization 14,813 14,274
------------------ ------------------
8,615 8,250
Intangibles 5,080 12,464
Other assets 3,300 1,144
================== ==================
Total assets $94,550 $97,105
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,332 $4,587
Amount due for acquired company 4,850 $0
Current portion of long-term debt 570 577
Accrued payroll 2,545 2,630
Accrued expenses 3,237 2,441
Income taxes payable 2,329 2,406
Deferred revenue 235 577
------------------ ------------------
Total current liabilities 18,098 13,218
------------------ ------------------
Non-current portion of long-term debt 2,367 1,635
------------------ ------------------
Total liabilities 20,465 14,853
------------------ ------------------
Shareholders' equity:
Preferred shares, no par value
Authorized: 1,000,000 shares, none issued -- --
Common shares:
Common stock, authorized: 28,500,000
shares; issued and outstanding:
7,975,777 shares in 1997 and
7,974,277 shares in 1996 13,188 13,168
Foreign currency translation adjustment 89 393
Retained earnings 60,808 68,691
------------------ ------------------
Total shareholders' equity 74,085 82,252
================== ==================
Total liabilities and shareholders' equity $94,550 $97,105
================== ==================
The accompanying notes are an integral part of
these condensed consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DH TECHNOLOGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(March 31, 1997 and 1996)
(In thousands, except per share data)
<S> <C> <C>
THREE MONTHS ENDED
March 31
(Unaudited)
-----------------------------
1997 1996
-----------------------------
Net sales $19,185 $28,196
Cost of net sales 12,527 18,470
------------- -------------
Gross margin 6,658 9,726
Operating expenses:
Selling, general and administrative 3,963 3,960
Research and development 1,451 1,288
In process technology, intangible assets,
acquisition integration and other charges 11,290
--
------------- -------------
Total operating expenses 16,704 5,248
Income (loss) from operations (10,046) 4,478
Interest income 421 330
Interest expense 40 46
------------- -------------
Income (loss) before income taxes (9,665) 4,762
Income taxes (1,782) 1,727
------------- -------------
Net income (loss) (7,883) $3,035
============= =============
Net income (loss) per share ($0.99) $.36
Weighted average number of shares outstanding
Per share (primary and fully diluted): 7,976 8,469
The accompanying notes are an integral part of
these condensed consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DH TECHNOLOGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
<S> <C> <C>
THREE MONTHS ENDED
March 31
(Unaudited)
-----------------------------------
1997 1996
-----------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM:
Operating activities:
Net income (loss) ($7,883) $3,035
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 979 775
Write down of acquired in-process technology 2,440
--
Intangible write down related to previous acquisition 7,193
--
Provision for loss on accounts receivable 3 28
Undepreciated value of asset disposals 53
--
Changes in assets and liabilities excluding effect of acquisitions 4,292 (1,149)
Provision for deferred income taxes (2,150) --
-----------------------------------
Net cash provided by operating activities 4,874 2,742
Investing activities:
Net increase (decrease) in short-term investment securities held to maturity (250) (5,900)
Capital expenditures (533) (1,271)
-----------------------------------
Net cash used in investing activities (783) (7,171)
Financing activities:
Principal repayments on long-term debt (73) (501)
Proceeds from the exercise of stock options 20 295
-----------------------------------
Net cash used in financing activities (53) (206)
Effect of exchange rate changes on cash (254) 316
Net increase (decrease) in cash and cash equivalents 3,784 (4,319)
Cash and cash equivalents at beginning of period 30,943 28,971
-----------------------------------
Cash and cash equivalents at end of period $34,727 $24,652
===================================
Supplemental Cashflow Disclosures:
Interest paid on debt $15 $12
Income taxes paid $441 $696
Supplementary disclosure of noncash investing activity:
Fair market value of assets acquired $3,181
--
Cash paid
-- --
Liabilities assumed $3,181
--
The accompanying notes are an integral part of these
condensed consolidated financial statements
</TABLE>
<PAGE>
DH TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(March 31, 1997 - Unaudited)
Note 1: Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared
in accordance with S.E.C. requirements for interim financial statements.
Therefore, they do not include all disclosures that would be presented in the
Company's Annual Report on Form 10-K. The financial statements should be read in
conjunction with the financial statements contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
The information furnished reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of financial position, results of operations, and changes in
cash position for the interim period. The results of operations for the periods
presented are not necessarily indicative of results to be expected for the full
year.
Note 2: Inventories
The composition of inventories at March 31, 1997, and December 31, 1996, were as
follows:
1997 1996
---- ----
Raw Materials $8,249,000 $6,810,000
Work in Process 941,000 934,000
Finished Goods 3,911,000 3,838,000
---------- ----------
Totals $13,101,000 $11,582,000
Note 3: Operations subject to Purchase and Sale Agreements
In October, 1995 the Company acquired certain assets and liabilities of Mos
Magnetics, a privately held company in San Diego, California, for $752,000 cash.
Mos Magnetics designs, manufactures, and markets magnetic read and write heads
and modules for credit card and debit card readers, check readers, and airline
ticket readers. This acquisition was accounted for using the purchase method. In
conjunction with this acquisition, the Company has recorded goodwill of
$239,000, which is being amortized over 25 years using the straight-line method.
In March, 1997 the Company purchased certain assets and liabilities of the card
reader business of American Magnetics Corporation (AMC), a wholly owned
subsidiary of Group 4 Securitas Holding (A) BV headquartered in The Netherlands.
AMC designs, manufactures and markets card reader modules and stand-alone card
readers, including both magnetics and chip card products. Based on fourth
quarter 1996 revenues the card reader business has approximately $12 million in
annualized revenues. The business was profitable in 1996.
This acquisition was accounted for under the purchase method, which requires
that the purchase price be allocated to the fair market value of the assets
acquired. Of the total consideration of $5.7 million, which consisted of $4.85
million due to AMC plus liabilities assumed of $.8 million, $3.2 million was
allocated to net assets acquired based on their estimated fair values, and $2.5
million was written down as in-process technology. In conjunction with the
acquisition, the Company also incurred $1.2 million of integration costs as
discussed below.
<PAGE>
Note 4: Non-Recurring Charges In First Quarter Of 1997
In the first quarter of 1997 the Company incurred non-recurring charges totaling
$11.3 million consisting of the items discussed below. In conjunction with the
acquisition of AMC discussed above, the Company wrote down acquired in-process
technology (projects that had not reached technological feasibility and had no
future alternative use) that was valued at $2.5 million. Additionally, the
Company incurred one-time, pre-tax charges of $1.2 million which included
severance, relocation and other integration charges associated with the
acquisition. This amount is included in accrued expenses and is expected to be
paid out over the next 12 months.
In March 1997, based on a review of the operating results of Cognitive
Solutions, Inc. and projections for subsequent quarters, the Company evaluated
the intangible assets associated with the acquisition in accordance with SFAS
121. Based on management's analysis of future undiscounted cashflows the Company
determined that the intangible assets were impaired. Accordingly, the Company
wrote down $7.2 million of intangibles, which represented the excess of the
carrying value over the estimated fair value of those assets, in the first
quarter of 1997. Also, the Company incurred a $400,000 charge in connection with
the discontinuance of certain product lines.
ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with DH
Technology, Inc.'s condensed consolidated financial statements and the notes
related thereto included herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997, COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net sales of $19.2 million for the quarter ended March 31, 1997, decreased 32.0%
compared to net sales of $28.2 million for the same period last year. The
decrease was due to delays in orders from several customers and no sales in the
first quarter of 1997 to one large customer, which represented more than half of
the decline in sales from the first quarter of 1996. See "Certain Factors That
May Affect Future Results - Future Operating Results Subject to Fluctuation."
<PAGE>
Cost of net sales decreased slightly to 65.3% of net sales for the first quarter
of 1997 from 65.5% of net sales for the same period of 1996 due in part to a
sales mix shift to products with higher margins, as well as material and labor
cost reductions offset by relatively fixed overhead costs applied to decreased
revenue.
Selling, general, and administrative expenses increased to 20.7% of net sales in
the first quarter of 1997 from 14.0% in the same period in 1996 due to
relatively fixed expenses applied to decreased net sales. These expenses
remained constant in absolute dollars at $4.0 million in the first quarter of
1997 and the first quarter of 1996.
Research and development expenses as a percentage of sales increased to 7.6% in
the first quarter of 1997 compared to 4.6% in the first quarter of 1996. Total
dollars expended for research and development increased to $1.5 million in the
first quarter of 1997 compared to $1.3 million in the same period of 1996. The
Company believes that the continued timely development of new products and
enhancements to its existing products are essential to maintaining the Company's
competitive position. Accordingly, the Company anticipates that such expenses
will continue to increase in absolute dollars during 1997.
In the first quarter of 1997 the Company incurred non-recurring charges totaling
$11.3 million consisting of the items discussed below. In conjunction with the
acquisition of certain assets and liabilities of AMC discussed in Note 3 of
Notes to Condensed Consolidated Financial Statements, the Company wrote down
acquired in-process technology that was valued at $2.5 million. The Company also
incurred one-time, pre-tax charges of $1.2 million which included severance,
relocation and other integration charges associated with the acquisition. This
amount is included in accrued expenses and is expected to be paid out over the
next 12 months. Additionally, the Company incurred one-time, non-cash charges of
$7.2 million to write down intangible assets related to the Cognitive
acquisition, and a $400,000 charge in connection with the discontinuance of
certain product lines. See Note 4 of Notes to Condensed Consolidated Financial
Statements.
Income from operations as a percentage of net sales excluding the effect of
non-recurring charges discussed above decreased to 6.0% for the quarter ended
March 31, 1997, compared to 15.9% for the same period in 1996 due primarily to
higher operating expenses as a percentage of revenue as discussed above. Income
(loss) from operations as a percentage of net sales including the effect of
non-recurring charges decreased to (52.4%) for the quarter ended March 31, 1997,
compared to 15.9% for the same period in 1996 due to the one-time charges
discussed above.
Interest income increased to $421,000 in the first quarter of 1997 from $330,000
in the first quarter of 1996 as a result of higher cash balances and higher
interest rates in the first quarter of 1997.
Interest expense decreased to $40,000 in the first quarter of 1997 from $46,000
for the same period in 1996 due to a $500,000 payment of debt in August 1996
related to the Cognitive acquisition.
Income taxes as a percentage of income (loss) before income taxes excluding the
effect of non-recurring charges, would have been 35.0% for the first quarter of
1997 compared to 36.3% for the same period in 1996 due to the effect of tax
exempt interest, the R & D credit, and a change in the effective tax rate of
foreign subsidiaries. Income taxes (benefits) as a percentage of income (loss)
before income taxes (benefits) including the effect of non-recurring charges
decreased to 18.4% for the first quarter of 1997 from 36.3% for the same period
in 1996 due to a portion of the non-recurring charges being non-deductible for
tax purposes.
<PAGE>
Certain Factors That May Affect Future Results
The Company's representatives may from time to time make forward looking
statements. The factors set forth below are among certain important factors that
could cause actual results to differ materially from those projected in any such
forward looking statements.
Future Operating Results Subject to Fluctuation. The Company's operating results
may fluctuate in the future as a result of a number of factors, including the
timing of customer orders, timing of completion of existing customer contracts,
variations in the Company's sales channels or the mix of products it sells,
changes in pricing policies by the Company's suppliers, fluctuations in
manufacturing yields, the market acceptance of new and enhanced versions of the
Company's products and the timing of acquisitions of other businesses, products
and technologies and any associated charges to earnings.
In 1996, purchases of transaction printers by a single customer accounted for
approximately 13% of total revenue, or $15,042,000. The Company generated no
revenue from this customer in the first quarter of 1997, and revenue, if any,
from this customer in 1997 is expected to be substantially below revenue
generated from this customer in 1996. To the extent that sales to this or other
customers decline and are not replaced with sales to other customers or sales
from the introduction of new products, the Company's results of operations will
be adversely affected. The Company anticipates that second quarter 1997 revenues
will be below the revenues for the second quarter of 1996 primarily due to the
expected lack of shipments in the second quarter of 1997 to the Company's
principal customer in the same period of 1996.
Further, the Company's expense levels are based in part on expectations of
future revenues. The Company has established a program to decrease expenses in
light of the anticipated reduction in revenue previously discussed. However, the
rate of new orders may vary significantly from month to month; consequently, if
anticipated sales and shipments in any quarter do not occur when expected,
operating expenses and inventory levels could be disproportionately high and the
Company's operating results for that quarter, and potentially for future
quarters, would be adversely affected. The Company's operating results could
also be affected by general economic conditions. Fluctuations in operating
results are likely to cause volatility in the price of the Company's Common
Stock.
Management of Acquisitions. Historically, the Company has achieved a portion of
its growth through acquisitions of other businesses and continues to pursue
additional acquisitions as part of its growth strategy. There are a number of
risks associated with any acquisition, including the substantial time and
attention required from management of the Company in connection with such
transactions, the difficulty of predicting whether the operations will perform
as expected and other problems inherent with any transition of one business
organization into another. There can be no assurance that the anticipated
benefits of any acquisition will be realized. A failure by the Company to manage
any such acquisitions effectively could materially and adversely affect the
Company's business and operating results. Additionally, there may be future
acquisitions which could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and other intangible assets associated with the
acquisitions of other businesses, any of which could materially adversely affect
the Company's operating results and financial condition.
Technological Change; Competition; Dependence on New Products. The markets for
some of the Company's products are characterized by frequent new product
introductions and declining average selling prices over product life cycles. The
Company's future success is highly dependent upon the timely completion and
introduction of new products at competitive price/performance levels. In
addition, the Company must respond to current competitors, who may choose to
increase their presence in the Company's markets, and to new competitors, who
may choose to enter those markets. If the Company is unable to make timely
introduction of new products or respond to competitive threats, its business and
operating results could be materially adversely affected.
<PAGE>
Fluctuation in Demand. The Company's customers encounter uncertain and changing
demand for their products. They typically order products from the Company based
on their forecasts. If demand falls below customers' forecasts, or if customers
do not control their inventories effectively, they may cancel or reschedule
shipments previously ordered from the Company. The Company has in the past
experienced, and may at any time and with minimal notice in the future
experience, cancellations and postponements of orders.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's primary source of liquidity has been cash flow generated from
operations. Cash, cash equivalents, and short-term investment securities held to
maturity totaled approximately $48.8 million on March 31, 1997, compared to
$44.8 million on December 31, 1996.
OPERATING ACTIVITIES
For the three ended March 31, 1997, the Company generated approximately $4.9
million in net cash from operating activities primarily as a result of
approximately $7.9 million in net loss, offset by $1.0 million in depreciation
and amortization, $2.5 million write down of in-process technology, $7.2 million
intangible write down related to the Cognitive acquisition, an increase in net
operating assets of $4.3 million, and a provision for deferred income taxes of
$2.2 million.
INVESTING ACTIVITIES
The Company's principal investing activities in the three months ended March 31,
1997 were the purchase of property and equipment for product development and
production and the investment in short-term securities held to maturity. As of
March 31, 1997, the Company had no material commitments for capital
expenditures. However, the Company anticipates capital expenditures of $3 to $4
million in 1997, principally for new product tooling and manufacturing
equipment.
The Company is also required to make additional payments, not to exceed an
aggregate of $3 million, to the former shareholder of Cognitive based upon the
attainment of specified net sales of a particular Cognitive product line. The
Company does not expect the payments to be material in 1997.
FINANCING ACTIVITIES
The Company's major financing activities in the three months ended March 31,
1997 were the principal repayment of debt. As of March 31, 1997, the Company had
$2.9 million in debt outstanding of which the current portion was approximately
$600,000. This debt includes $1.5 million payable to the former owner of
Cognitive in annual installments of $500,000 each due in 1997 through 1999. The
debt also includes $800,000 due to American Magnetics payable in the years 2000
and 2001.
On August 15, 1996, the Company renewed a $6.5 million line of credit agreement
originally signed on August 15, 1994. The line of credit includes a subfeature
to issue standby and/or commercial letters of credit not to exceed $1.5 million.
Borrowings under the line bear interest at a rate per annum equal to the prime
rate in effect from time to time. As of March 31, 1997, no amounts had been
drawn against this line of credit.
The Company currently expects that current cash balances and cash generated from
operations will adequately fund the Company's anticipated cash needs for the
next 12 months. However, the Company continues to evaluate potential
acquisitions of businesses that would complement the Company's existing
businesses and product lines, and any such acquisitions could require the use of
the Company's cash resources and/or additional borrowings.
The Company reviews potential foreign currency risks on an ongoing basis and to
date has been able to effectively manage this risk without the use of hedging
instruments.
<PAGE>
Item 6 - Exhibits and reports on Form 8-K
(a) Exhibits:
Exhibit 11 Computation of Net Income Per Share.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter
ended March 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
DH Technology, Inc. by:
May 15, 1997 /s/Janet W. Shanks
------------- ------------------------------------
Date Janet W. Shanks, Chief Accounting Officer
(Chief Accounting Officer)
<PAGE>
DH TECHNOLOGY, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
SEQUENTIALLY
EXHIBIT DESCRIPTION NUMBERED PAGE
- -------------------------------------------------------------------------------
11 Computation of Net Income Per Share 12
27 Financial Data Schedule 13
<PAGE>
EXHIBIT 11
DH TECHNOLOGY, INC. AND SUBSIDIARIES
Computation of Net Income Per Share
(In thousands, except per share data)
THREE MONTHS ENDED
March 31
------------ -------------
----------------------------
1997 1996
----------------------------
Primary and fully diluted:*
Average shares outstanding 7,976 7,830
Net effect of dilutive stock
options and warrants based on
the treasury stock method using
average market price 0 511
------------ ------------
Average common and common
equivalent shares outstanding 7,976 8,469
Net income ($7,883) $3,035
Per share (primary and fully diluted)
============ ============
Net income per share ($.99) $.36
============ ============
* There is no significant difference between primary and fully diluted earnings
per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> DH TECHNOLOGY, INC 10-Q FOR PERIOD ENDED 03/31/97
</LEGEND>
<CIK> 0000728376
<NAME> DH Technology, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 34,727
<SECURITIES> 15,085
<RECEIVABLES> 13,849
<ALLOWANCES> (1,315)
<INVENTORY> 13,101
<CURRENT-ASSETS> 77,555
<PP&E> 23,428
<DEPRECIATION> 14,813
<TOTAL-ASSETS> 94,550
<CURRENT-LIABILITIES> 18,098
<BONDS> 0
0
0
<COMMON> 13,188
<OTHER-SE> 89
<TOTAL-LIABILITY-AND-EQUITY> 94,550
<SALES> 19,185
<TOTAL-REVENUES> 19,185
<CGS> 12,527
<TOTAL-COSTS> 12,527
<OTHER-EXPENSES> 16,704
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> (9,665)
<INCOME-TAX> (1,782)
<INCOME-CONTINUING> (7,883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,883)
<EPS-PRIMARY> (.99)
<EPS-DILUTED> (.99)
</TABLE>
