<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 OCTOBER 3, 1998, 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
AXIOHM TRANSACTION SOLUTIONS, INC.
(EXACT 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.)
16 SENTRY PARK WEST, SUITE 450
1787 SENTRY PARKWAY WEST
BLUE BELL, PA 19422
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 591-0940
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 NOVEMBER 9, 1998, THERE WERE 6,519,301 SHARES OF THE REGISTRANT'S
COMMON STOCK OUTSTANDING.
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 1
OCTOBER 3, 1998 AND DECEMBER 31, 1997
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 3, 1998 AND SEPTEMBER 30, 1997 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 30, 1997 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 23
SIGNATURES 24
EXHIBITS INDEX 25
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
October 3, December 31,
1998 1997
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 1,919 3,877
Restricted cash -- 8,594
Accounts receivable, net 36,652 30,515
Inventories 31,997 30,103
Prepaid expenses and other current assets 12,518 11,015
------- -------
Total current assets 83,086 84,104
Fixed assets, net of accumulated depreciation 21,760 21,535
Intangible assets 72,483 92,371
Other assets 7,806 6,034
------- -------
Total assets 185,135 204,044
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 18,892 17,351
Current portion of long-term debt 6,901 5,948
Current portion of government grant obligations 884 649
Accrued payroll, payroll taxes and benefits 6,930 6,194
Accrued expenses 6,671 4,645
Income taxes payable 276 1,937
Deferred revenue 2,121 2,056
Rabbi Trust -- 8,594
Other current liabilities 298 4,481
------- -------
Total current liabilities 42,973 51,855
Non-current liabilities:
Long-term debt 175,181 165,564
Government grant obligations 1,334 1,569
Other long-term liabilities 4,053 3,137
------- -------
Total liabilities 223,541 222,125
------- -------
Shareholders' equity (deficit):
Preferred shares, no par value
Authorized: 1,000,000 shares, none issued -- --
Common shares:
Common stock, authorized: 28,500,000
shares; issued and outstanding:
6,519,301 shares in 1998 and 6,513,301 in 1997 24,257 23,852
Comprehensive Income 86 (658)
Accumulated deficit (62,749) (41,275)
------- -------
Total shareholders' equity (deficit) (38,406) (18,081)
------- -------
Total liabilities and shareholders' equity
(deficit) 185,135 204,044
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 1
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 3, September 30, October 3, September 30,
1998 1997 1998 1997
--------------------------------- ---------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $59,038 $ 42,943 $174,725 $ 99,558
Cost of net sales 38,533 28,176 112,613 66,978
------- -------- -------- --------
Gross margin 20,505 14,767 62,112 32,580
Operating expenses:
Selling, general and
administrative 10,024 5,285 28,306 10,984
Research and development 3,869 2,575 11,825 6,198
Plant closing expenses 799 -- 799 --
In-process technology -- 50,831 -- 50,831
Acquisition related
intangible amortization 8,970 2,894 25,892 2,894
------- -------- -------- --------
Total operating expenses 23,662 61,585 66,822 70,907
------- -------- -------- --------
Loss from operations (3,157) (46,818) (4,710) (38,327)
Interest and other income 100 327 230 390
Interest and other expense 4,333 2,715 13,333 3,077
------- -------- -------- --------
Loss before income taxes (7,390) (49,206) (17,813) (41,014)
------- -------- -------- --------
Income taxes 1,060 2,272 3,661 5,484
------- -------- -------- --------
Net loss ($8,450) ($51,478) ($21,474) ($46,498)
------- -------- -------- --------
------- -------- -------- --------
Basic and diluted:
Net loss per share $(1.30) $(7.90) $(3.29) $(7.14)
Shares used in per share
calculation 6,519 6,513 6,519 6,513
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 2
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 3, September 30,
1998 1997
----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cashflows from operating activities:
Net loss ($21,474) ($46,498)
Adjustments to reconcile net loss to net cash provided by
(used in) operations:
Write off of acquired in-process technology -- 50,831
Depreciation and amortization 30,978 5,369
Other non-cash items 332 450
Changes in assets and liabilities, net of effects of acquisition of business:
Accounts receivable (6,137) (8,909)
Inventories (1,894) (1,323)
Accounts payable and accrued expenses (162) 3,962
Other current assets (1,503) 4,819
Other current liabilities (4,183) --
-------- ---------
Net cash provided (used in) by operating activities (4,043) 8,701
Cashflows from investing activities:
Payment for acquisition of business, net of cash acquired (5,647) (148,074)
Capital expenditures and other (4,571) (3,670)
-------- ---------
Net cash used in investing activities (10,218) (151,744)
Cashflows from financing activities:
Proceeds from tender financing -- 186,979
Net borrowings under line of credit 14,029 (1,051)
Principal repayments under long term debt (2,543) (5,000)
Exercise of Stock Options 73 --
Payments of dividends -- (1,768)
Debt issuance costs -- (2,799)
Net loans to related parties -- 1,713
-------- ---------
Net cash provided by financing activities 11,559 178,074
Effect of exchange rate changes on cash 744 (622)
-------- ---------
Net increase (decrease) in cash and cash equivalents (1,958) 34,409
Cash and cash equivalents at beginning of period 3,877 1,839
-------- ---------
Cash and cash equivalents at end of period $ 1,919 $ 36,248
-------- ---------
-------- ---------
Supplemental Cashflow Disclosures:
Cash paid during the year for:
Interest $ 15,489 $ 488
Income taxes $ 5,192 $ 4,723
Schedule of non-cash investing and financing activities:
Fair value of assets acquired, net of cash acquired $ 5,647 $ 134,480
In-process technology -- $ 50,831
Liabilities assumed -- ($17,995)
Fair value of non-tendered stock -- ($19,242)
-------- ---------
Cash paid, net of cash acquired $ 5,647 $ 148,074
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
Page 3
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(OCTOBER 3, 1998 - UNAUDITED)
NOTE 1: UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the quarter ended October 3, 1998 are not necessarily indicative of the
results which may be expected for the year ending January 2, 1999 or any
other period. Reference is made to the Consolidated Financial Statements and
Notes thereto included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission (the "SEC") on March 31, 1998 as
amended on April 15, 1998.
In May 1998, Axiohm Transaction Solutions, Inc. (the "Company") changed its
fiscal year from the twelve-month period ended December 31 to the 52 or 53-week
period that ends on the Saturday nearest December 31, effective for fiscal year
1998. As a result, the Company's third quarter of 1998 represents the
thirteen-week period ended on October 3, 1998, the nine-month period represents
the thirty-nine week and three day period ended on October 3, 1998 and the
Company's 1998 fiscal year will end on January 2, 1999. Fiscal year 1998 will
have fifty-three weeks. The quarter ended September 30, 1997, contained 13 weeks
and the nine-month period ended September 30, 1997 contained 39 weeks. The
difference between the comparable periods is not material in terms of sales and
net loss.
NOTE 2: BASIS OF PRESENTATION
The financial statements of the Company include the accounts of its wholly owned
subsidiaries in the United States, France, Mexico, the United Kingdom,
Australia, Hong Kong and Japan. All intercompany accounts and transactions have
been eliminated.
On August 21, 1997, pursuant to an Agreement and Plan of Merger dated as of July
14, 1997 (the "Agreement of Merger"), AX Acquisition Corporation ("AX" or the
"Purchaser"), an indirect wholly-owned subsidiary of Axiohm S.A., a private
French Corporation, acquired approximately 88%, or 7,000,000 shares, of the
outstanding Common Stock of DH Technology, Inc. ("DH") through a public tender
offer to the shareholders of DH at a price of $25 per share (the "Tender
Offer").
On October 2, 1997, pursuant to the Agreement of Merger, AX acquired, directly
or indirectly, 100% of the outstanding Common Stock of Axiohm S.A. in exchange
for 5,518,524 shares of DH Common Stock and $12.2 million in cash (the "Share
Exchange Offer"). Simultaneously with the Share Exchange Offer, DH purchased all
of the outstanding shares of AX in exchange for the assumption of approximately
$190 million of debt (the "Acquisition Financing") incurred by AX to finance the
Tender Offer. As part of the Acquisition Financing the Company completed a
private placement (the "Senior Notes Offering") of $120 million of its 9.75%
Senior Subordinated Notes due 2007. The notes were exchanged in March 1998 for
new, substantially identical notes, which have been registered under the
Securities Act of 1933, as amended (the "Notes"). The Company's payment
obligation under the Notes is jointly and severally fully and unconditionally
guaranteed on a senior subordinated basis by certain of the Company's
subsidiaries (the "Guarantor Subsidiaries"), all of which are directly or
indirectly wholly owned by the Company. Immediately after the Share Exchange
Offer, AX was merged with and into DH (the "Merger"), the surviving legal
entity, and the company changed its name from "DH Technology, Inc." to "Axiohm
Transaction Solutions, Inc.". In connection with the Merger, Axiohm S.A. changed
its tax filing status and was renamed Axiohm S.A.R.L. Immediately after the
Merger, approximately 85% of DH's outstanding Common Stock were held by the
former shareholders of Axiohm S.A.R.L. and approximately 15% were held by the
former public shareholders of DH.
Page 4
<PAGE>
The Tender Offer, the Share Exchange Offer and the Merger (collectively the
"Acquisition") have been accounted for in a manner similar to a reverse
acquisition, in which Axiohm S.A.R.L. was treated as the acquirer for accounting
purposes. Accordingly, the historical financial information for periods prior to
August 31, 1997 is that of Axiohm S.A.R.L. The effective date of the Acquisition
and Merger of DH for accounting purposes was August 31, 1997, and, accordingly,
the capital structure of the Company has been retroactively restated to reflect
the number of shares and options outstanding as a result of the Acquisition.
NOTE 3: INVENTORIES
The composition of inventories at October 3, 1998 and December 31, 1997 was as
follows:
<TABLE>
<CAPTION>
October 3, 1998 December 31, 1997
--------------- -----------------
<S> <C> <C>
Raw materials $23,374,000 $20,014,000
Work in process 2,473,000 2,328,000
Finished goods 6,150,000 7,761,000
----------- -----------
Total Inventories $31,997,000 $30,103,000
----------- -----------
----------- -----------
</TABLE>
NOTE 4: COMPREHENSIVE INCOME
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130") was issued. FAS 130 requires the disclosure of
comprehensive income to reflect changes in equity that result from transactions
and economic events from non-owner sources. Comprehensive income for the nine
months ended October 3, 1998 and September 30, 1997 presented below includes
foreign currency translation items. There was no tax expense or tax benefit
associated with the foreign currency translation items.
<TABLE>
<CAPTION>
October 3, 1998 September 30, 1997
--------------- ------------------
<S> <C> <C>
Net loss (21,474) ($46,498)
Foreign currency translation
adjustments 744 (622)
Comprehensive loss ($20,730) ($47,120)
-------- --------
-------- --------
</TABLE>
NOTE 5: GUARANTORS AND FINANCIAL INFORMATION
The following consolidating financial information is presented for purposes of
complying with the reporting requirements of the Guarantor Subsidiaries.
Separate financial statements and other disclosures with respect to the
Guarantor Subsidiaries are not presented because the Company believes that such
financial statements and other information would not provide additional
information that is material to investors.
There are no contractual restrictions, under the Notes or otherwise, upon the
ability of the Guarantor Subsidiaries to make distributions or pay dividends to
their respective equity-holders. Directly or indirectly, the Company is the sole
equity-holder of all of the Guarantor Subsidiaries.
The Company's payment obligation under the Notes is jointly and severally fully
and unconditionally guaranteed on a senior subordinated basis by the Guarantor
Subsidiaries, all of which are directly or indirectly wholly owned by the
Company.
Page 5
<PAGE>
The condensed consolidating financial information presents condensed financial
statements as of October 3, 1998 and December 31, 1997 and for the nine month
period ended October 3, 1998 of:
a) the Company on a parent company only basis ("Parent")
(carrying its investments in the subsidiaries under
the equity method),
b) the Guarantor Subsidiaries separated as to French
Guarantors (Axiohm S.A.R.L., Dardel Technologies
E.U.R.L., Axiohm Investissements S.A.R.L.), and U.S.
Guarantors (Axiohm IPB, Inc., Cognitive L.L.C.,
Cognitive Solutions, Inc., and Stadia Colorado Corp.),
c) the Non-Guarantor Subsidiaries (DH Technology Plc, DH
Technology Pty, DH Technologia, Axiohm Ltd. (Hong
Kong), Axiohm Japan Inc. and AP Print S.A.R.L),
d) elimination entries necessary to consolidate the Parent
Company and its subsidiaries, and
e) the Company on a consolidated basis.
The condensed consolidating financial information also presents condensed
financial statements for the nine-month period ended September 30, 1997.
a) the Company on a parent company only basis ("Parent")
(carrying its investments in the subsidiaries under
the equity method),
b) the Guarantor Subsidiaries separated as to French
Guarantors (Axiohm S.A.R.L., Dardel Technologies
E.U.R.L., Axiohm Investissements S.A.R.L.), and U.S.
Guarantors (Axiohm IPB, Inc., Cognitive L.L.C.,
Cognitive Solutions, Inc., and Stadia Colorado Corp.),
c) the Non-Guarantor Subsidiaries (DH Technology Plc, DH
Technology Pty, DH Technologia, Axiohm Ltd. (Hong
Kong), Axiohm Japan Inc.
d) elimination entries necessary to consolidate the Parent
Company and its subsidiaries, and
e) the Company on a consolidated basis.
Page 6
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 3, 1998 (UNAUDITED)
------------------------------------------------------------------------------------
GUARANTOR
SUBSIDIARIES
-------------------- NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,321 $ (237) $(3,235) $ 1,070 $ -- $ 1,919
Accounts receivable, net 9,717 3,823 19,156 3,956 -- 36,652
Inventories 7,446 6,675 14,581 3,978 (683) 31,997
Prepaid expenses and other
current assets 9,975 1,412 436 496 199 12,518
Intercompany (7,910) (3,230) 11,832 (3,029) 2,337 --
-------- ------- ------- ------- -------- --------
Total current assets 23,549 8,443 42,770 6,471 1,853 83,086
Fixed assets, net of
accumulated depreciation 4,073 4,368 11,767 1,552 -- 21,760
Intangible assets 69,119 459 2,955 (50) -- 72,483
Other assets 5,770 482 1,482 72 -- 7,806
Investment in Subsidiaries 45,029 8,752 -- -- (53,781) --
-------- ------- ------- ------- -------- --------
Total assets $147,540 $22,504 $58,974 $ 8,045 $(51,928) $185,135
-------- ------- ------- ------- -------- --------
-------- ------- ------- ------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 3,484 4,974 8,523 1,911 -- 18,892
Current portion of long-term
debt 6,650 229 20 2 -- 6,901
Current portion of government
grant obligations (1) 865 -- 20 -- 884
Accrued payroll, payroll taxes
and benefits 2,783 1,821 1,931 395 -- 6,930
Accrued expenses 4,914 354 1,216 187 -- 6,671
Income taxes payable (3,704) 399 3,244 337 -- 276
Deferred revenue 192 1,232 697 -- -- 2,121
Other current liabilities 297 1 -- -- -- 298
-------- ------- ------- ------- -------- --------
Total current liabilities 14,615 9,875 15,631 2,852 -- 42,973
Non-current liabilities:
Long-term debt 173,411 1,633 24 113 -- 175,181
Government grant obligations -- 784 550 -- -- 1,334
Other long-term liabilities -- 2,106 1,646 -- -- 3,752
Deferred tax liability (2,168) 2,154 315 -- -- 301
-------- ------- ------- ------- -------- --------
Total liabilities 185,858 16,552 18,166 2,965 -- 223,541
-------- ------- ------- ------- -------- --------
Shareholders' equity (deficit):
Common stock 24,257 4,167 -- 505 (4,672) 24,257
Comprehensive Income 174 580 -- (95) (573) 86
Retained earnings (accumulated
deficit) (62,749) 1,205 40,808 4,670 (46,683) (62,749)
-------- ------- ------- ------- -------- --------
Total shareholders' equity (deficit) (38,318) 5,952 40,808 5,080 (51,928) (38,406)
-------- ------- ------- ------- -------- --------
Total liabilities and shareholders'
equity (deficit) $147,540 $22,504 $58,974 $ 8,045 $(51,928) $185,135
-------- ------- ------- ------- -------- --------
-------- ------- ------- ------- -------- --------
</TABLE>
Page 7
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 3, 1998 (UNAUDITED)
------------------------------------------------------------------------------------
GUARANTOR
SUBSIDIARIES
--------------------- NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 46,575 $34,903 $100,368 $17,353 $(24,474) $174,725
Cost of net sales 30,922 22,057 72,008 13,461 (25,835) 112,613
-------- ------- -------- ------- -------- --------
Gross margin 15,653 12,846 28,360 3,892 1,361 62,112
Operating expenses:
Selling, general & administrative 8,708 4,108 12,134 3,356 -- 28,306
Research and development 3,236 2,629 5,538 422 -- 11,825
Plant closing expenses 799 -- -- -- -- 799
Acquisition related
intangible amortization 25,892 -- -- -- -- 25,892
-------- ------- -------- ------- -------- --------
Total operating expenses 38,635 6,737 17,672 3,778 -- 66,822
-------- ------- -------- ------- -------- --------
Income (loss) from operations (22,982) 6,109 10,688 114 1,361 (4,710)
Interest and other income 3,980 51 12 105 (3,918) 230
Interest and other expense 12,975 4,043 208 18 (3,911) 13,333
Equity earnings in subsidiaries 6,541 -- -- -- (6,541) --
-------- ------- -------- ------- -------- --------
Income (loss) before income taxes (25,436) 2,117 10,492 201 (5,187) (17,813)
Income taxes (benefit) (3,963) 2,592 4,283 167 582 3,661
-------- ------- -------- ------- -------- --------
Net income (loss) $(21,473) $ (475) $ 6,209 $ 34 $ (5,769) $(21,474)
-------- ------- -------- ------- -------- --------
-------- ------- -------- ------- -------- --------
</TABLE>
Page 8
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 3, 1998 (UNAUDITED)
------------------------------------------------------------------------------------
GUARANTOR
SUBSIDIARIES
--------------------- NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cashflows from operating activities:
Net cash provided by (used in)
operating activities $(15,962) $ 678 $ 11,207 $ (356) $ 390 $ (4,043)
Cashflows from investing activities:
Payment for acquisition of business
and other intangibles (3,929) (733) (934) (51) -- (5,647)
Capital expenditures and other (1,443) (1,314) (1,842) 28 -- (4,571)
-------- ------- -------- ------ ----- --------
Net cash provided by (used in)
investing activities (5,372) (2,047) (2,776) (23) -- (10,218)
Cashflows from financing activities:
Net borrowings under line of credit 14,029 -- -- -- -- 14,029
Principal repayments under long
term debt (2,400) (143) -- -- -- (2,543)
Exercise of stock options 73 -- -- -- -- 73
-------- ------- -------- ------ ----- --------
Net cash provided by (used in)
financing activities 11,702 (143) -- -- -- 11,559
Effect of exchange rate changes on cash 93 1,137 -- (96) (390) 744
-------- ------- -------- ------ ----- --------
Net increase in cash and cash
equivalents (9,539) (375) 8,431 (475) -- (1,958)
Cash and cash equivalents at beginning
of period 13,860 138 (11,666) 1,545 -- 3,877
-------- ------- -------- ------ ----- --------
Cash and cash equivalents at end of
period $ 4,321 $ (237) $ (3,235) $1,070 $ -- $ 1,919
-------- ------- -------- ------ ----- --------
-------- ------- -------- ------ ----- --------
</TABLE>
Page 9
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
------------------------ NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,860 $ 138 $(11,666) $ 1,545 $ -- $ 3,877
Restricted cash 8,594 -- -- -- -- 8,594
Accounts receivable, net 10,388 3,760 15,209 3,099 (1,941) 30,515
Inventories 3,611 4,995 17,140 4,600 (243) 30,103
Prepaid expenses and other current assets 4,235 9,759 437 (3,316) (100) 11,015
Intercompany (14,259) 2,612 11,514 (1,761) 1,894 --
------------ ------------ ------------ ----------- ---------- -----------
Total current assets 26,429 21,264 32,634 4,167 (390) 84,104
Fixed assets, net of accumulated depreciation 3,847 4,052 11,679 1,957 -- 21,535
Intangible assets 88,555 93 3,521 202 -- 92,371
Other assets 5,428 413 418 83 (308) 6,034
Investment in Subsidiaries 45,030 -- -- -- (45,030) --
------------ ------------ ------------ ----------- ---------- -----------
Total assets $169,289 $25,822 $ 48,252 $ 6,409 $(45,728) $204,044
------------ ------------ ------------ ----------- ---------- -----------
------------ ------------ ------------ ----------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 2,511 6,569 6,767 1,504 -- 17,351
Current portion of long-term debt 5,689 227 32 -- -- 5,948
Current portion of government grant obligations -- 649 -- -- -- 649
Accrued payroll, payroll taxes and benefits 689 3,558 1,947 -- -- 6,194
Accrued expenses 1,620 1,196 2,113 (284) -- 4,645
Income taxes payable 1,937 174 (174) -- -- 1,937
Deferred revenue 416 1,121 519 -- -- 2,056
Rabbi Trust 8,594 -- -- -- -- 8,594
Other current liabilities 4,481 -- -- -- -- 4,481
------------ ------------ ------------ ----------- ---------- -----------
Total current liabilities 25,937 13,494 11,204 1,220 -- 51,855
Non-current liabilities:
Long-term debt 162,903 2,014 600 47 -- 165,564
Government grant obligations -- 1,569 -- -- -- 1,569
Other long-term liabilities (2,168) 3,455 1,850 -- -- 3,137
------------ ------------ ------------ ----------- ---------- -----------
Total liabilities 186,672 20,532 13,654 1,267 -- 222,125
------------ ------------ ------------ ----------- ---------- -----------
Shareholders' equity (deficit):
Common stock 23,852 4,167 -- 360 (4,527) 23,852
Comprehensive Income 40 (557) -- 2 (143) (658)
Retained earnings (accumulated deficit) (41,275) 1,680 34,598 4,780 (41,058) (41,275)
------------ ------------ ------------ ----------- ---------- -----------
Total shareholders' equity (deficit) (17,383) 5,290 34,598 5,142 (45,728) (18,081)
------------ ------------ ------------ ----------- ---------- -----------
Total liabilities and shareholders' equity
(deficit) $169,289 $25,822 $48,252 $6,409 $(45,728) $204,044
------------ ------------ ------------ ----------- ---------- -----------
------------ ------------ ------------ ----------- ---------- -----------
</TABLE>
Page 10
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
-------------------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------ ---- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 6,166 $ 33,558 $ 80,230 $ 4,040 $ (24,436) $ 99,558
Cost of net sales 4,160 20,968 61,531 3,415 (23,096) 66,978
-------- -------- -------- ------- --------- --------
Gross margin 2,006 12,590 18,699 625 (1,340) 32,580
Operating expenses:
Selling, general &
administrative 3,457 3,683 5,716 730 292 13,878
Research and development 322 2,371 3,513 44 (52) 6,198
In-process technology 50,831 -- -- -- -- 50,831
-------- -------- -------- ------- --------- --------
Total operating expenses 54,610 6,054 9,229 774 240 70,907
-------- -------- -------- ------- --------- --------
Income (loss) from operations (52,604) 6,536 9,470 (149) (1,580) (38,327)
Interest and other income 284 151 (62) 17 -- 390
Interest and other expense 3,588 161 (673) 1 -- 3,077
Equity earnings in subsidiaries 9,209 -- -- -- (9,209) --
-------- -------- -------- ------- --------- --------
Income (loss) before income taxes (46,699) 6,526 10,081 (133) (10,789) (41,014)
Income taxes (benefit) (201) 2,862 3,530 (51) (656) 5,484
-------- -------- -------- ------- --------- --------
Net income (loss) $(46,498) $ 3,664 $ 6,551 $ (82) $ (10,133) $(46,498)
-------- -------- -------- ------- --------- --------
-------- -------- -------- ------- --------- --------
</TABLE>
Page 11
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
-------------------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------ ---- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cashflows from operating activities:
Net cash provided by (used in)
operating activities 4,169 7,313 (669) (1,997) (115) 8,701
Cashflows from investing activities:
Payment for acquisition of business
and other intangibles (147,522) -- (552) -- -- (148,074)
Capital expenditures and other (15) (1,494) (2,161) -- -- (3,670)
--------- -------- --------- ------- ----- ---------
Net cash provided by (used in)
investing activities (147,537) (1,494) (2,713) -- -- (151,744)
Cashflows from financing activities:
Proceeds from tender financing 186,979 -- -- -- -- 186,979
Net repayment under line of credit -- 157 (1,174) (34) -- (1,051)
Principal repayments under long
term debt -- (1,102) (3,892) (6) -- (5,000)
Payments of dividends -- (1,768) -- -- -- (1,768)
Debt issuance costs (1,050) -- (1,749) -- -- (2,799)
Net loans to related parties (728) 712 (745) 2,474 -- 1,713
--------- -------- --------- ------- ----- ---------
Net cash provided by (used in)
financing activities 185,201 (2,001) (7,560) 2,434 -- 178,074
Effect of exchange rate changes on
cash (682) (601) 546 -- 115 (622)
--------- -------- --------- ------- ----- ---------
Net increase in cash and cash
equivalents 41,151 3,217 (10,396) 437 -- 34,409
Cash and cash equivalents at beginning
of period -- 1,494 230 115 -- 1,839
Cash and cash equivalents at end of
period $ 41,151 $ 4,711 $ (10,166) 552 $ -- $ 36,248
--------- -------- --------- ------- ----- ---------
--------- -------- --------- ------- ----- ---------
Page 12
</TABLE>
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included herein.
BACKGROUND
The Company was formed from the combination of Axiohm S.A. a French
corporation ("Axiohm") and DH Technology, Inc. ("DH"). On August 21, 1997, AX
Acquisition Corporation, an indirect wholly-owned subsidiary of Axiohm
("Purchaser"), acquired 7,000,000 shares of the Common Stock of DH
(approximately 88%) through a tender offer to the shareholders of DH ("the
Tender Offer"), resulting in a change in control of DH. On October 2, 1997,
the Purchaser exchanged 5,518,524 shares of the Common Stock it had acquired
in the Tender Offer and approximately $12.2 million in cash for certain of
the outstanding shares of capital stock of Axiohm and all of the outstanding
shares of capital stock of Dardel Technologies S.A. ("Dardel"), which held
the remaining shares of capital stock of Axiohm. Immediately after this
exchange, DH purchased from Axiohm IPB all of Purchaser's outstanding capital
stock in exchange for the assumption by DH of the obligations incurred in
financing the Tender Offer. Purchaser was then merged with and into DH (the
"Merger"), and the remaining 1,481,476 shares of DH's Common Stock acquired
in the Tender Offer and held by Purchaser at the time of the Merger were
canceled in the Merger. Simultaneously, DH changed its name to Axiohm
Transaction Solutions, Inc. The aggregate initial purchase price of $209.1
million consisted of cash for DH shares and stock options, transaction costs
and the fair value of DH shares not tendered. The above transactions were
financed with (i) borrowings of approximately $57.0 million, under a new $85
million credit facility that provides term loans in the aggregate principal
amount of $50.0 million (the "Term Loan Facility), and revolving loans and
letters of credit of up to $35.0 million (the "Revolving Credit Facility",
and together with the Term Loan Facility, the "New Credit Facility") (ii) the
proceeds of the Offering of $120,000,000 of its 9 3/4% Senior Subordinated
Notes due in 2007, which were exchanged in March 1998 for equivalent notes
which have been registered under the Securities Act (the "Notes").
Although DH was the surviving legal entity, the transaction was accounted for
as a purchase of DH by Axiohm. For the third quarter of 1997 and first nine
months of 1997, the following discussion includes the complete results of
operations of Axiohm, and one month of DH for comparative purposes. While the
effective date of the Merger was October 2, 1997 for legal purposes, the
effective date of the acquisition of DH for accounting purposes was August
31, 1997.
In connection with the foregoing transactions, the Company recorded
approximately $102.1 million of goodwill and other intangibles which is being
amortized over three years using the straight line method, which is the
period estimated to be benefited.
On July 28, 1998 the Company announced a major restructuring program designed
to streamline operations and improve manufacturing efficiencies. As part of
this program, the Company will consolidate its Paso Robles, California and
Riverton, Wyoming manufacturing operations principally into its Ithaca, New
York manufacturing operation. The Company expects that these actions will
result in the reduction of approximately 200 jobs in the closing locations
and the addition of approximately 100 jobs in Ithaca, New York. This final
program is a result of an assessment that began at the time of the
acquisition of DH Technology.
The Company expects that when the consolidation moves are completed by late
1999, pre-tax operating costs will be reduced by approximately $3.5 million a
year. The Company expects to incur approximately $6 million of costs to fully
implement the plan by the end of 1999, of which approximately $3 million was
recorded in the second quarter of 1998 as an adjustment of the purchase price
of DH Technology, Inc. thereby increasing goodwill and other intangibles from
$102.1 million to $105 million.
The company was reorganized into two divisions during the third quarter of
1998: transaction products, based in Blue Bell, Pennsylvania and
identification products, based in Denver, Colorado. Transaction products
account for approximately 85-90% of the revenue of the business and
identification products
Page 13
<PAGE>
represent the balance of the revenue of the business. This reorganization was
undertaken to better serve customer needs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES. Net Sales of $59.0 million for the third quarter of 1998 increased
37.5%, or $16.1 million, compared to net sales of $42.9 million for the same
period last year. Slightly more than 85% of the increase was the result of
the inclusion of sales of DH; the balance was due to growth in the existing
business which reflects increased unit volume of transaction printers and
printer mechanisms partially offset by a decline in average selling prices.
COST OF NET SALES. Cost of net sales of $38.5 million remained relatively
constant at 65.3% of net sales for the third quarter of 1998 compared to
65.6% of net sales for the same period of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses of $10.0 million increased to 17.0% of net sales in
the third quarter of 1998 from 12.3% in the same period in 1997. The majority
of the increase was due to the inclusion of expenses of DH and costs related
to the acquisition of DH; the balance was primarily the result of higher
staffing levels and expenses needed to support higher sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses as a
percentage of net sales increased to 6.6% in the third quarter of 1998
compared to 6.0% in the third quarter of 1997. Total dollars expended for
research and development increased $1.3 million to $3.9 million in the third
quarter of 1998 compared to $2.6 million in the third quarter of 1997
primarily due to the inclusion of expenses of DH. In addition, the Company
believes that continued timely development of new products and enhancements
to existing products are essential to maintaining the Company's competitive
position. Accordingly, the Company anticipates that such expenses will
continue to increase in absolute dollar terms for the foreseeable future.
PLANT CLOSING EXPENSES. The Company recorded $0.8 million in expenses in the
third quarter of 1998, relating to the relocation of operations from the Paso
Robles, California and Riverton, Wyoming facilities to the company's Ithaca,
New York facility, primarily for the accrual of bonuses to be paid to
employees upon completion of integration duties.
ACQUISITION RELATED INTANGIBLE AMORTIZATION. The Company anticipates that, on
a quarterly basis through the third quarter of 2000, operating expenses will
include approximately $8.9 million in non-cash acquisition related charges
which principally includes non-cash intangibles amortization.
LOSS FROM OPERATIONS. Loss from operations for the third quarter of 1998 was
$3.2 million, compared to a loss from operations of $46.8 million in the same
period for 1997. The loss from operations in the third quarter of 1998 was
primarily due to the acquisition related amortization charges discussed
above. The loss in the third quarter 1997 was due primarily to the one time
charge of $50.8 million for in-process technology, relating to the
acquisition.
INTEREST AND OTHER EXPENSE. Interest expense increased to $4.3 million in the
third quarter of 1998 from $2.7 million for the same period in 1997. This was
primarily due to higher average outstanding debt balances, couple with longer
outstanding periods related to the New Credit Facility and Notes.
INCOME TAXES. Provision for income taxes of $1.1 million in the third quarter
of 1998 decreased $1.2 million from $2.3 million in 1997. Although the
company reported a loss before income taxes, a provision for income taxes was
recorded because goodwill amortization was not deductible for income tax
purposes. In addition the company pays income taxes in foreign countries,
principally France, on income earned in those countries. Income taxes as a
percentage of income before taxes, excluding the effect of acquisition
related charges, was approximately 45.0% in 1998 compared to 46.0% in 1997,
and 39% in
Page 14
<PAGE>
the second quarter of 1998. The increase from the second quarter is the
result of higher than anticipated pretax income outside the United States.
NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES. Net Sales of $174.7 million for the first nine months of 1998
increased 75.5%, or $75.2 million, compared to net sales of $99.6 million for
the same period last year. Approximately 80% of the increase was the result
of the inclusion of sales of DH since the acquisition; the balance was due to
growth in the existing business which reflects increased unit volume of
transaction printers and printer mechanisms partially offset by a decline in
average selling prices.
COST OF NET SALES. Cost of net sales of $112.6 million decreased to 64.5% of
net sales for the first nine months of 1998 from 67.3% of net sales for the
same period of 1997, due primarily to the following four factors: a favorable
impact of the exchange rate between the U.S. dollar and the French franc for
products manufactured in France and sold in the U.S.; lower purchase prices
of components and parts; continuing technology improvements; and higher
absorption of relatively fixed overhead costs partially offset by a decrease
in average selling prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses of $28.3 million increased to 16.2% of net sales in
the first nine months of 1998 from 11.0% in the same period in 1997. The vast
majority of the increase was due to the inclusion of expenses of DH and costs
related to the acquisition of DH; the balance was primarily the result of
recruiting, severance and other expenses needed to support higher sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses as a
percentage of net sales increased to 6.8% in the first nine months of 1998
compared to 6.2% in the first nine months of 1997. Total dollars expended for
research and development increased $5.6 million to $11.8 million in the first
nine months of 1998 compared to $6.2 million in the same period of 1997
primarily due to the inclusion of expenses of DH.
PLANT CLOSING EXPENSES. The Company recorded $0.8 million in expenses in the
first nine months of 1998, relating to the relocation of operations from the
Paso Robles, California and Riverton, Wyoming facilities to the company's
Ithaca, New York facility, primarily for the accrual of bonuses to be paid to
employees upon completion of integration duties.
ACQUISITION RELATED INTANGIBLE AMORTIZATION. The Company anticipates that, on
a quarterly basis through the third quarter of 2000, operating expenses will
include approximately $8.9 million in non-cash acquisition related charges
which principally includes non-cash intangible amortization.
LOSS FROM OPERATIONS. Loss from operations for the first nine months of 1998
was $4.7 million, compared to a loss from operations of $38.3 million in the
same period for 1997. The loss from operations in the first nine months of
1998 was primarily due to the acquisition related amortization charges
discussed above. The loss in 1997 is inclusive of a one-time charge of $50.8
for in-process technology.
INTEREST AND OTHER EXPENSE. Interest expense increased to $13.3 million in
the first nine months of 1998 from $3.1 million for the same period in 1997
due to interest payments on the New Credit Facility and Notes.
INCOME TAXES. Provision for income taxes of $3.7 million in the first nine
months of 1998 decreased $1.8 million from $5.5 million in 1997. Although the
company reported a loss before income taxes, a provision for income tax was
recorded because goodwill amortization was not deductible for federal income
tax purposes. In addition the company pays income taxes in foreign countries,
principally France, where historically the tax rate is higher than that of
the U.S., on income earned in those countries. Income taxes as a percentage
of income before taxes, excluding the effect of acquisition related charges,
was approximately 44.8% for 1998 compared to 41.8% for 1997.
Page 15
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The risk factors set forth below are important factors that may affect future
results and that could cause actual results to differ materially from those
projected in forward-looking statements that may be made by the Company from
time to time, including the forward-looking statements included in this
report.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE. On October 3, 1998, the Company's
total debt (net of cash) was $182.4 million and the Company had a
shareholders' deficit of $38.4 million. Required principal payments under the
New Credit Facility and Notes (excluding the Revolver) are as follows: $0.8
million remaining in 1998; $7.8 million in 1999; $7.8 million in 2000; $9.1
million in 2001; $5.6 million in 2002; $12.25 million in 2003; and $120.0
million in 2007. In 1998, it is anticipated that capital expenditures will
not exceed the limit of $10.5 million permitted under the New Credit Facility.
The Company's ability to make scheduled payments of principal, or to pay the
premium, if any, interest or liquidated damages, if any, thereon, or to
refinance its indebtedness, or to fund planned capital expenditures, will
depend upon its future performance, which, in turn, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
that are beyond its control. There can be no assurance that the Company's
business will generate cash flow at or above anticipated levels or that the
Company will be able to borrow funds under the New Credit Facility in an
amount sufficient to enable the Company to service its indebtedness or make
anticipated capital expenditures. If the Company is unable to generate
sufficient cash flow from operations or to borrow sufficient funds in the
future to service its debt, it may be required to sell assets, reduce capital
expenditures, refinance all or a portion of its existing indebtedness or
obtain additional financing. There can be no assurance that any such
refinancing would be available on commercially reasonable terms, or at all,
or that any additional financing could be obtained, particularly in view of
the Company's high level of indebtedness, the restrictions on the Company's
ability to incur additional indebtedness under the New Credit Facility and
the indenture under which the Notes were issued (the "Indenture"), and the
fact that substantially all of the Company's and its subsidiaries' assets
have been pledged to secure obligations under the New Credit Facility.
In addition, the Indenture and the New Credit Facility contain financial and
other restrictive covenants that limit, among other things, the ability of
the Company to borrow additional funds. Failure by the Company to comply with
such covenants could result in events of default under the Indenture and the
New Credit Facility which, if not cured or waived, could permit the
indebtedness thereunder to be accelerated which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
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, 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 addition, the Company periodically evaluates the possible impairment of
goodwill to determine whether events or changes in circumstances indicate
that the carrying amount of goodwill may not be recoverable. Further, the
Company's expense levels are based in part on expectations of future
revenues. 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.
Axiohm has historically experienced, and the Company expects to continue to
experience, relatively lower levels of sales of existing point of sale
transaction printers during the period from mid-November to the end of
December primarily in the United States. The Company believes that this
seasonality has been caused by the fact that some of its POS customers do not
install new systems in their facilities between Thanksgiving and Christmas,
so as not to disturb their sales flow during this heavy selling period.
The Company's customers encounter uncertain and changing demand for their
products. They typically
Page 16
<PAGE>
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.
DEPENDENCE ON PRINCIPAL CUSTOMER. Sales to NCR Corporation ("NCR"), the
Company's largest customer, for the nine months ended October 3, 1998 were
25% of total revenue. Net sales for the years ended December 31, 1997 and
1996 were 35% and 52% respectively. No other customer accounted for more than
10% of net sales for the year ended December 31, 1996 or December 31, 1997.
On September 2, 1997, Axiohm IPB entered into a three-year contract with NCR
(the "NCR Contract"). The NCR Contract provides that NCR and Axiohm IPB
intend and expect that NCR will purchase from Axiohm IPB substantially all of
its requirements for transaction printers of the type manufactured by Axiohm
IPB (the "Covered Products"). In case there is reason to believe that NCR is
purchasing less than 75% of its requirements for Covered Products from Axiohm
IPB at any time during the term of the agreement, there is an obligation for
both parties to work together in good faith to eliminate such deficiency. The
NCR Contract provides that NCR's purchase commitment is subject to Axiohm
IPB's ability to meet NCR's specifications and requirements for price,
performance, quality, service and delivery with respect to such Covered
Products. Any failure by NCR to continue purchasing products from the Company
at historical levels or the termination of the NCR Contract would have a
material adverse effect on the Company's business, financial condition and
operating results. Sales of certain products in 1998 not covered by its
contract with NCR are expected to approximate 1997's level of approximately
5% of combined pro-forma revenues assuming companies were combined from
January 1st, of $212 million, and the Company does not anticipate significant
revenue from these products in 1999. In the second quarter Solectron Corp.
was assigned the NCR business as part of the sale of certain NCR
manufacturing operations to Solectron Corp. and is expected to be the
Company's largest customer in 1998. The company currently expects that this
assignment will not have a material adverse impact on its financial position
or results of operations.
COMPETITION. The Company has a number of significant domestic and foreign
competitors for its transaction printer, bar code printer and card reader
products. Many of the Company's competitors have significantly greater
financial, technical and marketing resources than does the Company. To remain
competitive, the Company believes that it will be required to maintain a high
level of technological expertise and deliver reliable cost-effective products
on a timely basis. There can be no assurance that the Company will have
sufficient resources to continue to make the investments necessary to
maintain its competitive position or that other competitors with
substantially greater financial resources, including other manufacturers of
non-transaction printers, will not attempt to enter the market. A failure to
remain competitive would have a material adverse effect on the Company's
business, financial condition and results of operations.
INTEGRATION OF OPERATIONS. The integration of the administrative, finance and
manufacturing operations of Axiohm and DH, the coordination of their
respective sales and marketing staffs and the implementation of appropriate
operational, financial and management systems and controls will require
significant financial resources and substantial attention from management.
During the second quarter of 1998, as part of the strategy to achieve
purchasing, manufacturing and other synergies begun with the acquisition of
DH, the Company finalized its plan to consolidate two of its manufacturing
operations principally into its Ithaca, New York manufacturing operation as
discussed above. The Company expects to incur $6 million in costs through
1999 related to consolidation of these two facilities and expects to realize
annual savings of approximately $3.5 million by the end of 1999. The company
recorded $3 million in additional goodwill in the second quarter related to
the closure of the two former DH manufacturing operations. Any inability of
the Company to integrate these operations successfully in a timely and
efficient manner could have a material adverse effect on the Company's
business, financial condition and results of operations and would adversely
affect its ability to realize its planned cost savings or would require
additional expenditures to realize such cost savings. In addition, even if
the businesses of Axiohm and DH are successfully integrated, no assurance can
be given that future expenses can be reduced by the expected cost savings.
The Company's prospects should be considered in light of the numerous risks
commonly encountered in business combinations. In addition, the historical
financial statements presented in this Report may not necessarily be
indicative of the results that would have been attained had the Company
actually operated on a combined basis.
Page 17
<PAGE>
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.
INTERNATIONAL SALES AND OPERATIONS. The Company expects that international
sales will continue to represent a significant portion of its net sales.
Although the Company's net sales are denominated in U.S. dollars, its
international business may be affected by changes in demand resulting from
fluctuations in exchange rates as well as by risks such as tariff regulations
and difficulties in obtaining export licenses. In addition, historically the
French operations of Axiohm S.A.R.L. have incurred a majority of Axiohm
S.A.R.L.'s expenses in French francs, while a substantial majority of Axiohm
S.A.R.L.'s revenues have been in U.S. dollars. Any material appreciation in
the French franc relative to the U.S. dollar would, absent any effects
associated with hedging or currency trading transactions, detrimentally
affect the financial performance of the Company's French operations. The
Company attempts to limit its exposure to French franc currency fluctuation
compared to the U.S. dollar by entering into various financial instruments,
including forward exchange contracts, to offset its French franc denominated
expenses with associated U.S. dollar denominated revenue, if, in the opinion
of the Company, to do so would mitigate foreign exchange losses. The forward
exchange contracts the Company has entered into are marked to market, with
any exchange gains or losses and associated costs recognized in the income
statement. The Company cannot predict the effect of exchange rate
fluctuations upon future operating results.
INTELLECTUAL PROPERTY RIGHTS. The Company holds various U.S. and foreign
patents on impact printheads, transaction printers, magnetic card readers and
bar code products and has applied for additional domestic and foreign
patents. The basic technology for many of the Company's products is based
upon these patents and on manufacturing expertise. There can be no assurance
that any issued patents will provide the Company with competitive advantages
or will not be challenged by third parties, or that the patents of others
will not have a material adverse effect on the Company's ability to do
business, or that others will not independently develop similar products,
duplicate the Company's products, or design around the patents issued to the
Company.
The Company has in the past been, and may in the future be, notified that it
may be infringing intellectual property rights possessed by third parties. In
addition, the Company has in the past commenced, and may in the future,
commence litigation against third parties for infringement of the Company's
intellectual property rights. Any such litigation initiated by the Company or
by others is, at a minimum, costly, and can divert the efforts and attention
of the Company's management and technical personnel, which can have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, there can be no assurance that other
infringement claims by third parties or other claims for indemnification by
customers or end-users of the Company's products resulting from infringement
claims will not be asserted in the future or that such assertions, if proven
to be true, will not have a material adverse effect on the Company's
business, financial condition and results of operations. If any such claims
are asserted against the Company, the Company may seek to obtain a license
under the third party's intellectual property rights. There can be no
assurance, however, that a license will be available on commercially
reasonable terms, if at all. The Company could decide, in the alternative, to
resort to litigation to challenge such claims or to design around the
patented technology. Such actions could be costly and would divert the
efforts and attention of the Company's management and technical personnel,
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
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<PAGE>
MANAGEMENT OF FUTURE ACQUISITIONS. Historically, the Company has achieved a
portion of its growth through acquisitions of other businesses, and the
Company intends 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 Company will be able to consummate any beneficial
acquisitions in the future or that the anticipated benefits of any
acquisition will be realized. If any such acquisitions are consummated, a
failure by the Company to manage any such acquisitions successfully could
have a material adverse effect on the Company's business, financial condition
and results of operations. Additionally, there may be future acquisitions
that could result in potentially dilutive issuance of equity securities, the
occurrence 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 have a material adverse
effect on the Company's business, financial condition and results of
operations.
FUTURE SALE OF AXIOHM EXCHANGE SHARES. In May 1998, the Company registered
with the SEC an aggregate of 5,515,858 shares of Common Stock held by the
former shareholders of Axiohm S.A.R.L. and Dardel for sale by such
shareholders from time to time in the open market or in private transactions.
Such sales, or the potential for such sales, could have a material adverse
effect on the market price for the Company's Common Stock.
YEAR 2000 COMPLIANCE. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000"
requirements.
YEAR 2000-STATE OF READINESS
The Company recognizes the need for addressing the "Year 2000" issue and has
developed an oversight committee to ensure compliance prior to December 31,
1999. Representatives from each operating location, both domestic and
international, have been identified and assigned the task of evaluating the
state of readiness of each respective location. In addition, the Company has
recently employed a Chief Information Officer to oversee the Company's Year
2000 compliance issues. Information systems ("IT") which are considered to be
non-compliant are expected to be modified or replaced with systems that are
Year 2000 compliant. Similar actions are being taken with respect to non-IT
systems, primarily those systems embedded in equipment and systems used in
manufacturing and other facilities. In addition, the teams have been given
the responsibility of determining the state of readiness of customers and
vendors and other third parties that may have a material impact on the
Company, and develop contingency plans where necessary. The Company thus far
has primarily used, and expects to continue to primarily use, internal
resources to implement its readiness plan and to upgrade or replace systems
affected by the Year 2000 issue.
As part of the Company's Year 2000 project, the Company has completed the
awareness phase of all IT and non-IT systems pertaining to the Year 2000
issue. The Company has completed its initial evaluation of current computer
systems hardware, including software and embedded technologies. Evaluation of
IT systems is approximately 75% complete and is expected to be 100% complete
during the fourth quarter of 1998. The Company expects to begin and complete
its evaluation of the "state of readiness" of both vendors and customers with
a material relationship during the fourth quarter 1998. The following table
summarizes the current status of the Company's position in addressing Year
2000 issues.
Page 19
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------
% PROJECT COMPLETION DATE
PHASE COMPLETED DURING THE QTR. ENDING
- - ------------------------------------------------------------------
<S> <C> <C>
Awareness 100%
- - ------------------------------------------------------------------
Evaluation 75% 3/31/99
- - ------------------------------------------------------------------
Renovation 50% 6/30/99
- - ------------------------------------------------------------------
Validation 50% 9/30/99
- - ------------------------------------------------------------------
Implementation 50% 12/31/99
- - ------------------------------------------------------------------
</TABLE>
Based on the evaluation process thus far, the Company has identified the
primarily non-compliant issue to reside within the company's accounting and
manufacturing software.
The Company has purchased the necessary hardware and software and is
currently in the process of implementing firm wide an Oracle based enterprise
resource planning system ("ERP"). To date, Version 10.6 has been implemented
in several locations. Although Version 10.6 does not fully address Year 2000
requirements, the Company believes that Oracle ERP Version 10.7 does. Such
Version 10.7 has already been released by Oracle, and the Company has begun
testing and implementation with those divisions currently working with 10.6.
The Company anticipates 75% completion of the Oracle conversion by second
quarter 1999, and 100% completion to be achieved by the third quarter 1999.
Failure to implement Oracle ERP Version 10.7 or some other form of enterprise
software that addresses Year 2000 requirements prior to the year 2000 might
result in significant difficulties in the Company's administration of
invoicing and payables and other processes. Such difficulties could have a
material adverse effect on the Company's business, financial condition and
results of operations.
While the Company has not completed its evaluation of non-IT systems, it is
believed that such items which are not Year 2000 compliant can easily be
remedied through the purchase of "over the counter" products. A material
effect on the company's performance is not expected.
YEAR 2000-COSTS TO ADDRESS ISSUES
Incremental costs associated with Year 2000 compliance are expected to
approximate $3.0 million through December 31, 1999. Of which, the Oracle
conversion is expected to be the largest portion totaling $2.0 million.
Through October 3, 1998, the company has spent $1.0 million associated with
the Oracle conversion or 50% of the total. This estimate assumes that the
Company will not incur significant costs associated with Year 2000 compliance
on behalf of vendors, customers or other third parties.
YEAR 2000-RISKS OF ISSUES
The Company's failure to resolve Year 2000 issues on or before December 31,
1999 could result in systems failure or miscalculations causing disruptions
in operations, including a temporary inability to process transactions, send
invoices, or engage in normal business activities. Such failures could
materially and adversely affect the liquidity and financial performance of
the company. Dependent on the readiness of suppliers, delays in supplies
could directly correlate to reduced shipments and lost sales. In addition, a
similar result can be suggested, in the event major customers do not meet
Year 2000 compliance.
YEAR 2000-CONTINGENCY PLAN
The Company has not, to date, implemented a contingency plan regarding Year
2000 non-compliance. It is the Company's goal to have the foundation
developed by the first quarter 1999. A completed plan is to be achieved by
the end of the second quarter 1999. The Company believes that in-house
problems can be addressed through the use of alternative resources and manual
processes. However, due to the uncertainty of third party factors, the
Company believes a detailed contingency plan is needed.
The costs and timetables in which the Company plans to complete the Year 2000
readiness activities, as well as potential outcomes of non-compliance are
based on management's best estimates. These estimates were derived using
numerous assumptions of future events including continuing factors.
Page 20
<PAGE>
Evaluation of Year 2000 issues is a continuous process. There can be no
assurance that these estimates will be achieved. Failure to achieve these
estimates, or complete the Company's Year 2000 readiness plan and activities,
could have a material effect on the company's financial condition and
operating results.
EURO.
On January 1, 1999, eleven of fifteen member countries of the European Union
are scheduled to establish fixed conversion rates between their existing
currencies ("legacy currencies") and one common currency - the Euro. The Euro
will then trade on currency exchanges and may be used in business
transactions. The conversion to the Euro will eliminate currency exchange
risk between the member countries. Beginning in January 2002, new
Euro-denominated bills and coins will be issued, and legacy currencies will
be withdrawn from circulation. The Company has recognized this situation and
is currently in the process of developing a plan to address any issue being
raised by the currency conversion. Possible issues include, but are not
limited to, the need to adapt computer and financial systems to recognize
Euro- denominated transactions, as well as the impact of one common European
currency on pricing. The Company anticipates that any unaddressed issues will
be resolved during 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary anticipated sources of capital are cash flow from
operations and borrowings under the New Credit Facility. For the nine months
ending October 3, 1998, cash used by operating activities was $4.0 million,
which is primarily the result of an increase in working capital of $13.6
million in excess of the net loss plus depreciation and amortization. The
Company's primary capital requirements include debt service, capital
expenditures and working capital. The Company's ability to make scheduled
payments of principal and interest to refinance its indebtedness, or to fund
planned capital expenditures, will depend upon its future performance, which,
in turn, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. At the time of the
acquisition of DH, the Company implemented a plan to achieve purchasing,
manufacturing and other synergies. As part of this plan, the Company
announced a major restructuring program that will consolidate two of its
former DH manufacturing operations principally into its Ithaca, New York
manufacturing operation as discussed above.
Required principal payments under the New Credit Facility and Notes
(excluding the Revolver) are as follows: $0.8 million remaining in 1998; $7.8
million in 1999; $7.8 million in 2000; $9.1 million in 2001; $5.6 million in
2002; $12.25 million in 2003; and $120 million in 2007. It is anticipated
that capital expenditures in 1998 will not exceed the maximum permitted under
the New Credit Facility of $10.5 million. There can be no assurance, however,
that the Company's business will generate cash flow at or above anticipated
levels or that the Company will be able to borrow funds under the New Credit
Facility in an amount sufficient to enable the Company to service its
indebtedness, or make anticipated capital expenditures. In particular, there
can be no assurance that anticipated revenue growth will be achieved at the
levels currently anticipated or at all. If the Company is unable to generate
sufficient cash flow from operations or to borrow sufficient funds in the
future to service its debt, it may be required to sell assets, reduce capital
expenditures, refinance all or a portion of its existing indebtedness, or
obtain additional financing. There can be no assurance that any such
refinancing would be available on commercially reasonable terms, or at all,
or that any additional financing could be obtained, particularly in view of
the Company's high level of debt.
At October 3, 1998, the Company's total debt (net of cash) including
government grant obligations was $182.4 million, including $13.5 million
under the revolving credit facility. Debt levels increased since December 31,
1997 due to borrowings against the line of credit to fund payments made to
former officers of $3.5 million, the payment of $11.8 million of subordinated
interest expense and working capital requirements in excess of net income
plus depreciation and amortization.
The New Credit Facility and the Notes, and other debt instruments of the
Company may, impose various restrictions and covenants on the Company which
could potentially limit the Company's ability to respond to market
conditions, to provide for unanticipated capital investments, to raise
additional debt or equity capital, or to take advantage of business
opportunities. The New Credit Facility includes various financial covenants
of the Company, including covenants with respect to the maximum capital
expenditures, a
Page 21
<PAGE>
maximum ratio of debt to EBITDA, a minimum interest coverage ratio and a
minimum fixed charge coverage ratio. As indicated above, the company's future
compliance with these covenants will depend on future performance which, in
turn, is subject to general economic, financial, competitive, legislative,
regulatory and other factors, which are beyond its control. Its compliance
depends on the timing of orders from customers, timing of new product
introductions, capital expenditures, working capital requirements, gross
margins and expense levels. The New Credit Facility subjects the Company to
certain negative covenants, including without limitation covenants that
restrict, subject to specified exceptions: the occurrence of additional
indebtedness and other obligations and the granting of additional liens;
mergers and acquisitions, investments and acquisitions and dispositions of
assets; the occurrence of capitalized lease obligations; investments, loans
and advances; dividends, stock repurchases and redemption's; prepayment or
repurchase of other indebtedness and other provisions. Effective September
25, 1998, the Company renegotiated the conditions of its bank agreement.
Modifications mainly affect the covenant levels within the agreement. See
attached amendment, Exhibit. 10.1 The Company has entered into a $20 million
interest rate swap agreement with a major financial institution. This swap
agreement has the effect of converting certain variable rate debt to defined
rate obligations and expires in November, 1999. Net amounts paid or received
are accrued on a settlement basis as adjustments to interest expense.
The Company incurred indebtedness of $120 million in connection with the
issuance of the Notes. The indebtedness evidenced by the Notes is
subordinated to the Company's obligations under the New Credit Facility.
Interest is payable semi-annually on the unpaid principal at 9.75% per annum.
The first payment of $5.9 million was paid April 1, 1998. A subsequent
payment of $5.9 million was made on October 1, 1998. The Indenture contains
covenants regarding restricted payments, occurrence of indebtedness, liens,
dividends, merger, consolidation or sale of assets, and transactions with
affiliates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement standardizes
the accounting for derivative instruments, including derivative instruments
embedded in contracts, by requiring that the entity recognize those items as
assets of liabilities in the statement of financial position and measure them
at fair value. The statement is effective for fiscal year beginning after
June 15, 1999. Management has not yet determined the impact that the adoption
of this statement may have on earnings, financial condition or liquidity of
the Company. The Company plans to adopt SFAS No. 133 as permitted by this
accounting standard by January 1, 2000.
In June 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company plans to adopt SFAS No. 131 in connection with the
preparation of the January 2, 1999 consolidated financial statements, as
permitted by the pronouncement. The adoption of these standards is not
expected to have a material impact on consolidated results, financial
condition, or long-term liquidity.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998.
In April 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-5, "Reporting for the costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of
start-up cost and organization costs. The SOP requires costs related to
start-up activities and organizational costs to be expensed as incurred. The
statement is effective for financial statements for fiscal year beginning
after December 15, 1998.
The Company plans to adopt these statements in connection with the
preparation of the December 31, 1999 consolidated financial statements, as
permitted by each statement, SOP 98-1, and 98-5. The adoption of these
standards is not expected to have a material impact on consolidated results,
financial condition, or long-term liquidity.
Page 22
<PAGE>
RESTRICTIONS ON DISTRIBUTIONS BY GUARANTORS TO THE COMPANY
There are no contractual restrictions, under the New Credit Facility or
otherwise, upon the ability of the Guarantor Subsidiaries to make
distributions or pay dividends to their respective equityholders. Directly or
indirectly, the Company is the sole equity-holder of all of the Guarantor
Subsidiaries.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the third quarter of 1998 the Company settled a pending claim
associated with a complaint which was filed by Axiohm S.A. on June 17, 1997
in the Central District of California alleging infringement of Axiohm's U.S.
Patent No. 5,579,043 by Seiko Epson and Epson America. On December 22, 1997,
Seiko Epson and Epson America had filed an answer to Axiohm's complaint as
well as counterclaims against both Axiohm and Axiohm IPB. In their response,
Seiko Epson and Epson America denied the validity of Axiohm S.A.'s Patent
No. 5,579,043 and infringement thereof, and sought declaratory relief
to that effect. Seiko Epson and Epson America further alleged that Axiohm and
Axiohm IPB had infringed and were infringing Seiko Epson's U.S. Patent Nos.
5,437,004 5,594,653 and 5,555,349, and sought injunction relief, treble
damages and attorney's fees. The settlement agreement does not require any
payments by any of the companies.
In September 1998, Andrew Newmark filed a complaint against the Company in
the United States District Court, Southern District of California, claiming
rights to a finders fee of up to $2,187,500 in connection with the 1997
acquisition of the Company by Axiohm S.A. Also in September, the Company
filed an action in the United States District Court for the Southern
District of New York against Mr. Newmark, seeking a judgement that Mr.
Newmark is not entitled to any fee. Motions have been presented by each
party in each suit regarding the appropriateness of the respective forums.
Although the Company believes that its position is meritorious, the
litigation may be costly and time consuming. There can be no assurance
that the Company will ultimately prevail in suits with Mr. Newmark.
Page 23
<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.
AXIOHM TRANSACTION SOLUTIONS, INC. BY:
NOVEMBER 6, 1998 /s/ WALTER S. SOBON
---------------- ----------------------------------------
DATE WALTER S. SOBON, CHIEF FINANCIAL OFFICER
(CHIEF FINANCIAL OFFICER)
Page 24
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 3, 1998
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.1 FOURTH AMENDMENT, dated as of September 25, 1998 to the CREDIT
AGREEMENT, dated as of October 2, 1997, among the
Company, as Borrower, the several Lenders from
time to time Parties thereto, Lehman Brothers
Inc. as Arranger, Lehman Commercial Paper Inc, as
Syndication Agent and Union Bank of California,
N.A. as Administrative Agent, as amended by the
Global Amendment and Assignment and Acceptance, dated
as of October 20, 1997.
27.1 Financial Data Schedule
</TABLE>
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<PAGE>
EXHIBIT 10.1
FOURTH AMENDMENT, dated as of September 25, 1998 (this "AMENDMENT"), to the
CREDIT AGREEMENT, dated as of October 2, 1997, as amended by the Global
Amendment and Assignment and Acceptance, dated as of October 20, 1997, the
Second Amendment, dated as of March 13, 1998, and the Third Amendment, dated
as of May 8, 1998 (as further amended, supplemented or otherwise modified
from time to time, the "CREDIT AGREEMENT"), among AXIOHM TRANSACTION
SOLUTIONS, INC. (f/k/a DH Technology, Inc.), a California corporation (the
"BORROWER"), the several banks and other financial institutions or entities
from time to time parties to the Credit Agreement (the "LENDERS"), LEHMAN
BROTHERS INC., as arranger, LEHMAN COMMERCIAL PAPER INC., as syndication
agent (in such capacities, the "SYNDICATION AGENT"), and UNION BANK OF
CALIFORNIA, N.A., as administrative agent (the "ADMINISTRATIVE AGENT").
W I T N E S S E T H :
WHEREAS, the Borrower, the Syndication Agent, the Administrative Agent and
the Lenders are parties to the Credit Agreement; and
WHEREAS, the parties wish to amend the Credit Agreement to effectuate certain
changes requested by the Borrower and the Administrative Agent, all as set
forth in this Amendment;
NOW THEREFORE, in consideration of the premises, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS.
1.1 DEFINED TERMS. Unless otherwise defined herein and except as set forth in
this Amendment, terms defined in the Credit Agreement are used herein as
therein defined.
SECTION 2. AMENDMENT OF CREDIT AGREEMENT.
2.1 AMENDMENTS TO SECTION 1.1 OF THE CREDIT AGREEMENT. (a) The following
definitions are hereby added to Section 1.1 of the Credit Agreement in their
proper alphabetical order:
"'FQE 1', 'FQE 2' or 'FQE 3' shall mean, respectively, the last day
of the Borrower's first, second and third fiscal quarters. The first fiscal
quarter of each fiscal year begins on the Sunday closest to the last day of
the prior calendar year, and continues for 13 calendar weeks. The second and
third fiscal quarters continue for successive periods of 13 weeks each, and
the fourth fiscal quarter continues for the period of 13 or 14 weeks, as the
case may be, until the end of such fiscal year."
"'FYE' shall mean the end of the designated fiscal year of the
Borrower. Each fiscal year ends on the Saturday following closest to the last
day of the designated year (which Saturday may fall in the succeeding
calendar year)."
(b) The definition of the term "Applicable Margin" is hereby amended
by deleting such definition in its entirety and by substituting in lieu
thereof the following:
"'APPLICABLE MARGIN': for each Type of Loan, the rate per annum set
forth under the relevant column heading below:
Page 26
<PAGE>
<TABLE>
<CAPTION>
Base Rate Eurodollar
Loans Loans
----- -----
<S> <C> <C>
Revolving Credit Loans and
Swing Line Loans 2.00% 3.00%
Tranche A Term Loans 2.00% 3.00%
Tranche B Term Loans 2.25% 3.25%
</TABLE>
; PROVIDED, that on and after the first Adjustment Date occurring at least
one year after the Merger, the Applicable Margin with respect to Revolving
Credit Loans, Swing Line Loans, Tranche A Term Loans and Tranche B Term Loans
will be determined pursuant to the relevant Pricing Grid."
(c) The definition of the term "Consolidated Fixed Charge Coverage
Ratio" is hereby amended by deleting such definition in its entirety and by
substituting in lieu thereof the following:
"'CONSOLIDATED FIXED CHARGE COVERAGE RATIO': for any period, the
ratio of (a) Consolidated EBITDA for such period less the aggregate amount
actually paid by the Borrower and its Subsidiaries in cash during such period
on account of Capital Expenditures (excluding the principal amount of
Indebtedness incurred in connection with such expenditures) to (b)
Consolidated Fixed Charges for such period."
(d) The definition of the term "Consolidated Fixed Charges" is
hereby amended by deleting such definition in its entirety and by
substituting in lieu thereof the following:
"'CONSOLIDATED FIXED CHARGES': for any period, the sum (without
duplication) of (a) Consolidated Interest Expense for such period and (b)
scheduled payments made during such period on account of principal of
Indebtedness (other than Indebtedness of the types described in clauses (f),
(g) and (k) of the definition thereof) of the Borrower or any of its
Subsidiaries (including scheduled principal payments in respect of the Term
Loans), minus any Net Cash Proceeds received by the Borrower during such
period in connection with an Asset Sale."
(e) The definition of the term "Consolidated EBITDA" is hereby
amended by deleting "1998" in clause (g) thereof and by replacing it with
"1999."
(f) The definition of the term "Net Cash Proceeds" is hereby amended
by deleting clause (b) thereof and by substituting in lieu thereof the
following:
"(b) in connection with any issuance or sale of equity securities or
debt securities or instruments or the incurrence of loans, the cash proceeds
received by the Borrower from such issuance or incurrence, net of attorneys'
fees, investment banking fees, accountants' fees and other professional fees,
underwriting discounts and commissions and other reasonable fees and expenses
actually incurred in connection therewith."
(g) The definition of the term "Pricing Grid" is hereby amended by
deleting such definition in its entirety and by substituting in lieu thereof
the following:
"'PRICING GRID': the pricing grids attached hereto as Annex A."
2.2 AMENDMENT TO SECTION 2.10 OF THE CREDIT AGREEMENT. Section 2.10(a) of the
Credit Agreement is hereby amended by deleting such Section 2.10(a) in its
entirety and by substituting in lieu thereof the following:
"(a) Unless the Required Prepayment Lenders shall otherwise agree,
if any Capital Stock or Indebtedness shall be issued or Incurred by the
Borrower or any of its Subsidiaries (excluding any Indebtedness Incurred in
accordance with Section 7.2 or Capital Stock issued in accordance with
Section 7.9), an amount equal to 100% of the Net Cash Proceeds of any
Indebtedness Incurred and 50% of the Net Cash Proceeds of any Capital Stock
issued shall be applied on the date of such issuance or Incurrence toward the
prepayment of the Term Loans and the reduction of the Revolving Credit
Commitments as set forth in Section 2.10(d)."
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<PAGE>
2.3 AMENDMENT TO SECTION 2.16(b) OF THE CREDIT AGREEMENT. Section 2.16(b) of
the Credit Agreement is hereby amended by deleting such Section 2.16(b) in
its entirety and by substituting in lieu thereof the following:
"(b) Each payment (including each prepayment) by the Borrower on
account of principal of and interest on the Term Loans shall be made PRO RATA
according to the respective outstanding principal amounts of the Term Loans
then held by the Term Loan Lenders (except as otherwise provided in Section
2.16(d)). The amount of each principal prepayment of the Term Loans shall be
applied to reduce the then remaining installments of the Tranche A Term Loans
and Tranche B Term Loans, as the case may be, in the inverse order of their
respective maturities. Notwithstanding the foregoing, in the case of
principal prepayments of the Term Loans with Net Cash Proceeds of any Capital
Stock issued by the Borrower or any of its Subsidiaries in accordance with
Section 2.10(a), such prepayments shall be applied to reduce the then
remaining installments of the Tranche A Term Loans and Tranche B Term Loans,
as the case may be, PRO RATA based upon the then remaining principal amount
thereof. Amounts prepaid on account of the Term Loans may not be reborrowed."
2.4 AMENDMENT TO SECTION 7.1 OF THE CREDIT AGREEMENT. Section 7.1 of the
Credit Agreement is hereby amended by deleting such Section 7.1 in its
entirety and by substituting in lieu thereof the following:
"7.1 FINANCIAL CONDITION COVENANTS.
(a) CONSOLIDATED LEVERAGE RATIO. Permit the Consolidated Leverage
Ratio as at the last day of any period of four consecutive fiscal quarters of
the Borrower (or, if less, the number of full fiscal quarters subsequent to
the Closing Date) ending with any fiscal quarter set forth below to exceed
the ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
Consolidated
Fiscal Quarter Leverage Ratio
-------------- --------------
<S> <C>
FYE 1997 5.50 to 1.00
FQE 1 1998 5.50 to 1.00
FQE 2 1998 5.50 to 1.00
FQE 3 1998 5.50 to 1.00
FYE 1998 5.50 to 1.00
FQE 1 1999 5.75 to 1.00
FQE 2 1999 5.75 to 1.00
FQE 3 1999 5.50 to 1.00
FYE 1999 5.25 to 1.00
FQE 1 2000 5.25 to 1.00
FQE 2 2000 5.25 to 1.00
FQE 3 2000 5.25 to 1.00
FYE 2000 4.75 to 1.00
FQE 1 2001 4.75 to 1.00
FQE 2 2001 4.75 to 1.00
FQE 3 2001 4.75 to 1.00
FYE 2001 3.75 to 1.00
FQE 1 2002 3.75 to 1.00
FQE 2 2002 3.75 to 1.00
FQE 3 2002 3.75 to 1.00
FYE 2002 3.00 to 1.00
Thereafter 3.00 to 1.00
</TABLE>
; PROVIDED, that for the purposes of determining the ratio described
above for the fiscal quarters of the Borrower ending FYE 1997, FQE 1
1998 and FQE 2 1998, Consolidated EBITDA for the relevant period shall
be deemed to equal Consolidated EBITDA for such fiscal quarter (and, in
the case of the latter two such determinations, each previous fiscal
quarter commencing after the Closing Date) MULTIPLIED BY 4, 2 and 4/3,
respectively.
Page 28
<PAGE>
(b) CONSOLIDATED INTEREST COVERAGE RATIO. Permit the Consolidated
Interest Coverage Ratio for any period of four consecutive fiscal
quarters of the Borrower (or, if less, the number of full fiscal
quarters subsequent to the Closing Date) ending with any fiscal quarter
set forth below to be less than the ratio set forth below opposite such
fiscal quarter:
<TABLE>
<CAPTION>
Consolidated Interest
Fiscal Quarter Coverage Ratio
-------------- --------------
<S> <C>
FYE 1997 1.75 to 1.00
FQE 1 1998 1.50 to 1.00
FQE 2 1998 1.70 to 1.00
FQE 3 1998 1.90 to 1.00
FYE 1998 1.80 to 1.00
FQE 1 1999 1.75 to 1.00
FQE 2 1999 1.75 to 1.00
FQE 3 1999 1.80 to 1.00
FYE 1999 1.90 to 1.00
FQE 1 2000 1.90 to 1.00
FQE 2 2000 1.90 to 1.00
FQE 3 2000 1.90 to 1.00
FYE 2000 2.00 to 1.00
FQE 1 2001 2.00 to 1.00
FQE 2 2001 2.00 to 1.00
FQE 3 2001 2.00 to 1.00
FYE 2001 2.50 to 1.00
FQE 1 2002 2.50 to 1.00
FQE 2 2002 2.50 to 1.00
FQE 3 2002 2.50 to 1.00
FYE 2002 3.00 to 1.00
Thereafter 3.00 to 1.00
</TABLE>
(c) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Permit the Consolidated
Fixed Charge Coverage Ratio for any period of four consecutive fiscal
quarters of the Borrower ending with any fiscal quarter set forth below
to be less than the ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
Consolidated Fixed
Fiscal Quarter Charge Coverage Ratio
-------------- ---------------------
<S> <C>
FQE 3 1998 1.45 to 1.00
FYE 1998 1.25 to 1.00
FQE 1 1999 1.15 to 1.00
FQE 2 1999 1.05 to 1.00
FQE 3 1999 1.05 to 1.00
FYE 1999 1.05 to 1.00
FQE 1 2000 1.05 to 1.00
FQE 2 2000 1.05 to 1.00
FQE 3 2000 1.05 to 1.00
FYE 2000 1.10 to 1.00
FQE 1 2001 1.10 to 1.00
FQE 2 2001 1.10 to 1.00
FQE 3 2001 1.10 to 1.00
FYE 2001 1.15 to 1.00
FQE 1 2002 1.15 to 1.00
FQE 2 2002 1.15 to 1.00
FQE 3 2002 1.15 to 1.00
FYE 2002 1.25 to 1.00
Thereafter 1.25 to 1.00"
</TABLE>
Page 29
<PAGE>
2.5 AMENDMENT TO SECTION 7.12 OF THE CREDIT AGREEMENT. Section 7.12 of the
Credit Agreement is hereby amended by deleting such Section 7.12 in its entirety
and by substituting in lieu thereof the following:
"7.12 LIMITATION ON CHANGES IN FISCAL PERIODS. Permit the
fiscal year of the Borrower to end on a day other than as
described in the definition of "FYE" or change the
Borrower's method of determining fiscal quarters."
2.6 AMENDMENT TO ANNEX A OF THE CREDIT AGREEMENT. Annex A of the Credit
Agreement is hereby amended by deleting such Annex A in its entirety and by
substituting in lieu thereof the following:
"PRICING GRID FOR REVOLVING CREDIT LOANS, SWING LINE LOANS AND
TRANCHE A TERM LOANS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Consolidated Leverage Ratio Applicable Margin Applicable Margin for
for Eurodollar Loans Base Rate Loans
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Greater than or equal to 5.00 to 1.00 3.00% 2.00%
- - ---------------------------------------------------------------------------------------------------------
Less than 5.00 to 1.00 but greater than 2.75% 1.75%
or equal to 4.25 to 1.00
- - ---------------------------------------------------------------------------------------------------------
Less than 4.25 to 1.00 but greater than 2.50% 1.50%
or equal to 3.50 to 1.00
- - ---------------------------------------------------------------------------------------------------------
Less than 3.50 to 1.00 but greater than 2.25% 1.25%
or equal to 3.00 to 1.00
- - ---------------------------------------------------------------------------------------------------------
Less than 3.00 to 1.00 but greater than 2.00% 1.00%
or equal to 2.50 to 1.00
- - ---------------------------------------------------------------------------------------------------------
Less than 2.50 to 1.00 1.75% 0.75%
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
PRICING GRID FOR TRANCHE B TERM LOANS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Consolidated Leverage Ratio Applicable Margin Applicable Margin for
for Eurodollar Loans Base Rate Loans
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Greater than or equal to 5.00 to 1.00 3.25% 2.25%
- - ---------------------------------------------------------------------------------------------------------
Less than 5.00 to 1.00 3.00% 2.00%
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
Changes in the Applicable Margin with respect to Revolving Credit Loans,
Tranche A Term Loans and Tranche B Term Loans resulting from changes in the
Consolidated Leverage Ratio shall become effective on the date (the
"ADJUSTMENT DATE") on which financial statements are delivered to the Lenders
pursuant to Section 6.1 (but in any event not later than the 45th day after
the end of each of the first three quarterly periods of each fiscal year or
the 90th day after the end of each fiscal year, as the case may be) and shall
remain in effect until the next change to be effected pursuant to this
paragraph. If any financial statements referred to above are not delivered
within the time periods specified above, then, until such financial
statements are delivered, the Consolidated Leverage Ratio as at the end of
the fiscal period that would have been covered thereby shall for the purposes
of this definition be deemed to be greater than 5.00 to 1.00. In addition, at
all times while an Event of Default shall have occurred and be continuing,
the Consolidated Leverage Ratio shall for the purposes of this definition be
deemed to be greater than 5.00 to 1.00. Each determination of the
Consolidated Leverage Ratio pursuant to this definition shall be made with
respect to the period of four consecutive fiscal quarters of the Borrower
ending at the end of the period covered by the relevant financial statements."
Page 30
<PAGE>
SECTION 3. MISCELLANEOUS.
3.1 EFFECTIVENESS. This Amendment shall become effective as of the date
hereof (the "EFFECTIVE DATE") when (i) the Administrative Agent shall have
received counterparts of this Amendment, duly executed and delivered by the
Borrower, the Administrative Agent and the Required Lenders and (ii) each
Lender shall have received an amendment fee equal to 0.375% of the total
Commitment as of the date hereof paid on a PRO RATA basis to each Lender.
3.2 REPRESENTATIONS AND WARRANTIES. After giving effect to the amendments
contained herein, on the Effective Date, the Borrower hereby (i) confirms,
reaffirms and restates the representations and warranties set forth in
Section 4 of the Credit Agreement; PROVIDED that each reference in such
Section 4 to "this Agreement" shall be deemed to be a reference both to this
Amendment and to the Credit Agreement as amended by this Amendment and (ii)
confirms that no Default or Event of Default shall have occurred and be
continuing.
3.3 CONTINUING EFFECT; NO OTHER AMENDMENTS. Except as expressly amended or
waived hereby, all of the terms and provisions of the Credit Agreement and
the other Loan Documents are and shall remain in full force and effect. The
amendments contained herein shall not constitute an amendment or waiver of
any other provision of the Credit Agreement or the other Loan Documents or
for any purpose except as expressly set forth herein.
3.4 COUNTERPARTS. This Amendment may be executed in any number of
counterparts by the parties hereto, each of which counterparts when so
executed shall be an original, but all the counterparts shall together
constitute one and the same instrument.
3.5 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
3.6 EXPENSES. The Borrower agrees to pay or reimburse the Administrative
Agent for all of its out-of-pocket costs and expenses incurred in connection
with the preparation, negotiation and execution of this Amendment, including,
without limitation, the fees and disbursements of counsel to the
Administrative Agent.
Page 31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their respective duly authorized officers as of the
date first above written.
AXIOHM TRANSACTION SOLUTIONS, INC.
By:
Title:
UNION BANK OF CALIFORNIA, N.A., as
Administrative Agent and as a Lender
By:
Title:
LEHMAN COMMERCIAL PAPER INC., as
Syndication Agent and as a Lender
By:
Title:
SOUTHERN PACIFIC BANK
By:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
Title:
By:
Title:
BSB BANK & TRUST COMPANY
By:
Title:
Page 32
<PAGE>
IMPERIAL BANK, A CALIFORNIA
BANKING CORPORATION
By:
Title:
MELLON BANK, N.A.
By:
Title:
SOCIETE GENERALE
By:
Title:
BANQUE NATIONALE DE PARIS
By:
Title:
BALANCED HIGH-YIELD FUND I LTD.
By: BHF-Bank Aktiengesellschaft,
acting through its New York
Branch, as attorney-in-fact
By:
Name:
Title:
By:
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-03-1998
<CASH> 1919
<SECURITIES> 0
<RECEIVABLES> 36652
<ALLOWANCES> 0
<INVENTORY> 31997
<CURRENT-ASSETS> 83086
<PP&E> 38720
<DEPRECIATION> 16960
<TOTAL-ASSETS> 185135
<CURRENT-LIABILITIES> 42973
<BONDS> 0
0
0
<COMMON> 24257
<OTHER-SE> (62663)
<TOTAL-LIABILITY-AND-EQUITY> 185135
<SALES> 174725
<TOTAL-REVENUES> 174725
<CGS> 112613
<TOTAL-COSTS> 179435
<OTHER-EXPENSES> (69)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13172
<INCOME-PRETAX> (17813)
<INCOME-TAX> 3661
<INCOME-CONTINUING> (21474)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21474)
<EPS-PRIMARY> (3.29)
<EPS-DILUTED> (3.29)
</TABLE>
