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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15() OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15() OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-13459
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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.)
1787 SENTRY PARKWAY WEST
BLUE BELL, PA 19422
(Address of principal executive offices)
Registrant's telephone number, including area code: (215) 591-0940
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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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 as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon 3,008,687 non-affiliate shares at the closing sale
price of $7.50 the Common Stock on March 23, 1999 as reported on the Nasdaq
National Market, was approximately $22,565,153. Shares of Common Stock held by
officers and directors and their affiliated entities have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily conclusive for other purposes.
As of March 23, 1999, the Registrant had 6,519,301 shares of Common
Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 5, 1999 (the "Proxy Statement") is incorporated
by reference in Part III of this Form 10-K to the extent stated herein.
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With the exception of the reported actual results, the information
presented herein contains predictions, estimates and other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, without
limitation, statements that include the words "expects" "anticipates" and
"believes" or similar expressions and statements, which has been identified with
an asterisk (*). Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual results,
performance or achievements of the Company to differ materially from those
expressed or implied by such forward-looking statements. Although the Company
believes that its plans, intentions and expectations reflected in such
forward-looking statements are based on reasonable assumptions, it can give no
assurance that such plans, intentions, expectations, objectives or goals will be
achieved. See "The Certain Risks Factors that may affect Future Results"
section. Important factors that could cause actual results to differ materially
from those included in the forward-looking statements include but are not
limited to: the timing of customer orders and product mix; the level of backlog;
market acceptance of new and enhanced versions of the Company's products; Year
2000 issues; the revenue and cost impact of closing two of the Company's
manufacturing facilities; the efficiency and cost of labor in its Ithaca, New
York facility; the potential ability of the Company to transfer/relocate
employees from its Paso Robles and Riverton manufacturing facilities; the
inability of the Company to realize anticipated cost reductions because of the
substantial amount of management time involved; the impact of substantial
leverage and debt service on the Company; and the uncertainty as to whether, and
at what price, private purchases of securities from existing shareholders might
occur.
PART I
ITEM 1. BUSINESS
GENERAL
Axiohm Transaction Solutions, Inc. (the "Registrant" or "Company") is a
non-captive designer, manufacturer and marketer of transaction printers. The
Company has a broad product line and manufactures its own thermal and impact
printheads and printer components utilizing thermal, magnetic and impact
technologies. The Company's transaction printer products are used in retail,
financial and commercial transactions to provide transaction records such as
receipts, tickets, register journals, checks and other documents. In addition to
transaction printers, the Company also designs, manufactures and markets: (i)
card readers which, similar to transaction printers, are an integral part of
transaction activity; and (ii) barcode printers and related consumable supplies,
which are used for automatic identification and data collection systems. The
Company operates on a worldwide basis with significant activities in North
America and Europe. The Company sells its products to OEMs, VARs, distributors
and end-users.
1997 BUSINESS COMBINATION
Until October 2, 1997, the Company operated under the name DH
Technology, Inc. ("DH"). On that date, the last in a series of transactions (the
"Transactions") occurred as a result of which the Company was acquired by Axiohm
S.A., a French corporation ("Axiohm"), and DH, the surviving corporation,
changed its name to Axiohm Transaction Solutions, Inc.
DH, which was headquartered in San Diego, California, had been a
leading designer, manufacturer and marketer of impact transaction printing
mechanisms, impact and thermal transaction printers, impact printheads and
thermal bar code products. DH broadened its role in recent years in transaction
products with strategic acquisitions of a manufacturer of magnetic heads and a
manufacturer of card readers.
Axiohm, which was headquartered in Montrouge, France, had been a
leading designer, manufacturer, and marketer of thermal transaction printing
mechanisms and thermal and impact transaction printers for both standard and
application-specific uses. Axiohm was created in 1988 through a management
buyout of the thermal printhead business from Schlumberger Limited
("Schlumberger"). At that time, Axiohm had annual sales of approximately $3.0
million. In 1994, Axiohm purchased from NCR Corporation ("NCR") the assets and
operations of NCR's transaction printer business and placed the business in a
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wholly owned U.S. subsidiary, Axiohm IPB, Inc. ("Axiohm IPB").
On August 21, 1997, AX Acquisition Corporation, a California
corporation (the "Purchaser") and an indirect wholly owned subsidiary of Axiohm,
acquired 7,000,000 shares of the Common Stock of DH through a tender offer to
the shareholders of DH at a price per share of $25 in cash (the "Tender Offer").
The Tender Offer was made pursuant to an Agreement and Plan of Merger, dated
July 14, 1997, among DH, Axiohm and Purchaser (the "Merger Agreement"). The
7,000,000 shares acquired by Purchaser in the Tender Offer represented
approximately 87.5% of the outstanding Common Stock of DH and thereby gave
Axiohm and its controlling shareholders 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 (the
"Axiohm Exchange"). Immediately after the Axiohm 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 (the
"Acquisition of Purchaser").
Immediately after the Axiohm Exchange and the Acquisition of Purchaser,
Purchaser was merged with and into DH (the "Merger"). 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.
The Company financed the above transactions with (i) borrowings of
approximately $57.0 million under a new $85.0 million credit facility that
provides for term loans in the aggregate principal amount of $50.0 million (the
"Term Loan Facility") and revolving loans and letters of credit up to $35.0
million (the "Revolving Credit Facility" and, together with the Term Loan
Facility, the "Credit Facility") and (ii) the proceeds of a private placement
(the "Offering") of $120,000,000 of its 93/4% 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 "Securities Act") (such new notes herein the "Notes").
INDUSTRY OVERVIEW
Transaction products are used in numerous applications in three primary
vertical markets: (i) the Point of Sale (POS) market, which includes retailers,
supermarkets, gas stations, convenience stores and fast food retailers; (ii) the
financial services market, for applications such as ATMs, money order machines
and bank teller systems; and (iii) the specialty applications market, for use in
products such as lottery machines, transportation ticketing machines,
pari-mutuel betting machines and information kiosks. The transaction printer
industry is comprised of non-captive manufacturers, such as the Company, and the
internal manufacturing operations of certain OEMs.* The non-captive transaction
printer market is highly fragmented, and includes many small competitors that
have limited product lines. The Company also believes that larger competitors,
such as the Company, benefit from a greater diversification of end-use
applications and markets, customers, technology, and geography, which reduces
the impact of industry or regional cyclicality.
Transaction printers utilize impact, direct thermal and thermal
transfer printing technologies. Impact printers create an image by striking an
ink ribbon, transferring ink to paper as the printhead passes over the paper.
Direct thermal printers create an image by passing a heated element over
specially treated paper as the paper passes by the printhead, causing the heated
section of the paper to change color. Thermal transfer printers create an image
by melting ink from a ribbon onto paper as the paper passes by the printhead.
Customers select printer technology based on cost, application
requirements and cost of consumables such as paper and ribbons. Impact printers
generally have lower paper costs, can print multiple copies of records and can
print on checks, tickets and forms. Thermal printers are generally faster, print
higher quality images, are quieter, have fewer moving parts and therefore have
lower maintenance costs, last longer and operate in a greater range of
environments. As a result of these factors, impact
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printers for POS applications generally represent the lower to middle price
range of the transaction printer market, thermal transaction printers for POS
applications generally represent the middle price range of the transaction
printer market and hybrid printers (incorporating both thermal and impact
printing technologies) represent the high end price range of the transaction
printer market. In developing countries and for certain specialty applications
in developed countries, impact printing continues to be popular because of its
lower printer and paper cost and the need to maintain duplicate paper records.
However, for higher end applications in the United States and Europe, thermal
printing represents a greater proportion of new transaction printer and printer
mechanism sales.
PRODUCTS
The Company's products consist of transaction products, bar code
products and related consumable supplies and services. The Company has
historically received the majority of its revenues from the sales of transaction
printers and printer mechanisms and expects to continue to derive a significant
portion of its revenues from sales of transaction printers and printer
mechanisms.* However, the Company has been focusing on two growing product
markets *: (i) magnetic stripe and computer chip card readers which, similar to
transaction printers, are an integral part of transaction activity; and (ii) bar
code printers and related consumable supplies, which are used for automatic
identification and data collection systems.*
TRANSACTION PRODUCTS
The Company designs, manufactures and sells the following transaction
products: (i) thermal and impact transaction printers and printer mechanisms as
well as a hybrid thermal/impact transaction printer; (ii) impact printheads; and
(iii) magnetic heads, magnetic stripe and computer chip card readers and card
reader modules.
Printheads are the part of the printer that actually creates the image
on the paper. Printer mechanisms are application-specific printers that are
designed to be integrated into an OEM final product. Magnetic heads retrieve
from and store data on a magnetic stripe on a credit or debit card, a check or
an airline ticket or boarding pass. Computer chip card readers retrieve from and
store data on integrated circuits ("chips") imbedded in a card. Card reader
modules are mechanisms designed for the integration into an OEM final product.
While both magnetic stripe and chip cards can be used for stored value, credit,
debit and personal identification applications, a chip card can store
substantially more data and information than a magnetic stripe card.
TRANSACTION PRINTERS AND PRINTER MECHANISMS. The Company's transaction
printers are largely used in retail, financial and commercial applications. The
Company has a broad offering of transaction printers ranging from basic single
receipt printers, to receipt, slip and journal printers and highly complex
transaction printers incorporating such features as magnetic ink character
recognition ("MICR") check reading. These products are either designed for OEMs
for integration in their final products and systems or as standard products
produced by the Company for non-OEM sales to VARs, distributors and end-users.
The Company has focused on being a solution provider to OEMs for
application-specific transaction printer mechanisms. The Company offers its OEM
customers highly developed, customized mechanisms that are designed into the
OEM's final products and are, consequently, difficult to replace with products
from an alternate supplier. The Company's application-specific products are
designed to adhere to OEM specifications, including providing electronic and
information interface with the other systems of the OEM's final product,
conforming to the space cavity provided in the OEM's final product and meeting
or exceeding performance quality and reliability standards.
IMPACT PRINTHEADS. Impact printheads are used in a multitude of
transaction printing applications, such as POS receipts, bank transaction
printing, lottery tickets, entertainment tickets and airline tickets. In
addition, the Company's impact printheads are used in a variety of
non-transaction printing applications, including office automation and data
processing.
The Company's impact printhead products range from 7 to 42 wires per
head and 200
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to 1200 characters per second in print speeds. Technological advances by the
Company and others now enable impact printheads to print text at speeds up to
1200 characters per second and print multiple text sizes and fonts in draft
quality or letter quality under software control. The Company's strategy has
been to convince large OEM impact printhead manufacturers to outsource their
development and manufacturing of impact printheads to the Company as impact
transaction printheads become less of a product focus for these OEMs, thus
allowing the Company to expand its impact printhead business even though the
market for impact printheads in higher-end applications is declining.
The Company also sells replacement printheads and utilizes its
expertise in printhead design and manufacturing to support its printhead repair
and replacement operations.
MAGNETIC HEADS AND CARD READERS
The Company manufactures magnetic heads, as well as magnetic stripe and
computer chip card readers and card reader modules, all of which are utilized in
the "input" or "front-end" of transaction activity. The Company's card reader
products read either magnetic stripe cards or computer chip cards, and in some
case both magnetic stripe and computer chip cards. The Company entered the
magnetic head and the card reader markets through two strategic acquisitions in
late 1995 and early 1997. The Company believes that these "input" or "front-end"
transaction products complement the Company's expertise and leading position in
the "output" or "back-end" printing segment of transaction activity.
BAR CODE PRODUCTS
The Company's bar code products are primarily utilized in commercial,
retail and service environments to print labels and bar codes to automate the
collection of information. Typical applications include product identification,
inventory control, work order tracking and shipping and receiving in retail,
hospital and pharmaceutical, industrial, materials handling, and car and
equipment rental industries. The Company's bar code printer products incorporate
direct thermal and thermal transfer technology into a wide range of products,
including compact desktop printers designed for medium volume printing
requirements, portable printers for on-demand printing, industrial printers
designed for high volume printing and/or harsh environment printing, and print
and apply products for wholesale and industrial applications that automatically
apply bar code labels in high speed packaging environments. In addition, the
Company supplies a full range of related supplies including stock and custom bar
code labels as well as other custom label products and software.
PRODUCT DEVELOPMENT
The Company's product development activities are targeted at both
existing and new applications. A variety of engineering skills are required in
the development of the Company's products, and the Company maintains expertise
in, mechanical, electrical, the firmware, and software engineering disciplines.
As of January 2, 1999, the Company had 155 employees dedicated to research and
development and spent $15.8 million and $10.0 million in 1998 and 1997,
respectively, for research and development.
Most of the product and product feature innovations developed by the
Company arise out of creative mechanical and electrical engineering approaches
and close cooperation between the sales and marketing and engineering divisions.
Customers generally inform the Company of their transaction printing
requirements, but generally depend upon the Company to design a product that is
suitable for the desired application. For its OEM customers, the Company's
engineers work closely with each OEM's design and engineering department to
provide a comprehensive, application-specific transaction printer solution.
The Company has developed many technologies and improvements in the
field of transaction printing and processing to improve speed, performance and
ease of use and to reduce the overall cost of its transaction printers. Such
improvements include innovations in the areas of paper loading, paper cutters,
print speeds, check processing incorporating MICR and proprietary software
drivers that are compatible with various hardware platforms and the Windows 95,
Windows NT and OLE for Point-of-Sale Operating Systems. In 1998 and 1997, the
Company's new product introductions included low-cost
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thermal and impact printers, a liner-less bar code label printer, a lower-cost
general purpose bar code printer, an Ethernet bar code printer, an easy-load,
multi-station POS impact printer, a high speed thermal printer and the first
clamshell shuttle printer.
The Company holds various U.S. and foreign patents on impact and
thermal printheads, transaction printers and printing mechanisms and has various
U.S. and foreign patent applications pending. See "Intellectual Property
Rights."
SALES AND MARKETING
The Company sells its products to OEMs, VARs, distributors and
end-users. For each of the years ended January 2, 1999 and December 31, 1997,
approximately 70% to 80% of its net sales were derived from OEMs after giving
pro forma effect to the Transactions, with the remaining sales largely split
equally among VARs and distributors and direct sales to end-users. Due to the
wide variety of end-users and applications for the Company's transaction and bar
code printers and card reader products, the Company believes that it is
effective to sell through multiple VARs and distributors with defined market
niche expertise and presence as well as to OEMs and end-users. OEMs and VARs
provide customers with a variety of POS components (including printers),
accessories, application software and systems integration expertise. Some OEMs,
such as NCR, resell the Company's products under their own brand names.
The Company maintains sales offices in the United States, France,
Germany, the United Kingdom, Australia, Taiwan, China and Japan and also sells
through distributors in 32 countries in order to reach its worldwide customer
base. The Company employs a collaborative approach to sales and marketing,
focusing the efforts of its sales, engineering and manufacturing resources to
present its products and capabilities to its customers. See footnote 10 to the
Company's Consolidated Financial Statements under Item 8. Financial Statements
and Supplementary Data.
The Company develops application-specific, customizable and
standardized products. Application-specific products are typically developed for
one OEM or end-user customer. The process to develop and produce
application-specific products typically takes 12 to 18 months. Depending on the
product, life cycles are approximately four to eight years. In the case of the
development of an application-specific printer mechanism for an OEM, the Company
has historically been insulated from competition for approximately six years
since it is expensive and time-consuming for OEMs to change suppliers. The OEM
would be required to reconfigure its cabinetry tools, electronic hardware and
software to the specifications of a particular printer mechanism. In addition,
the product produced by the new supplier would have to undergo extensive product
testing for reliability. The Company's OEM application-specific products also
establish an opportunity for recurring equipment and parts sales as well as
service revenue following the introduction of application-specific products.
The Company develops standard products for a variety of applications
that are sold to VARs, distributors and end-users. In some cases, the Company
develops standard products as derivatives of application-specific products or
product features previously developed for OEMs. The process to develop and
produce standard products is typically shorter than application-specific
products. The unit volumes for standard products tend to be smaller but the
number of customers is much greater than that of application-specific products
and therefore the Company sells many of its standard products through
distributors.
In addition to specific direct customer marketing efforts, the Company
exhibits at major international trade shows. These trade shows are used to
introduce new products, develop customer leads, and help expand the Company's
sales to VARs and distributors. The Company also advertises in major trade
publications.
CUSTOMERS
TRANSACTION PRINTERS AND PRINTER MECHANISMS. The Company sells its
transaction printers to OEMs, VARs, distributors and end-users and its printer
mechanisms to OEMs. The Company recently became the sole global supplier of
thermal printing mechanisms for ATM requirements to NCR, the Company's largest
customer for transaction printers and printer mechanisms in 1998 and 1997.
Application-specific printer mechanisms are typically developed for and sold to
one OEM customer for integration into
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the OEM's final products. Some OEMs, such as NCR, resell the Company's
transaction printers under their own brand names.
IMPACT PRINTHEADS. The Company sells impact printheads to OEMs for
various transaction and non-transaction applications and has benefited from the
trend among OEMs of outsourcing the production of non-core components.
CARD READERS. The Company sells its magnetic stripe and computer chip
card reader products to OEMs, VARs, distributors and end-users.
BAR CODE PRODUCTS. The Company sells its bar code products to VARs,
distributors and end-users. The Company's VAR and distributor customers enhance
the value of the Company's bar code products by adding software and service.
Sales to NCR, the Company's largest customer represented 25% and 35%,
respectively, of net sales for the years ended January 2, 1999 and December 31,
1997. No other customer accounted for more than 10% of net sales for the year
ended January 2, 1999 or December 31, 1997. On September 2, 1997, the Company
entered into a three-year contract with NCR (the "NCR Contract"). The NCR
Contract provides that NCR and the Company intend and expect that NCR will
purchase from the Company substantially all of its requirements for transaction
printers of the type manufactured by the Company (the "Covered Products"). In
case there is reason to believe that NCR is purchasing less than 75% of its
requirements for Covered Products from the Company 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 the Company'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.
BACKLOG
Most customers purchase products from the Company under purchase orders
that specify prices for particular quantities. The total backlog under such
purchase orders was $45,254,000 as of March 16, 1999, compared to $51,470,000 as
of March 6, 1998 taking into account total backlog for both DH and Axiohm. The
Company's backlog is generally subject to cancellation or rescheduling by the
customer on short notice with little or no penalty. Accordingly, the Company's
backlog as of any particular date may not necessarily be indicative of actual
sales for any future period.
COMPETITION
The markets in which the Company competes are extremely competitive and
the Company expects that competition will increase. The Company believes the
principal competitive factors in its business are product features, price,
product reliability, ability to meet customer delivery schedules, customer
service and support, reputation and distribution. The Company believes that it
competes favorably with respect to each of these factors. The Company competes
with other manufacturers of transaction products and bar code products,
including in some cases, the captive suppliers of some of its OEM customers.
Many of the Company's competitors have significantly greater financial and other
resources than the Company and may have greater access to distribution channels.
The Company's principal competitor is Epson America along with affiliated Epson
entities, including Seiko Epson.
The Company's future prospects will be highly dependent upon the
successful development and introduction of new products that are responsive to
market needs. There can be no assurance that the Company will be successful in
developing or marketing such products. 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. A
failure to remain competitive would have a material adverse effect on the
Company's business, financial condition, and results of operations.
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MATERIALS
The Company's materials purchases are primarily comprised of
custom-designed component parts used in the assembly of the Company's products,
most of which use tooling designed and owned by the Company. The Company's
principal custom-designed component parts include printed circuit boards,
plastic injection molded parts, power supplies, metal stampings and motors,
among other items. The Company purchases its component parts from a variety of
suppliers, and believes alternate sources of supply are readily available.
MANUFACTURING
The Company manufactures its thermal printheads in Puiseaux, France and
its impact printheads and magnetic heads in Tijuana, Mexico. Transaction
printers and mechanisms are manufactured in Ithaca, New York; Puiseaux, France;
Riverton, Wyoming; and Manchester, England. During 1998 bar code printers are
manufactured in Paso Robles, California, and Ithaca, New York; and bar code
printing labels and supplies are produced in Denver, Colorado. Magnetic stripe
and computer chip card readers are manufactured in Cypress, California.
Currently, the Company manufactures all of its impact printheads in Mexico.
The Company manufactures its products to exacting quality standards.
Accordingly, the Company maintains an extensive quality assurance program,
including precision computerized final testing of all printheads and extensive
burn-in testing for transaction printers and mechanisms and its bar code
products.
The Company's San Diego, Tijuana, Ithaca and Riverton facilities are
certified ISO 9001, and the Manchester and Puiseaux facilities are certified ISO
9002.
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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EMPLOYEES
As of January 2, 1999, the Company had 1,594 full-time employees,
including 155 in research and development. Other than the approximately 200
hourly production and manufacturing employees (as of January 2, 1999) at the
Ithaca, New York manufacturing facility, no United States employees of the
Company are represented by a labor union. The Company's Ithaca employees are
members of the International Association of Machinists and Aerospace Workers.
There is a collective bargaining agreement in place with this union until July
1999. To date, the Company has not experienced any work stoppages or significant
employee-related problems at its Ithaca, New York manufacturing facility. The
Company considers its relationship with the union and its other employees to be
satisfactory, and expects to renegotiate a contract with its union.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's Executive Officers is as follows:
Nicolas Dourassoff, 44, became the Company's Chief Executive Officer in
May 1998. Prior to that, he had served as Managing Director of ABN AMRO,
Investissement, the investment subsidiary of ABN AMRO (a Dutch Bank), a position
he has held since June 1993. Concurrently, he served as the Director of the
Acquisition Financing Department of Banque De Neuflize, Schlumberger Mallet, a
subsidiary of ABN AMRO, from January 1994 through June 1995. Mr. Dourassoff
received his MBA from Groupe HEC (France) and his Bachelor of Science degree
from the Ecole Nationale Superieure de Techniques Avancees (France) and holds an
engineering degree from the French Naval Academy, where he graduated as an
officer.
Walter Sobon, 50, has served as the Chief Financial Officer of the
Company (formerly DH Technologies) since March 1997. From November 1995 to March
1997 Mr. Sobon was an independent management consultant. From October 1989 to
November 1995, Mr. Sobon served as the Senior Vice President, Chief Financial
Officer and Corporate Secretary of VWR Scientific Products Corporation, a
laboratory products company. Mr. Sobon is a certified public accountant.
Malcolm Unsworth, 49, has served as Vice President of Operations for
the Company since September 1997. He has been the Vice President of the Company
and General Manager of Axiohm IPB since April 1995. Prior to joining Axiohm, Mr.
Unsworth worked for Schlumberger for 17 years in various North American General
Manager positions including the Retail Petroleum Systems Division, the
Transducer Division, the Electricity Measurement Division and the Defense
Systems Group. In two of these positions, Mr. Unsworth was the immediate General
Manager following the acquisition of the businesses by Schlumberger and led the
consolidation and rationalization activity of numerous businesses within each
group.
Jack Confrey, 50, has served as Vice President of Sales and Marketing
of the Americas for the Company since October 1998. From October 1997 to October
1998, he served as Vice President, US Sales and Business Development for SCM
Microsystems. Prior to that he served as Vice President of POS Printer Division
for Epson, from October 1992 through October 1997. Epson is a direct competitor
of Axiohm. Mr. Confrey has an MBA from the University of Chicago, and holds a
Bachelor Degree in Mechanical Engineering from Massachusetts Institute of
Technology.
Rudy Falkenburg, 52, has served as Vice President of Sales and
Marketing, International for the Company since November 1998. From February 1995
through August 1998 he served as Managing Director of Comtec Europe B.V. (the
Netherlands). Prior to that he served as Managing Director of Oversees
Operations for Kentek Europe B.V. (Netherlands) from June 1991 to February 1995.
Mr. Falkenburg holds a Master Degree in Chemical Engineering from the Technical
University Eindhoven (Netherlands).
Pierre Bastid, 43, has served as Vice President of Product and
Strategic Management of the Company since January 1998. From January 1995
through December 1997, he served as the Managing Director of Valeo Electronics
in Paris. From January 1992 through December 1994, he held the position of
General Manager, Asian Operations for Schneider Electrical. Mr. Bastid holds an
MBA, Insead,, Engineering degree, from Ecole Centrale de Lyon (France).
8
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The risk factors set forth below and elsewhere under this Item 1
including, without limitation under the captions "Customers," "Backlog," and
"Competition" 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.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE. The Company is, and will continue to be,
highly leveraged. On January 2, 1999, the Company's total debt, net of cash was
$177.4 million and the Company had a shareholders' deficit of $47.9 million.
Required long-term debt payments under the Credit Facility and Notes are as
follows: $9.1 million in 1999; $8.5 million in 2000; $9.4 million in 2001; $16.2
million in 2002; $12.2 million in 2003; and $121.2 million thereafter. In 1999,
it is anticipated that capital expenditures will not exceed the limits set forth
under the "Credit Facility."
The Company's ability to make scheduled payments of principal of, 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 Credit Facility in an amount sufficient to enable
the Company to service its indebtedness, including the Notes, 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 (including
the Notes) 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 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 Credit Facility.
In addition, the Indenture and the 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
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.
9
<PAGE>
Axiohm has historically experienced, and the Company expects to
experience, relatively lower levels of sales of transaction printers during the
period from mid-November to the end of December. 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 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.
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. As part of the plan to
achieve purchasing, manufacturing and other synergies, the Company has
identified certain potential cost savings related to the business combination
effected by the business combination. The Company expects to incur significant
integration costs through 1999 related to the Merger and the aforementioned
potential cost savings. Any inability of the Company to integrate these
companies 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.
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.
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 incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets associated
with the acquisitions of other businesses, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
YEAR 2000 RISKS. 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
10
<PAGE>
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements.
The Company's failure to resolve Year 2000 issues 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 reduce
shipments and lost sales. In addition, a similar result may occur, in the event
major customers do not meet Year 2000 compliance.
LIMITED TRADING; SIGNIFICANT OVERHANG; POSSIBLE NASDAQ DELISTING.
Although the Company's Common Stock trades on the Nasdaq Stock Market,
the volume of trading has been limited since the 1997 combination of Axiohm and
DH due to the fact that a significant percentage of the outstanding stock is
held by former shareholders of Axiohm and Dardel and has not been resold into
the public market. In May 1998, the Company registered for resale an aggregate
of 5,515,858 shares of Common Stock held by the former shareholders of Axiohm
and Dardel. As a result, such shares are available for sale by such holders on
the open market from time to time. Sales of such shares, or the potential for
such sales in the future, may have affected and could in the future affect
adversely the market price for the Company's Common Stock.
On March 3, 1999, the Nasdaq Stock Market notified the Company that it
would review the Company's continuing eligibility to have its Common Stock
traded on The Nasdaq Stock Market unless the Company can show that it has two
active market makers for the stock by April 2, 1999. While the Company is
actively working to obtain market makers for its Common Stock, there can be no
assurance that the Company's efforts will succeed or that the Company's Common
Stock will remain listed for trading on The Nasdaq Stock Market. Delisting of
the Company's Common Stock from Nasdaq would have a material adverse effect on
the liquidity of the Company's Common Stock and a possible material adverse
effect on the market price for the Company's Common Stock.*
EURO CURRENCY RISKS
Eleven of fifteen member countries of the European Union established
fixed conversion rates between their existing currencies ("legacy currencies")
and one common currency - the Euro. The Euro now trades on currency exchanges
and may be used in business transactions, eliminating 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 issues raised by the Euro 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.
11
<PAGE>
ITEM 2. PROPERTIES.
The following table sets forth the Company's existing manufacturing and
other facilities:
<TABLE>
<CAPTION>
LOCATION PURPOSE LEASE SQUARE FEET
EXPIRATION DATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
San Diego, California....................... Marketing, engineering 2000/2001 22,500
- ------------------------------------------------------------------------------------------------------------------------------------
Sevres, France.............................. Executive offices 2000 1,257
- ------------------------------------------------------------------------------------------------------------------------------------
Montrouge, France........................... Marketing and research and development 2006 25,000
- ------------------------------------------------------------------------------------------------------------------------------------
Riverton, Wyoming........................... Manufacturing, marketing, research and 2002 40,000
development
- ------------------------------------------------------------------------------------------------------------------------------------
Paso Robles, California..................... Manufacturing, marketing, research and 1999 45,000
development
- ------------------------------------------------------------------------------------------------------------------------------------
Cypress, California Manufacturing 2003 22,830
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Bell, Pennsylvania..................... Executive Offices 2003 7,600
- ------------------------------------------------------------------------------------------------------------------------------------
Golden, Colorado............................ Manufacturing, marketing, research and 1999 5,400
development 2002 14,400
- ------------------------------------------------------------------------------------------------------------------------------------
Tijuana, Mexico............................. Manufacturing * 27,000
10,500
- ------------------------------------------------------------------------------------------------------------------------------------
Angers, France.............................. Executive Offices, manufacturing, research 2003 6,278
and development
- ------------------------------------------------------------------------------------------------------------------------------------
Ithaca, New York............................ Manufacturing, marketing, research and Owned 270,000
development, administration
- ------------------------------------------------------------------------------------------------------------------------------------
Puiseaux, France............................ Manufacturing 2010 75,000
- ------------------------------------------------------------------------------------------------------------------------------------
Manchester, England......................... Manufacturing Owned 12,000
- ------------------------------------------------------------------------------------------------------------------------------------
Altrincham, England......................... Storage 1999 2,070
- ------------------------------------------------------------------------------------------------------------------------------------
Sydney, Australia........................... Marketing, technical support 2003 7,180
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
* The Company leases its Tijuana facilities on a month-to-month basis.
The Company does not own any facilities other than the Manchester and
Ithaca facilities. The term of the Montrouge facility lease expires in June
2006; however, under French law, the Company has the option to terminate the
lease in June of 2000 or 2003, without penalty. The Puiseaux facility is
occupied under a capitalized lease that commenced in 1995 and terminates in
2010. Pursuant to the terms of the Puiseaux lease, the Company is committed to
make payments through the end of the term, but will be able to purchase the
facility at the end of the term for the sum of one French franc.
The Company believes that its existing facilities are generally
suitable and adequate for its businesses and has generally been able to renew
its manufacturing and office facilities leases as they expire at then-current
market rates. The Company believes that renewal of existing leases at market
rates will not have a material adverse effect on operating expenses or cash
flow.
ITEM 3. LEGAL PROCEEDINGS.
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. The New York action has been stayed pending resolution of the
California action, in which discovery is presently being conducted. The Company
strongly believes that its position is meritorious, and that Mr. Newmark's
claims are without merit. However, there can be no assurance that the Company
will ultimately prevail in the suits with Mr. Newmark.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market,
trading symbol AXHM. At the 1998 fiscal year end, there were approximately 762
shareholders of record of the Company's Common Stock. The Company has never paid
dividends on its common stock nor does it expect to pay dividends in the
foreseeable future. The following table sets forth the high and low closing
prices of the Company's Common Stock in each quarter in 1998 and 1997.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 2, 1999 DECEMBER 31, 1997
--------------- -----------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter.................................................. $17.00 13.13 $24.13 15.00
Second Quarter................................................. 14.50 10.25 18.00 13.50
Third Quarter.................................................. 11.75 7.25 24.25 15.75
Fourth Quarter................................................. 8.50 4.13 19.00 16.50
</TABLE>
On March 3, 1999, the Nasdaq Stock Market notified the Company that it
would review the Company's continuing eligibility to have its Common Stock
traded on The Nasdaq Stock Market unless the Company can show that it has two
active market makers for the stock by April 2, 1999. See "Certain Factors that
May Affect Future Results - Limited Trading; Significant Overhang; Possible
Nasdaq Delisting."
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
AXIOHM TRANSACTION SOLUTIONS, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JANUARY 2, Years ended December 31,
------------------------------------------------------------------
INCOME STATEMENT DATA 1999 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Net sales $ 231,011,000 $ 153,748,000 $ 95,302,000 $ 72,155,000 $ 23,952,000
Other - - - - 858,000
----------------------------------------------------------------------------------
Total revenue 231,011,000 153,748,000 95,302,000 72,155,000 24,810,000
Cost of net sales 150,929,000 102,600,000 66,390,000 52,202,000 15,095,000
----------------------------------------------------------------------------------
Gross margin 80,082,000 51,148,000 28,912,000 19,953,000 9,715,000
Operating expenses:
Selling, general and administrative 37,756,000 19,139,000 11,013,000 9,200,000 4,506,000
Research and development 15,825,000 10,033,000 6,648,000 5,836,000 3,310,000
In-process technology - 34,236,000 - - -
Plant Closing Expenses 1,565,000 - - - -
Amortization of intangible assets 35,470,000 11,474,000 200,000 161,000 -
----------------------------------------------------------------------------------
Total operating expenses 90,616,000 74,882,000 17,861,000 15,197,000 7,816,000
----------------------------------------------------------------------------------
Income (loss) from operations (10,534,000) (23,734,000) 11,051,000 4,756,000 1,899,000
Interest and other income, net (16,918,000) (9,940,000) 159,000 (1,731,000) 13,000
----------------------------------------------------------------------------------
Income (loss) before income taxes (27,452,000) (33,674,000) 11,210,000 3,025,000 1,912,000
Income taxes 3,485,000 5,784,000 4,406,000 1,095,000 482,000
----------------------------------------------------------------------------------
Net income (loss) $(30,937,000) $(39,458,000) $ 6,804,000 $ 1,930,000 $ 1,430,000
----------------------------------------------------------------------------------
Basic: Net income (loss) per share $ (4.75) $ (6.06) $ 1.08 $ 0.32 $ 0.24
----------------------------------------------------------------------------------
Shares used in per share calculation 6,519,000 6,513,000 6,276,000 6,016,000 6,016,000
----------------------------------------------------------------------------------
Diluted: Net income (loss) per share $ (4.75) $ (6.06) $ 1.08 $ 0.32 $ 0.24
----------------------------------------------------------------------------------
Shares used in per share calculation 6,519,000 6,513,000 6,300,000 6,016,000 6,016,000
----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JANAUARY 2, YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
BALANCE SHEET DATA 1999 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 31,096,000 $ 32,249,000 $ 14,072,000 $ 12,713,000 $ 10,875,000
Total assets 171,726,000 204,044,000 43,978,000 40,184,000 34,753,000
Government Grant Obligation 2,187,000 2,218,000 2,762,000 2,927,000 919,000
Total Debt 176,119,000 171,512,000 7,770,000 19,508,000 19,415,000
Shareholders' equity (deficit) (47,998,000) (18,081,000) 16,433,000 5,977,000 4,302,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The selected financial data should be read with the related consolidated
financial statements and notes
thereto, included herein.
14
<PAGE>
ITEM 7. 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
EFFECT OF ACQUISITIONS
The Company was formed from the combination of Axiohm S.A. a French
corporation ("Axiohm") and DH Technology, Inc. ("DH"). Historically, Axiohm and
DH have achieved a portion of their growth through the acquisition of other
businesses and the Company intends to pursue additional acquisitions as a part
of its growth strategy. See "Item 1. Business-Certain Factors That May Affect
Future Results-Management of Future Acquisitions", and Note 2 of Notes to the
Consolidated Financial Statements.
In December 1994, Axiohm acquired the transaction printer business of
NCR Corporation ("NCR"), and placed the business in an indirect wholly owned
subsidiary of Axiohm, Axiohm IPB, Inc. ("Axiohm IPB"). The purchase price
consisted of $15.6 million paid at closing and earn-out payments of $552,000 and
a $952,000 final payment in 1998. Axiohm recorded approximately $3.0 million of
goodwill in connection with this acquisition, which was accounted for using the
purchase method of accounting.
On August 21, 1997, 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 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. The aggregate
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 "Credit
Facility") and (ii) the proceeds of the Offering of $120,000,000 of its 9 3/4%
Senior Subordinated Notes due in 2007. See "Item 1. Business Combinations".
Although DH was the surviving legal entity, the transaction was
accounted for as a purchase of DH by Axiohm. For 1996, the following discussion
includes the results of operations of Axiohm only. For 1997, the following
discussion includes the results of operations of Axiohm for the full year plus
the results of operations of DH since August 31, 1997. 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 DH acquisition, the Company (i) incurred a
non-cash charge of $34.2 million due to the write-off of acquired in-process
technology that had not reached technological feasibility and had no future
alternative use and (ii) will amortize approximately $99.5 million of goodwill
and other intangibles over the next three years. Of the approximately $12.2
million paid for DH stock options, approximately $8.6 million was funded to a
Rabbi trust and is reflected on the Company's balance sheet as restricted cash
at December 31, 1997. See Note 2 of Notes to the Consolidated Financial
Statements.
15
<PAGE>
IN-PROCESS TECHNOLOGY AND INTANGIBLES
As part of the acquisition of DH, the Company acquired in-process
research and development and technology, developed technology, customer lists,
workforce and goodwill. After an initial review of the activities and assets of
DH, $50.8 million of the purchase price was allocated to in-process technology,
$22.9 million was allocated to acquired technology, $5.1 million was allocated
to customer lists and $2.1 million was allocated to workforce. The remaining
value of $51.5 million was allocated to goodwill.
The acquired in-process research and development had not reached
technological feasibility, had no alternative future use and was charged to
operations in accordance with generally accepted accounting principles. The
in-process technology was material to the future operations of DH in terms of
expected revenues and cash flows, and included several development activities or
projects.
Frequent refinement and enhancement of existing products and new
product introductions characterize the markets for some of the Company's
products. The Company's future prospects are highly dependent upon the timely
completion and introduction of new products at competitive price and performance
levels and the acceptance by new markets of the Company's products. The Company
also must respond to current competitors, which may choose to increase their
presence in the Company's markets, and to new competitors, which may choose to
enter those markets. To anticipate and respond to competitive activities, DH had
invested in research and development projects.
Some of the larger projects were designed to:
- Introduced a multi-station point of sale (POS) printer,
incorporating the latest in thermal and impact technology,
intended to replace current multi-station printer technology,
to become the leading printer in the industry. The printer is
used in POS applications to print receipts and print, verify
and validate checks,
- Introduced a multi-station printer to be used primarily in
banking applications at the teller station,
- Introduced a low cost thermal coupon printer for the retail
POS market.
- Introduced two low cost thermal receipt printers, to be used
in the high growth arena of Electronic Fund Transfer. (EFT)
- Introduced a low cost, faster, smaller footprint, single
station thermal receipt printer designed to enhance current
Company product offerings.
- Introduce a printer with new technology to be used where an
extremely quiet performance is required.
- Developing a new line of products built upon the next
generation of magnetic technology. In addition the Company is
expanding into various markets with a new hybrid card reader
that incorporates magnetic and smart card technology within
the same reader.
The three largest projects, in terms of expected future revenues, were
estimated to contribute significant revenues during fiscal years 1999 and 2000.
Many of the projects were in an advanced state of development.
To fully develop the other projects and to develop other new projects,
the Company expects that research and development expenditures, as a percent of
sales, will not be materially different from historical levels, and accordingly
will not have a material adverse impact on future operations and cash flow.
However, there can be no assurance that any of the in-process research and
development projects or any new projects started by the Company will be
successful in the marketplace. There can also be no assurance that activity in
the competitive marketplace will not intensify and cause the Company to make a
greater investment in research and development. If the development of in-process
technology or the investment in new projects is not successful, there
16
<PAGE>
would be a material adverse effect on future operations of the acquired business
of DH which could adversely impact the Company's standing in the marketplace
with current customers and employees. Accordingly, there could be an accelerated
amortization or immediate future write-off of acquired technology, customer
lists, goodwill and workforce. In addition, while the Company is not aware of
any new fundamental technologies for transaction printers that are likely to be
a significant factor in the near future or of a greater intensity in the
marketplace which would require greater research and development expenditures,
no assurance can be given that the Company's competitors will not introduce new
technologies or technological improvements that will place the Company at a
competitive disadvantage. The failure by the Company to make timely introduction
of new products or respond to competitive threats could have a material adverse
effect on its business, financial condition and results of operations.
In evaluating the period to amortize goodwill and other intangible
assets (acquired technology, customer lists and workforce), the Company
considered many factors, including but not limited to (i) the age of its
existing product lines, (ii) the Company's current market share, (iii)
competitors' technology, (iv) pricing and market share, (v) the amount of rapid
change in product design and technology, (vi) the rate of change in its employee
base, (vii) its customer base, (viii) its own research and development efforts,
and (ix) the potential periods for which the earnings stream from acquired
products and technology will have a significant impact upon combined operating
results. The Company also specifically:
- Reviewed the financial performance and level of product
activity of four public companies that were either direct
competitors or competed in markets with similar
characteristics,
- Reviewed the length of customer contracts and the criteria for
termination of the contracts,
- Reviewed the turnover of key employee groups and how that
turnover is influenced by intense competition in the
marketplace,
- Reviewed the expected actions of competitors in response to
the Company's new product introductions and their financial
strength in relation to that of the Company, and,
- Reviewed the periods that several companies (either
competitors or companies with similar characteristics)
amortize intangible assets.
After consideration and evaluation of these and other factors, management has
concluded that a 3-year amortization of goodwill and other intangibles would be
appropriate.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS OPERATING PERCENTAGES
JANUARY 2, December 31, December 31,
1999 1997 1996
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of net sales 65.3% 66.7% 69.7%
Selling, general, and administrative 16.3% 12.4% 11.6%
Research and development 6.9% 6.5% 7.0%
In-process technology - 22.3% -
Intangible amortization 15.4% 7.5% 0.2%
Income (loss) from operations (4.6%) (15.4%) 11.6%
Income (loss) before income taxes (11.9%) (21.9%) 11.8%
Income taxes 1.5% 3.8% 4.6%
Net loss (13.4%) (25.7%) 7.1%
- ---------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
1998 COMPARED TO 1997
NET SALES. Net Sales of $231.0 million for the year ended January 2, 1999
increased 50.0%, or $77.3 million, compared to net sales of $153.7 million for
the period ended December 31, 1997. 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. Fiscal year 1998 is inclusive of 53 weeks where the
comparable years presented are inclusive of a 52 week calendar year. The
difference between comparable periods is not material in terms of sales and net
loss. Fourth quarter 1998 sales of $56.3 million compared to the 4th quarter of
1997, increased 3.9%. 1997 fourth quarter results are inclusive of DH sales for
the complete quarter. Historically, the industry experiences constant sales
during the fourth quarter. The Company's long-term growth objectives, over a
three to five year period, are to grow revenues at a rate of approximately 10%
to 15% and to grow operating profit before acquisition related charges in excess
of sales. Although in any individual year, the growth rate could be materially
different from stated objectives.*
COST OF NET SALES. Cost of net sales of $151.0 million decreased to 65.3% of net
sales for the year-ended January 2, 1999 from 66.7% of net sales for the same
period ended December 31, 1997, due primarily to the following factors: 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. The Company anticipates that 1999 cost of
sales will be higher than 1998 levels as a percent of sales, due to product mix
changes. *
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses of $37.7 million increased to 16.3% of net sales for the
year ended January 2, 1999 from 12.4% 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
executive recruiting expenses, 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 6.9% during 1998 compared to 6.5% in 1997.
Total dollars expended for research and development increased $5.8 million to
$15.8 million for 1998 compared to $10.0 million in the same period of 1997
primarily due to the inclusion of expenses of DH, coupled with a management
decision to increase focus on Research & Development. The Company believes that
the timely development of new products and enhancements to its existing products
are essential to maintaining its competitive position.
PLANT CLOSING EXPENSES. The Company recorded $1.6 million in expenses for the
year ended January 2, 1999, relating to the relocation of operations from the
Paso Robles, California and Riverton, Wyoming manufacturing facilities to the
Company's Ithaca, New York facility, primarily for staying bonuses to be paid to
employees upon completion of integration duties.
ACQUISITION RELATED INTANGIBLE AMORTIZATION. In conjunction with the acquisition
of DH, the Company recognized a non-cash charge of $35.5 million due to the
amortization of intangible assets and capitalized in-process technology. The
Company anticipates that, on a quarterly basis through the third quarter of
2000, operating expenses will include approximately $9.0 million in non-cash
acquisition related charges, which principally includes non-cash intangible
amortization.
LOSS FROM OPERATIONS. Loss from operations for the year ended January 2, 1999
was $10.5 million, compared to a loss from operations of $23.7 million in the
same period for 1997. The loss from operations in 1998 was primarily due to the
acquisition related amortization charges discussed above. The loss in 1997 is
inclusive of a one-time charge of $34.2 for in-process technology.
INTEREST AND OTHER INCOME, NET. The Company did not generate significant
interest income and other income during the past 12 months, as the Company's
cash was used to complete the acquisition of DH. The Company does not expect to
generate significant amounts of interest income during fiscal year 1999 for the
above-mentioned reason. The Company does not anticipate that it will generate
significant interest income for at
18
<PAGE>
least the next 12 months because substantially all of the Company's cash was
used to complete the acquisition of DH.
INTEREST EXPENSE
Interest expense increased to $17.1 million in 1998 from $10.5 million for the
same period in 1997 due to interest expense related to the long term Credit
Facility and Notes, which created higher outstanding debt for the entire year.
See Note 6 to the consolidated financial statements.
INCOME TAXES. Provision for income taxes of $3.5 million for the year ended
January 2, 1999 decreased $2.3 million from $5.8 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 43.1% for 1998 compared to 29.1% for 1997. The Company expects the
1999 tax rate, before non-cash acquisition related charges, to be approximately
42%.* This rate could vary as a result of the actual income recognized in
various tax jurisdictions in 1999.
1997 COMPARED TO 1996
NET SALES. 1997 net sales of $153.7 million increased 61.3% compared to net
sales of $95.3 million for 1996. This increase was attributable to the addition
of DH net sales of $34.7 million and an internal growth in net sales of $23.7
million. The increase in net sales reflects increased unit volumes of
transaction printers and printer mechanisms partially offset by a decline in
average selling prices and a unit decline in sales of thermal mechanisms.
COST OF NET SALES. Cost of net sales as a percentage of revenues decreased to
66.7% in 1997 from 69.7% in 1996. The decline was due to 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 $19.1 million for 1997 increased $8.1 million or
73.6% from $11.0 million in 1996. Selling, general and administrative expenses
as a percentage of revenues increased to 12.4% in 1997 from 11.6% in 1996. This
increase was primarily the result of the inclusion of expenses attributable to
DH of $6.5 million, an increase of $1.2 million in base expenses and a $442,000
non-cash charge for stock options. The increase in base expenses was primarily a
result of higher staffing levels and expenses required to support increased
sales, offset, in part, by the favorable impact of the fluctuations in the U.S.
dollar compared to the French franc.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses of $10.0
million in 1997 increased $3.4 million or 51.5% from $6.6 million in 1996. This
increase was primarily due to the inclusion of expenses attributable to DH of
$2.2 million. Research and development expenses as a percentage of revenues
decreased to 6.5% in 1997 from 7.0% in 1996. The Company believes that the
timely development of new products and enhancements to its existing products are
essential to maintaining its competitive position. Accordingly, the Company
anticipates that such expenses will continue to increase in absolute dollar
terms for the foreseeable future but will not vary significantly from historical
levels as a percent of net sales.
IN-PROCESS TECHNOLOGY. In conjunction with the acquisition of DH, the Company
incurred a non-cash charge of $34.2 million due to the write-off of acquired in-
process technology (projects that had not reached technological feasibility and
had no future alternative use). If the Company were to complete these in-process
projects, it would not expect to incur research and development costs in excess
of historical levels as a percentage of sales of DH.
19
<PAGE>
ACQUISITION RELATED INTANGIBLE AMORTIZATION. Non-cash intangible amortization
expense in 1997 increased to $11.5 million in 1997 from $.2 million in 1996 due
to the acquisition of DH.
INCOME (LOSS) FROM OPERATIONS. The loss from operations for 1997 was $23.7
million, compared to income from operations of $11.1 million in 1996. The loss
from operations in 1997 was largely due to the in-process technology and
intangible amortization charges discussed above.
INTEREST AND OTHER INCOME, NET. Interest and other income of $0.6 million in
1997 decreased $0.6 million from $1.2 million in 1996. In 1996, the Company
received insurance proceeds of $1.0 million as compensation for the loss of
revenue and commercial damage caused by water damage in its clean room facility
located in Puiseaux, France.
INTEREST EXPENSE. Interest expense increased to $10.5 million for 1997 from $1.0
million in 1996 due to the incurrence of the acquisition financing. See Note 6
of Notes to the Consolidated Financial Statements.
INCOME TAXES. Income taxes of $5.8 million in 1997 increased $1.4 million from
$4.4 million in 1996. Income taxes as a percentage of income (loss) before
taxes, excluding the effect of acquisition related charges, was approximately
29.1% in 1997 compared to 39.3% in 1996 due primarily to changes in tax
jurisdictions and related tax rates as a result of the acquisition of DH. Income
tax expense as a percentage of loss before income taxes including the effect of
acquisition related charges, was 17.2% in the 1997 period primarily due to the
in-process technology charge and intangible amortization being non-deductible
for income tax purposes.
YEAR 2000 RISKS 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, computer
systems and/or software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements.
The Company's failure to resolve Year 2000 issues 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 reduce
shipments and lost sales. In addition, a similar result may occur, in the event
major customers do not meet Year 2000 compliance.
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. 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 second quarter
20
<PAGE>
of 1999.* The Company has begun its evaluation of the "state of readiness" and
expects to complete this evaluation of the "state of readiness" of both vendors
and customers with a material relationship during the second quarter 1999.* The
following table summarizes the current status of the Company's position in
addressing Year 2000 issues.
<TABLE>
<CAPTION>
------------------------- ---------------- --------------------------------
% COMPLETED PROJECT COMPLETION DATE DURING
PHASE THE QTR. ENDING*
------------------------- ---------------- --------------------------------
------------------------- ---------------- --------------------------------
<S> <C> <C>
Awareness 100%
------------------------- ---------------- --------------------------------
Evaluation 75% 6/30/99
------------------------- ---------------- --------------------------------
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. 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
January 2, 1999, the company has spent $1.4 million associated with the Oracle
conversion or 70% 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-CONTINGENCY PLAN
The Company has not, to date, implemented a contingency plan regarding
Year 2000 non-compliance. The Company has developed a foundation for the
contingency plan and is expecting to complete the plan 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
21
<PAGE>
future events including continuing factors. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are cash flow from operations
and borrowings under the Credit Facility. For the year ended January 2, 1999,
cash provided by operating activities was $4.1 million. Depreciation and
amortization represented $42 million of cash flows from operating activities. An
additional $1.1 million in operating cash flows was attributable to reductions
in temporary differences pertaining to deferred taxes. Working capital resulted
in the use of cash totaling $6.8 million due primarily to the increase in
accounts receivable and inventory of $2.2 million and $2.7 million,
respectively. Increases have direct correlation to increases in sales activity.
Other tax related items attributed to increased uses of cash of $3.2 million
compared to the December 31, 1997, primarily due to a lower net loss at January
2, 1999 and a reduced tax benefit. Accounts payable increased by $2.8 million.
Cash used in investing activities of $11.9 million in 1998, is
comprised primarily by the capital expenditures of $5.4 million coupled with
acquisition related items of $5.5 million. Increases in capital expenditures
relate primarily to increases in tooling used to support new products.
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. Based
upon current levels of operations and anticipated growth in revenues and cost
savings, the Company believes that the Company's cash flow from operations and
amounts available under the Credit Facility will be adequate to meet its
anticipated future requirements for working capital, capital expenditures, and
scheduled payments of principal and interest on its indebtedness during the next
twelve months.*
Required long term debt payments under the Credit Facility and Notes
are as follows: $9.1 million in 1999; $8.5 million in 2000; $9.4 million in
2001; $16.2 million in 2002; $12.2 million in 2003; and $121.2 million
thereafter. It is anticipated that capital expenditures in 1999 will not exceed
the maximum permitted under the New Credit Facility of $11.5 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 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 January 2, 1999, the Company's total debt excluding government
grants was $176.1 million, or $175.2 million net of cash. The Company also had
borrowing availability under the Credit Facility of an additional $24.6 million
for working capital and capital expenditure requirements, subject to the
borrowing conditions contained therein. Debt levels are expected to increase
during the first half of 1999 from the debt levels at January 2, 1999 due the
payment of $5.9 million of subordinated interest on April 1, 1999. Effective
September 25, 1998 the Company renegotiated the conditions of its bank
agreement. Modifications mainly affected the covenant levels within the
agreement. At January 2, the Company is in compliance with the debt covenants.
See "Item 1. Business-Certain factors that may affect future results-Substantial
Leverage and Debt Service."
22
<PAGE>
The Credit Facility and the Notes do, and other debt instruments of the
Company may, pose 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 Credit
Facility includes various financial covenants of the Company, including
covenants with respect to the maximum capital expenditures, a maximum ratio of
debt to EBITDA, a minimum interest coverage ratio and a minimum fixed charge
coverage ratio. The Credit Facility subjects the Company to certain negative
covenants, including without limitation covenants that restrict, subject to
specified exceptions: the incurrence of additional indebtedness and other
obligations and the granting of additional liens; mergers and acquisitions,
investments and acquisitions and dispositions of assets; the incurrence of
capitalized lease obligations; investments, loans and advances; dividends, stock
repurchases and redemption's; prepayment or repurchase of other indebtedness and
other provisions.
In managing interest rate exposure, principally under the Company's
floating rate revolving credit facilities, the Company has entered into 3
interest rate swap agreements during the period from December 1997 through
October 2001. The swap agreements are with major financial institutions and
aggregate $35 million in notional principal amount at January 2, 1999. The first
swap agreement of $20 million notional principal amount requires fixed interest
payments at a fixed rate of 5.90% through November 1999. The second swap
agreement of $10 million notional principal amount requires fixed interest
payments at a fixed rate of 4.76% through October 2001. The third swap agreement
of $5 million in notional principal amount requires fixed interest payments at a
fixed interest rate of 4.365% through October 2001.
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 Credit Facility. Interest is
payable semi-annually on the unpaid principal at 9.75% per annum. The Indenture
contains covenants regarding restricted payments, incurrence of indebtedness,
liens, dividends, merger, consolidation or sale of assets, and transactions with
affiliates. See "Item 1. Business-Certain Factors That May Affect Future
Results-Substantial Leverage And Debt Services" and Note 6 of the Notes to the
Consolidated Financial Statements.
In connection with the resignation and termination of employment of the
Company's Chief Executive Officer and another executive, the $8.6 million of
restricted cash on the December 31, 1997 balance sheet was paid out. In January
1998, $1.8 million was paid for tax obligations due to the officers under the
option cancellation agreements the Company had entered into with them in August
1997. Severance and non-compete payments of $1.7 million were also made in the
first quarter.
RESTRICTIONS ON DISTRIBUTIONS BY GUARANTORS TO THE COMPANY
There are no contractual restrictions, under the Credit Facility or
otherwise, upon the ability of the Guarantors to make distributions or pay
dividends to their respective equityholders. Directly or indirectly, the Company
is the sole equity-holder of all of the Guarantors.
NEW ACCOUNTING STANDARDS
In February 1999, the Financial Accounting Standards board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 135 "Discussion of
FASB Statement No. 75 and Technical Corrections." This Statement amends existing
authoritative literature to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. The statement is
effective for fiscal year ending after February 15, 1999. Management has not yet
determined the impact that the inclusion of this statement may have on
consolidated results, financial condition or liquidity of the Company.
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
23
<PAGE>
beginning after June 15, 1999. Management has not yet determined the impact that
the adoption of this statement may have on consolidated results, 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 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 1st quarter 1999 consolidated financial statements, as
permitted by each. The adoption of these standards is not expected to have a
material impact on consolidated results, financial condition, or long-term
liquidity of the Company.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKS
The market risk exposure inherent in the Company's international
operations creates potential for losses arising from adverse changes in foreign
currency exchange rates. The Company is exposed to such foreign exchange rate
risks in two main areas: (1) The company has operating facilities and
correspondingly expense generation from multiple non-US locations such as:
France; the United Kingdom; and Australia, operating expenses are expected to be
denominated in various foreign currencies and (2) most of the Company's capital
lease obligation is expressed in the French Franc. Conversions from foreign
currencies to US Dollars can cause significant exchange gains or losses. In
addition, gains and losses arising from the conversion to U.S. dollars of assets
and liabilities denominated in foreign currencies may contribute to fluctuations
in the Company's operating results.
The Company manufactures and sells its products in a number of
locations around the world, resulting in a diversified revenue and cost base
that is exposed to fluctuations in European and Asian currencies. The diverse
base of foreign currency revenues and costs serves to create a hedge that limits
the Company's net exposure to fluctuations in these foreign currencies.
The Company uses financial instruments, primarily forward exchange
contracts, to hedge its exposure to foreign currency exchange rate fluctuations.
In order to mitigate the associated risk resulting from increases in the French
franc compared to the U.S. dollar, the Company identifies on a monthly basis its
cash requirements denominated in each currency for the next quarterly period.
Based on these requirements, currency forwards are entered into and designated
as hedges of specific cash commitments. These contracts must be designated at
inception as a hedge and measured for effectiveness at both inception and on an
ongoing basis. Realized and unrealized gains and losses arising from currency
forwards are recognized in income in the same period as gains and losses
resulting from the underlying hedged transactions. For contracts which do not
meet the Company's criteria for hedge accounting, realized and unrealized gain
or losses are recognized currently. At January 2, 1999 the Company's portfolio
consisted of five foreign exchange contracts to sell $9 million at an average
rate of $1 = FF 5.60.
The Company has undertaken a substantial amount of debt associated with
the Merger. (See item 1. Business - Substantial Debt Leverage and Service) In
managing interest rate exposure, principally under the Company's floating rate
revolving credit facilities, the Company has entered into 3 interest rate swap
agreements during the period from December 1997 through October 2001. The swap
agreements are with major financial institutions and aggregate $35 million in
notional principal amount at January 2, 1999. The first swap agreement of $20
million notional principal amount requires fixed interest payments at a fixed
rate of 5.90% through November 1999. The second swap
24
<PAGE>
agreement of $10 million notional principal amount requires fixed interest
payments at a fixed rate of 4.76% through October 2001. The third swap agreement
of $5 million in notional principal amount requires fixed interest payments at a
fixed interest rate of 4.365% through October 2001. A 100 (10% adverse change)
basis point move in interest rates would not have a material affect on the
Company's floating and fixed rate instruments, including short and long-term
debt and derivative instruments.
The Company's hedging activities have not had a material impact on its
operations or cash flows. The Company does not use or hold financial instruments
for speculative trading purposes. The Company does not anticipate an adverse
impact on the interest rate protection agreements, as a result of interest rate
volatility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in Part IV Item
14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report
because the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's officers required by this Item
is included in the section in Part I hereof entitled "Item 1. Business-Executive
Officers of the Registrant." The information concerning the Company's directors
required by this Item is incorporated by reference to the Company's Proxy
Statement under the heading "Election of Directors-Nominees." Information
concerning the Company's officers, directors and 10% shareholders compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to the information contained in the Company's Proxy Statement under
the heading "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Proxy Statement under the heading "Certain Relationships and
Related Transactions."
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K.
1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG LLP, Independent Auditors............................................................................ F-1
Report of PricewaterhouseCoopers, Independent Accountants........................................................... F-2
Financial Statements
Consolidated Balance Sheets...................................................................................... F-3
Consolidated Statement of Operations............................................................................. F-4
Consolidated Statement of Stockholders' Equity (Deficit)......................................................... F-5
Consolidated Statement of Cash Flows............................................................................. F-6
Notes to Consolidated Financial Statements....................................................................... F-7
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES.
Schedule included in Item 14(a):
<TABLE>
<S> <C>
II Valuation and Qualifying Accounts................................................................................... F-36
</TABLE>
3. EXHIBITS. The following Exhibits are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K.
<TABLE>
<S> <C>
2.1 Agreement and Plan of Merger dated as of July 14, 1997, among DH
Technology, Inc., Axiohm S.A. and AX Acquisition Corporation
(incorporated by reference to Exhibit (c)(1) to DH Technology, Inc.'s
Schedule 14D-9 filed July 16, 1997).
2.2 Purchase and Assumption Agreement, dated October 2, 1997, among Axiohm
IPB, Inc., AX Acquisition Corporation and DH Technology, Inc.
(incorporated by reference to Exhibit 2.2 to Axiohm Transaction
Solutions, Inc.'s Current Report on Form 8-K filed October 17, 1997).
2.3 Stock Purchase Agreement dated August 12, 1994, by and between the
Registrant, Cognitive Solutions, Inc., and John Bergquist, by which
Registrant purchased Cognitive Solutions, Inc. (incorporated by
reference to Exhibit 2.1 of Registrant's Current Report on Form 8-K
dated September 14, 1994.)
3.1 Certificate of Restated Articles of Incorporation of the Registrant
filed with the California Secretary of State on January 13, 1998
(incorporated by reference to Exhibit 3.3A of the Registrant's
Registration Statement on Form S-4 declared effective February 17,
1998).
3.2 Amended and Restated Bylaws of The Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K
filed October 17, 1997).
4.1 Indenture dated as of October 2, 1997 among the Registrant, the
Guarantors named therein and The Bank of New York, as trustee (the
"Indenture") (incorporated by reference to Exhibit 4.1 to The
Registrant's Current Report on Form 8-K filed October 17, 1997).
4.2 Supplemental Indenture to the Indenture, dated as of January 9, 1998,
between Axiohm S.A.R.L., as a supplemental guarantor, and The Bank of
New York, as trustee (incorporated by reference to Exhibit 4.1A of the
Registrant's Registration Statement on Form S-4 declared effective
February 17, 1998)
4.3 Supplemental Indenture to the Indenture, dated as of November 26, 1997,
between Axiohm Investissements S.A.R.L., as a supplemental guarantor,
and The Bank of New York, as trustee (incorporated by reference to
Exhibit 4.2 of the Registrant's Registration Statement on Form S-4
declared effective February 17, 1998).
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
4.3 Supplemental Indenture to the Indenture, dated as of November 26, 1997,
between Cognitive L.L.C., as a supplemental guarantor, and The Bank of
New York, as trustee (incorporated by reference to Exhibit 4.3 of the
Registrant's Registration Statement on Form S-4 filed declared
effective February 17, 1998).
4.4 Supplemental Indenture to the Indenture, dated as of November 26, 1997,
between Dardel Technologies E.U.R.L., as a supplemental guarantor, and
The Bank of New York, as trustee (incorporated by reference to Exhibit
4.4 of the Registrant's Registration Statement on Form S-4 declared
effective February 17, 1998).
4.5 Unrestricted Global Note for $120,000,000 in principal amount of New 9
3/4% Senior Subordinated Notes due 2007 and attached Subsidiary
Guarantees.
10.1 Registration Rights Agreement, dated as of October 2, 1997 among the
Registrant, Axiohm S.A., Axiohm IPB, Inc., Dardel Technologies
E.U.R.L., Stadia Colorado Corp., Cognitive Solutions, Inc. and Lehman
Brothers Inc. (incorporated by reference to Exhibit 10.1 to The
Registrant's Current Report on Form 8-K filed October 17, 1997).
10.2 Resignation Agreement dated January 10, 1998 between the Registrant and
William H. Gibbs (incorporated by reference to Exhibit 10.3A of the
Registrant's Registration Statement on Form S-4 declared effective
February 17, 1998).
10.3 Non-competition and Mutual Release Agreement dated January 10, 1998
between the Registrant and William H. Gibbs (incorporated by reference
to Exhibit 10.4A of the Registrant's Registration Statement on Form S-4
declared effective February 17, 1998).
10.4* Employment Agreement between the Registrant and Walter Sobon dated as
of July 14, 1997 (incorporated by reference to Exhibit 10.4 to The
Registrant's Current Report on Form 8-K filed October 17, 1997).
10.5* Letter Agreement dated March 15, 1998 between the Registrant and
Nicolas Dourassoff.
10.6 $85,000,000 Credit Agreement among the Registrant, 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 dated as of
October 2, 1997.
10.7 Guarantee and Collateral Agreement, dated as of October 2, 1997,
between the Registrant, Lehman Brothers Inc., Lehman Commercial Paper
Inc. and certain of The Registrant's subsidiaries (incorporated by
reference to Exhibit 10.8 to The Registrant's Current Report on Form
8-K filed October 17, 1997).
10.8* 1983 Incentive Stock Option Plan and Forms of Incentive Stock Option
Agreement and Non-statutory Stock Option Agreement, as amended.
(incorporated by reference to Exhibit 10.4 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990; filed
March 28, 1991).
10.9* 1992 Stock Plan and Form of Incentive Stock Option Agreement, as
amended (incorporated by reference to Exhibit 10.6 of the Registrant's
Form 10-K for the fiscal year ended December 31, 1994; filed March 15,
1995).
10.10 Lease Agreement dated April 20, 1990, between the Registrant and Coast
Income Properties, Inc., as amended (incorporated by reference to
Exhibit 10.5 of The Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 filed March 29, 1993).
10.11 Lease Agreement dated July 1, 1990, between DH Tecnologia de Mexico
S.A. de C. V. and Alberto Lutteroth (incorporated by reference to
Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 filed March 28, 1991).
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
10.12 Lease Agreement dated April 1, 1994, by and between the Registrant and
Wind River Development Co., a Wyoming corporation (incorporated by
reference to Exhibit 10.6 of The Registrant's Form 10-K for the fiscal
year ended December 31, 1994 filed March 15, 1995).
10.13 Lease Agreement dated February 28, 1994, between Chardan, Ltd., and
Stadia Colorado Corp (incorporated by reference to Exhibit 2.2 of The
Registrant's Current Report on Form 8-K filed March 14, 1994).
10.14 Sublease Agreement dated September 30, 1992, by and between Medical
Engineering Corporation and Cognitive Solutions, Inc. (incorporated by
reference to Exhibit 10.6 of the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 filed March 15, 1995).
10.15 Line of Credit Agreement dated August 15, 1994 by and between DH
Technology, Inc. and Wells Fargo Bank (incorporated by reference to
Exhibit 10.10 of the Registrant's Form 10-Q for the Quarter Ended March
31, 1995 filed May 15, 1995).
10.16* Stock Option Agreement dated October 2, 1997 between the Registrant and
Malcolm Unsworth (incorporated by reference to Exhibit 10.18 of the
Registrant's Registration Statement on Form S-4 filed on November 28,
1997).
10.17* Co-Chairman Employment Agreement dated effective October 2, 1997
between the Registrant and Patrick Dupuy (incorporated by reference to
Exhibit 10.19 of the Registrant's Registration Statement on Form S-4
filed on November 28, 1997).
10.18* Co-Chairman Employment Agreement dated effective October 2, 1997
between the Registrant and Gilles Gibier (incorporated by reference to
Exhibit 10.19 of the Registrant's Registration Statement on Form S-4
filed on November 28, 1997).
21.1 List of Subsidiaries.
23.1 Independent Auditor's Consent and Report on Schedule (KPMG LLP).
23.2 Consent of Independent Accountants (PricewaterhouseCoopers)
24.1 Power of Attorney included on signature page.
27.1 Financial Data Schedule.
</TABLE>
- -----------
* This item is a compensatory plan or management contract.
(b) Reports on Form 8-K.
No 8-K was filed by the Company in the 4th quarter 1998
28
<PAGE>
REPORT OF INDEPENDENT AUDITORS'
To the Board of Directors and Shareholders of Axiohm Transaction Solutions,
Inc.:
We have audited the accompanying consolidated balance sheets of Axiohm
Transaction Solutions, Inc. and subsidiaries as of January 2, 1999 and December
31, 1997 and the related consolidated statements of operations, shareholders'
(deficit), and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of Axiohm
Transaction Solutions, Inc. and subsidiaries as of December 31, 1996 and for the
year then ended, were audited by other auditors, whose report dated September
12, 1997, on those statements expressed an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Axiohm
Transaction Solutions, Inc. and subsidiaries as of January 2, 1999 and December
31, 1997 and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
March 16, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Axiohm S.A.
In our opinion, the consolidated statements of operations, cash flows
and shareholders' equity (deficit) for the year ended December 31, 1996 present
fairly, in all material respects, the results of operations and cash flows of
Axiohm S.A. (the "Company") and its subsidiaries for the year ended December 31,
1996, in conformity with United States Generally Accepted Accounting Principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
United States Generally Accepted Auditing Standards, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free on material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Axiohm S.A.
and its subsidiaries for any period subsequent to December 31, 1996.
Price Waterhouse
Paris, France
September 12, 1997, except as to note 19, which is as of January 9, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
AXIOHM TRANSACTION SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 2, DECEMBER 31,
1999 1997
---------- ------------
<S> <C> <C>
ASSETS (NOTE 6)
Current Assets:
Cash and cash equivalents $ 902,000 $ 3,877,000
Restricted cash (note 2) 8,594,000
-
Accounts receivable, net of allowance for doubtful accounts of $462,000
in 1998, and $205,000 in 1997. 33,361,000 30,515,000
Inventories (note 3) 33,210,000 30,103,000
Deferred tax asset (note 14) 7,664,000 8,751,000
Other current assets 3,812,000 2,264,000
----------- ------------
Total current assets 78,949,000 84,104,000
Property, plant and equipment, net (note 4) 20,556,000 21,535,000
Intangible assets, net (notes 2 and 5) 63,411,000 92,371,000
Other assets 8,810,000 6,034,000
----------- ------------
Total assets $171,726,000 $204,044,000
----------- ------------
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
Current liabilities
Accounts payable $20,712,000 $ 17,351,000
Current portion of long-term debt (notes 6 and 15) 9,085,000 5,948,000
Current portion of government grant obligations 813,000 649,000
Accrued payroll, payroll taxes, and benefits 5,367,000 6,194,000
Accrued expenses 6,951,000 4,645,000
Income taxes payable (note 14) 1,937,000
-
Deferred revenue 1,910,000 2,056,000
Rabbi trust (note 2) 8,594,000
-
Other current liabilities 3,015,000 4,481,000
----------- ------------
Total current liabilities 47,853,000 51,855,000
Long-term debt (notes 6 and 15) 167,034,000 165,564,000
Government grant obligations 1,374,000 1,569,000
Deferred tax liability (note 14) 167,000 131,000
Other long-term liabilities (note 8) 3,296,000 3,006,000
----------- ------------
Total liabilities $ 219,724,000 $ 222,125,000
----------- ------------
Shareholders' (deficit)
Preferred shares, no par value
Authorized: 1,000,000 shares; none issued $ - $ -
Common shares:
Common stock, no par value, authorized: 28,500,000 shares; issued
and outstanding: 6,519,301 shares in 1998 and 6,512,926 in 1997 24,367,000 23,852,000
Other comprehensive income (153,000) (658,000)
Retained deficit (72,212,000) (41,275,000)
----------- ------------
Total shareholders' (deficit) (47,998,000) (18,081,000)
----------- ------------
Total liabilities and shareholders' deficit $ 171,726,000 $ 204,044,000
----------- ------------
----------- ------------
</TABLE>
See accompaning notes to consolidated financial statements
F-3
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------------
JANUARY 2, DECEMBER 31, DECEMBER 31,
1999 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 231,011,000 $ 153,748,000 $95,302,000
Cost of net sales 150,929,000 102,600,000 66,390,000
------------ ------------ ----------
Gross margin 80,082,000 51,148,000 28,912,000
Operating expenses
Selling, general, and administrative 37,756,000 19,139,000 11,013,000
Research and development 15,825,000 10,033,000 6,648,000
In-process technology (note 2) - 34,236,000 -
Plant closing expenses 1,565,000 - -
Amortization of intangible assets (Note 2) 35,470,000 11,474,000 200,000
------------ ------------ ----------
Total operating expenses 90,616,000 74,882,000 17,861,000
Income (loss) from operations (10,534,000) (23,734,000) 11,051,000
Interest and other income 178,000 585,000 1,191,000
Interest expense (17,096,000) (10,525,000) (1,032,000)
------------ ------------ ----------
Income (loss) before income taxes (27,452,000) (33,674,000) 11,210,000
Income taxes (Note 14) 3,485,000 5,784,000 4,406,000
------------ ------------ ----------
Net income (loss) (30,937,000) (39,458,000) 6,804,000
------------ ------------ ----------
------------ ------------ ----------
Basic: Net income (loss) per share (4.75) (6.06) 1.08
Shares used in per share calculation 6,519,000 6,513,000 6,276,000
------------ ------------ ----------
------------ ------------ ----------
Diluted: Net income (loss) per share (4.75) (6.06) 1.08
Shares used in per share calculation 6,519,000 6,513,000 6,300,000
------------ ------------ ----------
------------ ------------ ----------
Foreign currency translation adjustment 505,000 (775,000) 256,000
------------ ------------ ----------
Other comprehensive Income (Loss) $(30,432,000) $(40,233,000) $7,060,000
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT)
<TABLE>
<CAPTION>
OTHER TOTAL
COMMON STOCK COMPREHENSIVE SHAREHOLDERS'
SHARES (note 1) AMOUNT INCOME RETAINED EQUITY
DEFICIT (DEFICIT)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 6,015,780 $ 682,000 $ (139,000) $ 5,434,000 $ 5,977,000
Stock issuance 497,093 3,846,000 - - 3,846,000
Stock issuance costs - (39,000) - - (39,000)
Allocation to restricted reserves - (322,000) - 322,000 -
Dividends - - - (411,000) (411,000)
Net income - - - 6,804,000 6,804,000
Foreign currency translation adjustment - - 256,000 - 256,000
----------- ------------ ----------- ------------- -------------
Balance, December 31, 1996 6,512,926 4,167,000 117,000 12,149,000 16,433,000
Fair value of DHT non-tendered shares (note 2) - 19,243,000 - - 19,243,000
Stock option compensation expense - 442,000 - - 442,000
Dividends - - - (13,966,000) (13,966,000)
Net loss - - - (39,458,000) (39,458,000)
Foreign currency translation adjustment - - (775,000) - (775,000)
----------- ------------ ----------- ------------- -------------
Balance, December 31, 1997 6,512,926 23,852,000 (658,000) (41,275,000) (18,081,000)
Stock issuance 6,375 73,000 - - 73,000
Stock option compensation expense - 442,000 - - 442,000
Net loss - - - (30,937,000) (30,937,000)
Foreign currency translation adjustment - - 505,000 - 505,000
----------- ------------ ----------- ------------- -------------
Balance, January 2, 1999 6,519,301 $24,367,000 $ (153,000) $(72,212,000) $(47,998,000)
----------- ------------ ----------- ------------- -------------
----------- ------------ ----------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------------------
JANUARY 2, DECEMBER 31, DECEMBER 31,
1999 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(30,937,000) $ (39,458,000) $ 6,804,000
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
In process technology - 34,236,000 -
Depreciation and amortization 42,263,000 19,971,000 2,921,000
Provision for deferred income taxes 1,111,000 (2,020,000) 458,000
Provision for long-term liabilities 221,000 843,000 461,000
Other (1,695,000) (146,000) 213,000
Changes in assets and liabilities, excluding effect of acquisitions:
Accounts receivable (2,155,000) (7,262,000) (2,215,000)
Inventories (2,701,000) (3,533,000) (736,000)
Other current assets (32,000) 3,941,000 (517,000)
Accounts payable 2,873,000 3,778,000 2,700,000
Accrued payroll, payroll taxes, and benefits (950,000) 997,000 329,000
Accrued expenses (328,000) 3,298,000 187,000
Income taxes payable (1,842,000) 992,000 618,000
Deferred revenue (221,000) 823,000 (107,000)
Other current liabilities (1,466,000) (182,000) 621,000
--------------- --------------- ---------------
Net cash provided by operating activities $4,141,000 $ 16,278,000 $ 11,737,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisition purchases, net of cash acquired (5,432,000) $(147,995,000) $ -
Additional purchase price for IPB (952,000) (552,000) -
Capital expenditures (5,432,000) (5,960,000) (3,056,000)
Proceeds from sale of property, plant and equipment - 16,000 71,000
Other - (38,000) (12,000)
--------------- --------------- ---------------
Net cash used in investing activities $(11,912,000) $(154,529,000) $ (2,997,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft $ - $ - $ (545,000)
Net borrowings under lines of credit 8,296,000 (1,127,000) (128,000)
Proceeds from long-term debt and merger financing - 172,000,000 -
Principal repayment under long-term debt (3,608,000) (9,198,000) (8,565,000)
Proceeds from government grant obligations 116,000 550,000 338,000
Repayment under government grant obligations (248,000) (612,000) (308,000)
Debt issuance costs (172,000) (8,137,000) -
Payment of dividends - (13,966,000) (411,000)
Proceeds from stock issuance, net of issuance costs 73,000 - 3,807,000
Net loans to related parties - 1,713,000 (1,851,000)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities $ 4,457,000 $ 141,223,000 $ (7,663,000)
Effect of exchange rate changes on cash 339,000 (934,000) 126,000
Net increase (decrease) in cash and cash equivalents $(2,975,000) $ 2,038,000 $ 1,203,000
Cash and cash equivalents at beginning of year 3,877,000 1,839,000 636,000
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 902,000 $ 3,877,000 $ 1,839,000
--------------- --------------- ---------------
--------------- --------------- ---------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH PAID DURING THE YEAR FOR:
Interest $17,379,000 $ 7,253,000 $ 845,000
Income taxes 2,246,000 4,705,000 3,245,000
NON-CASH INVESTING ACTIVITY:
Fair market value of assets acquired $ 5,528,000 $ 148,364,000 $ -
In-process technology - 34,236,000 -
Liabilities assumed - (15,363,000) -
Non-tendered shares - (19,242,000) -
--------------- --------------- ---------------
Cash paid, net of cash acquired $ 5,528,000 $ 147,995,000 $ -
OTHER NON-CASH TRANSACTIONS:
Capital lease obligation $ - $ - $ 163,000
Accrual for contingent purchase price consideration
- 952,000 552,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's fiscal year consists of the 52 or 53 week period ended on
the last Saturday nearest the December 31, effective for fiscal year ended 1998.
Fiscal year 1998 is inclusive of 53 weeks where as comparable years-presented
are inclusive of a 52 week calendar year. The difference between comparable
periods is not material in terms of sales and net loss.
DESCRIPTION OF BUSINESS
Axiohm Transaction Solutions, Inc. ("Company") is a designer,
manufacturer and marketer of transaction printers and printer components
utilizing thermal, magnetic and impact technologies. The Company's transaction
printer products are used in retail, financial and commercial transactions to
provide transaction records such as receipts, tickets, register journals, checks
and other documents. In addition, to transaction printers, the Company also
designs, manufactures and markets: (i) card readers, which, similar to
transaction printers, are an integral part of transaction activity; and (ii) bar
code printers and related consumable supplies, which are used for automatic
identification and data collection systems. The Company operates on a worldwide
basis with significant activities in North America and Europe. The Company sells
its products to OEMs, VARs, distributors and end-users.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements of Axiohm 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.,
acquired approximately 88%, or 7,000,000 shares, of the outstanding Common Stock
of 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
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"). Simultaneous 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. 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." (the
"Company"). Immediately after the Merger, approximately 85% of DH's outstanding
Common Stock was held by the former shareholders of Axiohm S.A. and 15% was held
by the former public shareholders of DH, Inc.
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. was treated as the acquirer for accounting
purposes. Accordingly, the historical financial information for periods prior to
August 31, 1997 are those of Axiohm S.A. 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. The
results of operations for the twelve-month period ended December 31, 1997
include the operations of DH after August 31, 1997.
CASH AND CASH EQUIVALENTS
Cash equivalents consist principally of highly liquid investments with
a maturity of less than three months at the time of purchase.
F-7
<PAGE>
INVENTORIES
Inventories are valued at the lower of cost or market, cost being
determined using the first-in, first-out ("FIFO") method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated using
the straight-line method over the shorter of the estimated useful life of the
asset or the lease term, ranging from one to 40 years. The Company utilizes the
following estimated useful lives: Building - 40 years; Machinery and Equipment
from 3 to 5 years; Furniture and Fixtures from 3 - 7 years. Renewals and
replacements, which extend the useful life of the fixed asset, are capitalized.
GOODWILL AND OTHER INTANGIBLES
The Company has classified as goodwill the cost in excess of fair value
of the net assets acquired in purchase transactions. Goodwill and other
intangibles are amortized on a straight-line basis over periods estimated to be
benefited, generally three to fifteen years. The Company periodically assesses
the recoverability of goodwill based on a review of projected undiscounted cash
flows of the related operating entities.
OTHER ASSETS:
Amortization of debt issuance costs is recorded as interest expense,
using the effective interest method over the life of the related debt.
GOVERNMENT GRANTS AND SUBSIDIES
Grants received from government agencies for the acquisition of
property and equipment are netted against the related capital expenditure.
Grants for investments in foreign countries are deferred and recognized as a
deduction to expenses if and when the conditions for the grant have been
satisfied. Subsidies received for employee training is recognized as a deduction
to expenses during the period in which the related costs are incurred.
POST RETIREMENT BENEFITS
Certain employees participate in a defined benefit post-retirement
medical plan. The projected benefit obligation relating to such benefits is
calculated and recorded in accordance with Statement of Financial Accounting
Standards No. 106, ACCOUNTING FOR POST-RETIREMENT BENEFITS (SFAS NO. 106).
In 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 132, "Employers' Disclosure about Pensions and Other
Post-retirement Benefits." SFAS 132 revises the employers' disclosure about
pensions and other post-retirement benefit plans; however, it does not change
the measurement or recognition of those plans. Prior year disclosures have been
restated.
STOCK- BASED COMPENSATION
The Company adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
(SFAS NO. 123 and accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The proforma net
income and proforma earnings per share disclosures for employee stock option
grants made are made using the fair-value based method required by SFAS No. 123.
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries where the local currency is the
functional currency are translated at the year end rate for assets and
liabilities unless hedged by forward foreign exchange contracts, in which case
the rates specified in such forward contracts are used, while income and
expenses are translated using the average rate for the year. Adjustments
resulting from translating foreign functional currency financial statements into
U.S. dollars are included as a separate component of shareholders' deficit.
Financial results of foreign subsidiaries in Mexico, which has a highly
inflationary economy and is translated using a combination of current and
historical
F-8
<PAGE>
exchange rates and any translation adjustments are included in net earnings,
along with all transaction gains and losses for the period
FOREIGN CURRENCY HEDGES
The Company uses financial instruments, primarily forward exchange
contracts, to hedge its exposure to foreign currency exchange rate fluctuations.
In order to mitigate the associated risk resulting from increases in the French
franc compared to the U.S. dollar, the Company identifies on a monthly basis its
cash requirements denominated in each currency for the next quarterly period.
Based on these requirements, currency forwards are entered into and designated
as hedges of specific cash commitments. These contracts must be designated at
inception as a hedge and measured for effectiveness at both inception and on an
ongoing basis. Realized and unrealized gains and losses arising from currency
forwards are recognized in income in the same period as gains and losses
resulting from the underlying hedged transactions. For contracts which do not
meet the Company's criteria for hedge accounting, realized and unrealized gain
or losses are recognized currently. The Company's hedging activities have not
had a material impact on its operations or cash flows. The Company does not use
or hold financial instruments for speculative trading purposes. At January 2,
1999 the Company's portfolio consisted of five foreign exchange contracts to
sell $9 million at an average rate of $1 = FF 5.60.
CONCENTRATION OF CREDIT RISK
The Company sells products to various customers across several
industries throughout the world. Financial instruments, which potentially
subject the Company to concentrations of credit risk, are accounts receivable
and cash. The Company performs on-going credit evaluations of its customer's
financial condition and generally requires no collateral from its customers. The
Company has established reserves for potential credit losses.
INTEREST RATE SWAP AGREEMENT
The Company has entered into three interest rate swap agreements
totaling $35,000,000 with a major financial institution with respect to its term
debt outstanding under its Credit Agreement (note 6). This swap agreement has
the effect of converting certain of the Company's variable rate term debt to
fixed rate obligations. Expiration dates are as follows: $20,000,000 November
1999; $10,000,000 October 2001; and $5,000,000 October 2001. Net amounts paid or
received are accrued on a settlement basis as adjustments to interest expense.
REVENUE RECOGNITION
Revenues related to product sales are recognized upon shipment of
products to the customer at which time title and risk of ownership pass.
Estimated provisions for product returns and warranty costs are accrued upon
revenue recognition. Cash received in advance of revenue recognition is recorded
as deferred revenue in the accompanying consolidated balance sheet.
RESEARCH & DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Certain
government research grants are repayable in the event that the related research
project proves to be successful. If it is determined that the project is
unsuccessful and all other conditions of the grant have been satisfied, the
Company is not obligated to repay the grants and an offset to expense is
recorded at that time.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing net earnings (loss) by
the
F-9
<PAGE>
weighted average shares of common stock outstanding during the year. Diluted
earnings per share are computed by dividing net earnings by the weighted average
shares of common stock and common stock equivalents outstanding during the year.
The dilutive effect of the potential exercise of outstanding options to purchase
shares of common stock is calculated using the treasury stock method. For the
year ended January 2, 1999 and December 31, 1997 options representing 85,623 and
95,000 shares respectively, were not included in the calculation of diluted
earnings per share, respectively, as their effect would have been anti-dilutive.
December 31, 1996 diluted weighted average shares outstanding were increased by
24,000 to reflect the effect of outstanding options.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, including
estimates relating to assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenue and
expenses during the reporting period. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and therefore,
cannot be determined with precision. Actual results could differ from estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses, approximate fair values due to the
short-term nature of these instruments. The carrying amounts of long-term debt
approximate fair values as the applicable interest rates approximate current
market rates. Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instruments.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF.
The Company periodically evaluates the carrying value of long-lived
assets to be held and used, including certain identifiable intangible assets,
when events and circumstances indicate that the carrying amount of an asset may
not be recovered. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less cost to
sell.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the
1998 presentation.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income, (SFAS 130)." SFAS 130 establishes the standards for the reporting of
comprehensive income and its components. Comprehensive income consists of net
income and foreign currency translation adjustments and is presented in the
Consolidated Statement of Shareholders' Equity. The adoption of SFAS 130 had no
impact on total shareholders' equity. Prior year financial statements have been
reclassified to conform to the SFAS 130 requirements.
SEGMENT DISCLOSURES
In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information, (SFAS 131)." SFAS 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
2. ACQUISITIONS
In March, 1997 DH purchased certain assets and liabilities of the card
reader business of American Magnetics Corporation (AMC), for a total
consideration of $5.7 million, $4.85 million paid in cash and $322,000 and
$478,000 due to American Magnetics in the years 2000 and 2001, respectively. AMC
designs, manufactures and markets card reader modules and stand-alone card
readers, including both magnetic and chip card products. This acquisition was
accounted for under the purchase method.
F-10
<PAGE>
On August 21, 1997, Purchaser, an indirect wholly owned subsidiary of
the Company, acquired 7,000,000 shares of the Common Stock of DH (approximately
88%) through the Tender Offer to the shareholders of DH, 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 the
Company and all of the outstanding shares of capital stock of Dardel, which held
the remaining shares of capital stock of the Company. Immediately after this
exchange, DH purchased from Axiohm 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, 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. The aggregate
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 the $85.0 Term Loan Facility and the Revolving Credit Facility of
up to $35.0 million and (ii) the proceeds of the Offering of $120,000,000 of its
Notes, which were exchanged in March 1998 for equivalent notes which have been
registered under the Securities Act of 1933. See "Item 1. Business -- Recent
Acquisition"
Although DH was the surviving legal entity, the transaction was
accounted for as a purchase of DH by Axiohm. 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.
The aggregate purchase price of $209.1 million was allocated based on
the fair values of tangible and intangible assets acquired and consisted of the
following:
<TABLE>
<S> <C>
Cash paid for DH shares $175,000,000
Cash paid for DH stock options 12,720,000
Transaction costs. 2,142,000
Fair value of DH non-tendered shares (1) 19,242,000
----------------------
$209,104,000
----------------------
----------------------
</TABLE>
(1) Recorded as an increase to common stock on the accompanying consolidated
balance sheet.
A summary of the purchase price allocation is as follows:
<TABLE>
<S> <C>
Net tangible assets acquired $75,391,000
In-process technology 34,236,000
Acquired technology 22,910,000
Customer lists 5,100,000
Workforce 2,100,000
Goodwill 69,367,000
---------------------
Total 209,104,000
---------------------
---------------------
</TABLE>
The purchased in-process research and development charges recognized by
the Company at December 31, 1997 totaled $34,236,000. At the time of the
acquisition of DH, the Company implemented a plan to achieve purchasing,
manufacturing and other synergies. Goodwill and other intangibles are being
amortized over three years using the straight-line method, which is the period
estimated to be benefited
Of the cash paid for the DH stock options, $8.6 million was funded to a
Rabbi trust and is reflected on the balance sheet as restricted cash and a
corresponding liability at December 31, 1997. The two officers who were the
beneficiaries of the Rabbi trust were terminated during the 1st quarter 1998,
whereby the trust was liquidated. Accordingly, restricted cash and the
corresponding liability are classified as current on the accompanying
consolidated balance sheet.
The acquisition was financed with $120 million of 9.75% Senior
Subordinated Notes due 2007 and borrowings under the $85 million Credit
Facility. See Note 6 to the Consolidated Financial Statements.
F-11
<PAGE>
The following unaudited pro forma information has been prepared
assuming that the acquisition of DH and the acquisition financing had occurred
at the beginning of 1997. Pro forma adjustments include increased amortization
for the purchase price in excess of assets acquired; an adjustment to remove the
impact of in-process technology of $34,236,000; increased interest expense from
the acquisition financing; and related income tax effects. The pro forma
information does not reflect any potential cost savings from combining the
operations of DH and Axiohm S.A.
<TABLE>
<CAPTION>
YEAR ENDED
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net sales $212,479,000
Net loss $30,951,000
Net loss per share $4.75
Weighted average number of shares outstanding 6,513,000
-------------------------------------------------------
</TABLE>
The pro forma information is provided for information purposes only and
does not purport to be indicative of the Company's results of operations that
would actually have been achieved had the Acquisition and the acquisition
financing been completed at the beginning of the periods presented, or results
that may be obtained for any other period.
During the 2nd quarter of 1998, the Company acquired AP Print, S.A.
based in Angers, France. AP Print is a developer and manufacturer of plastic
card printers used in applications such as driver's licenses, membership cards,
access control badges and smart cards. The acquisition is not material, and
therefore pro forma information has not been presented.
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 31,
1999 1997
---------------------------- -----------------------
<S> <C> <C>
Raw Materials $24,632,000 $20,014,000
Work in Process 2,027,000 2,328,000
Finished Goods 6,551,000 7,761,000
---------------------------- -----------------------
$33,210,000 $30,103,000
---------------------------- -----------------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 31,
1999 1997
- ----------------------------------------------------- ------------------------- --------------------
<S> <C> <C>
Land $ 1,141,000 $ 935,000
Building & leasehold improvements 9,474,000 8,860,000
Machinery and equipment 14,785,000 11,414,000
Furniture, fixtures, and equipment 12,837,000 11,229,000
------------------------- --------------------
38,237,000 32,438,000
Accumulated depreciation
And amortization (17,681,000) (10,903,000)
------------------------- --------------------
$20,556,000 $21,535,000
------------------------- --------------------
</TABLE>
Included above are assets under capital leases amounting to $1,355,000
and $1,672,000, net of accumulated amortization of $148,000 and $358,000 at
January 2, 1999; December 31, 1997, respectively.
F-12
<PAGE>
5. INTANGIBLES ASSETS
Intangible assets are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 2, 1999 DECEMBER 31, 1997
--------------------- --------------------
<S> <C> <C>
Goodwill $79,156,000 $73,287,000
Acquired technology 22,910,000 22,910,000
Customer lists 5,100,000 5,100,000
Workforce 2,100,000 2,100,000
Patents and technology rights 512,000 703,000
Covenants not to compete 2,325,000 950,000
--------------------- --------------------
112,103,000 105,050,000
--------------------- --------------------
Accumulated amortization (48,692,000) (12,679,000)
--------------------- --------------------
$63,411,000 $92,371,000
--------------------- --------------------
</TABLE>
6. LONG TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 31,
1999 1997
------------------------ -----------------------
<S> <C> <C>
9.75% senior subordinated notes with interest
due semi-annually in April and October, payable in full on October 1, 2007;
guaranteed by certain of the Company's' subsidiaries. $ 120,000,000 $ 120,000,000
Two Tranche amortizing term loan: Tranche A of $35 million due December 31,
2002, Tranche B of $15 million due December 31, 2003;
Secured by all of the real and personal property of the Company and certain of
its subsidiaries. Interest rates are based on the Eurodollar rate plus a margin
of between 3.0% and 3.25%. 42,550,000 45,750,000
Revolving line of credit of $35 million available through October 2, 2002;
secured on the same
basis as the term loan. Interest rates vary based on Prime plus 1.5% to 2.0% or
LIBOR plus 2.5% to 3.0%. 10,405,000 2,000,000
Notes payable related to acquisitions by DH
at rates of 7% to 8%, due in annual installments through March 31,
2001. 1,261,000 1,690,000
Financing arrangement with a commercial
Lender at PIBOR plus 1.2% payable in quarterly
Payable through 2009 (4.5% at January 2, 1999). 1,258,000 1,217,000
Sodecco bank loan at PIBOR plus 1.2% (4.5% at January 2, 1999)payable in full in
June
2002, secured by equipment. 507,000 589,000
Credit Lyonnais bank loan at 8.0%, payable
Through November 1999. 46,000 -
7.5% note payable in monthly installments of
</TABLE>
F-13
<PAGE>
<TABLE>
<S> <C> <C>
$9,000 (including interest) with final payment
due September 1998; secured by equipment. - 60,000
Capital Lease obligation for office equipment and vehicles, interest rates
ranging from 7.3% to 10.6% per annum, secured by equipment,
due between 1998 and 2000. 92,000 206,000
------------------------ -----------------------
TOTAL DEBT $176,119,000 $171,512,000
------------------------ -----------------------
LESS CURRENT PORTION $9,085,000 $5,948,000
------------------------ -----------------------
TOTAL LONG-TERM PORTION $167,034,000 $165,564,000
------------------------ -----------------------
------------------------ -----------------------
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
DEBT CAPITAL FINANCING TOTAL LONG-
LEASES ARRANGEMENTS TERM DEBT
<S> <C> <C> <C> <C>
1999 $8,976,000 $39,000 $70,000 $9,085,000
2000 8,419,000 53,000 76,000 8,548,000
2001 9,253,000 -- 112,000 9,365,000
2002 16,086,000 -- 94,000 16,180,000
2003 12,035,000 -- 131,000 12,166,000
Thereafter 120,000,000 -- 1,203,000 121,203,000
--------------------- ----------------- -------------------- -------------------
174,769,000 92,000 1,686,000 176,547,000
Less imputed interest -- 8,000 420,000 428,000
--------------------- ----------------- -------------------- -------------------
174,769,000 84,000 1,266,000 176,119,000
Less current portion 8,976,000 39,000 70,000 9,085,000
--------------------- ----------------- -------------------- -------------------
$165,793,000 $45,000 $1,196,000 $167,034,000
--------------------- ----------------- -------------------- -------------------
</TABLE>
SENIOR BANK CREDIT FACILITY
On October 2, 1997, the Company entered into a Credit Facility with a
syndicate of banks (the "Banks"), led by Union Bank and Lehman Brothers which
acted as agent. Pursuant to the Credit Facility, the Banks extended the Company
a two tranche amortizing term loan in the original principal amount of $50
million (the "Term Loan") and established a $35 million revolving line of credit
(the "Revolver") available through October 2, 2002. The Term Loan consists of a
Tranche A term loan in an aggregate principal amount of $35 million, which has a
maturity of five years, and a Tranche B term loan in an aggregate principal
amount of $15 million, which has a maturity of six years. The Term Loan and
Revolver are secured by a lien on substantially all of the real and personal
property of the Company and certain of its subsidiaries and a pledge of capital
stock of certain of its subsidiaries (provided that no lien was or will be
granted on the assets of Foreign Subsidiaries (as defined) and no capital stock
of Foreign Subsidiaries will be pledged to the extent that the granting of such
lien or the making of such pledge would result in materially adverse United
States federal income tax consequences to the Company or would violate
applicable law). The proceeds of the Term Loan and the initial advance under the
Revolver are used by the Company to repay principal and accrued interest under
the Acquisition Financing. Both the Term Loan and the Revolver have interest
rate options including an interest rate based on the Eurodollar Rate plus a
margin of between 2.5% to 3%. Such margins vary depending upon the relationship
between the Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") and the then aggregate total debt outstanding. The
Company is required to pay a fee of 0.375% per annum on the unused portion of
the Revolver. Under the Credit Facility, the Company is required to enter into
arrangements to provide interest protection. See Interest Rate Swap Agreement
Note, under Summary of Significant Accounting Policies. The Credit Facility
contains various restrictive covenants with which the Company must comply. The
more significant covenants relate to: limitations of capital expenditures,
established maximum debt to EBITDA ratios, minimum
F-14
<PAGE>
interest coverage ratios, minimum fixed charge ratios, and limitations on
indebtedness related to capital leases and certain of the Company's
subsidiaries. Effective September 25, 1998, the Company renegotiated the
conditions of its bank agreement. Modification mainly affected the covenant
levels within the agreement. At January 2, 1999 the Company is in compliance
with the debt covenants.
SENIOR SUBORDINATED NOTES
On October 2, 1997, the Company completed a private placement (the
"Senior Notes Offering") of $120 million of its 9.75% Senior Subordinated Notes
due 2007 (the "Notes"). The underwriting discount to the Initial Purchaser was
2.75% of the principal amount of the Senior Notes purchased (or an aggregate of
$3.3 million). The Notes were exchanged in March 1998 for new, substantially
identical Notes, which have been registered under the Securities Act of 1933, as
amended. Interest on the Senior Notes is payable semi-annually on April 1 and
October 1, commencing on April 1, 1998, until maturity on October 1, 2007. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after October 1, 2002 at various premiums to original face value. 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 Guarantors"), all of which are directly or
indirectly wholly owned by the Company. The proceeds from the sale of the Notes,
together with borrowings under the $85 million Credit Facility (see above) and
existing cash are used to repay principal and accrued interest under the
acquisition financing.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at January 2, 1999 and December
31, 1997. FASB Statement No. 107, "Disclosure about Fair Value of Financial
Instruments" defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties.
<TABLE>
<CAPTION>
- ----------------------------- ----------------------------------------------- ----------------------------------------------
JANUARY 2, 1999 DECEMBER 31, 1997
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
FINANCIAL ASSETS:
- ----------------------------- ------------------------ ---------------------- -------------------------- -------------------
<S> <C> <C> <C> <C>
Cash, including cash $902,000 $902,000 $12,471,000 $12,471,000
equivalents
- ----------------------------- ------------------------ ---------------------- -------------------------- -------------------
Accounts and Notes 33,361,000 33,361,000 30,515,000 30,515,000
Receivables
- ----------------------------- ------------------------ ---------------------- -------------------------- -------------------
Financial Liabilities
- ----------------------------- ------------------------ ---------------------- -------------------------- -------------------
Notes Payable 9,898,000 9,898,000 6,597,000 6,597,000
- ----------------------------- ------------------------ ---------------------- -------------------------- -------------------
Trade A/P 20,712,000 20,712,000 17,351,000 17,351,000
- ----------------------------- ------------------------ ---------------------- -------------------------- -------------------
Other Accrued 6,951,000 6,951,000 4,645,000 4,645,000
Liabilities
- ----------------------------- ------------------------ ---------------------- -------------------------- -------------------
Long-term Debt 168,408,000 160,008,000 167,133,000 167,133,000
- ----------------------------- ------------------------ ---------------------- -------------------------- -------------------
</TABLE>
The carrying amounts shown in the table are included in the statement
of financial position under the indicated captions.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash, including cash equivalents, short-term accounts and accounts
receivable, other current assets, notes payable to banks, trade accounts
payables, and other accrued expenses: The carrying amounts approximate fair
value because of short term maturity of those instruments.
Long-term debt: The Senior Subordinated Debt of $120,000,000 under the
Credit Facility is traded on the open market and was valued at the market rate
of $93 for each $100 of carrying value at year end January 2, 1999. A total
discount of $8,400,000 is included above in the fair value of the long-term
debt.
F-15
<PAGE>
The estimated fair values of financial instruments have been determined
based on available market information and appropriate valuation methodologies.
However, considerable judgement is necessary in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company might realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value.
7. OPERATING LEASES
Leases that do not meet the criteria for capitalization are classified
as operating leases with the related expense charged to operations as incurred.
The Company leases manufacturing and office facilities at various locations
under operating leases, which expire at various dates through 2004. Management
expects that in the normal course of business, leases that expire will be
renewed or replaced with comparable leases.
Future minimum lease payments under non-cancelable operating leases
(with initial lease terms in excess of one year) as of January 2, 1999, are as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING:
- ----------------------------------------- --------------------
<S> <C>
1999 $2,005,000
2000 1,984,000
2001 1,881,000
2002 1,505,000
Thereafter 2,147,000
--------------------
$9,522,000
--------------------
</TABLE>
Total rent expense for operating leases was $1,807,000, $1,025,000, and $349,000
for 1998, 1997, and 1996, respectively.
8. EMPLOYEE BENEFITS PLAN
In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 132, "Employers' Disclosure about Pensions and Other Post-Retirement
Benefits." SFAS 132 revises the employers' disclosure about pensions and other
post-retirements benefit plans. Prior years have been restated.
Other long-term liabilities are comprised of the following:
<TABLE>
<CAPTION>
JANUARY, 2 1999 DECEMBER 31,1997
-------------------------- -------------------------
<S> <C> <C>
Post-retirement benefit obligation $1,684,000 $1,527,000
Pension and profit sharing obligations - non-US
employees 1,612,000 1,479,000
-------------------------- -------------------------
Total $3,296,000 $3,006,000
-------------------------- -------------------------
-------------------------- -------------------------
</TABLE>
The Company is currently obligated to provide certain post-retirement
medical and life insurance benefits to approximately 100 employees who have met
certain requirements as to age (generally 55) and length of service (generally
10 years, which includes a minimum of 5 years after January 1, 1995). The
Company accounts for the cost of these benefits in accordance with SFAS No. 106
and funds these costs on a pay-as-you-go basis. The net periodic post-retirement
benefit expense for the years ended January 2, 1999 and December 31, 1997, 1996
was $158,000, $91,000 and $96,000, respectively.
A reconciliation of the funded status of the post-retirement benefit
plan at January 2, 1999 and December 31, 1997 is as follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 31,
1999 1997
------------- --------------
<S> <C> <C>
Change in benefit obligation
Accumulated postretirement benefit obligation (APBO) at beginning of year $ 682,000 $ 440,000
Service cost 228,000 185,000
Interest cost 50,000 31,000
Actuarial losses 100,000 26,000
Benefits paid (2,000) -
------------- --------------
Benefit obligation at end of year $ 1,058,000 $ 682,000
Reconciliation of funded status
APBO - total (1,684,000) $(682,000)
Fair value of assets - -
------------- --------------
Funded status (1,058,000) (682,000)
Unrecognized prior service cost (1,340,000) (1,515,000)
Unrecognized net actuarial loss 714,000 670,000
------------- --------------
Accrued benefit cost $(1,684,000) $(1,527,000)
------------- --------------
------------- --------------
Key assumptions as of measurement date
Discount rate 6.75% 7.00%
Medical trend - valuation year (pre-Medicare/post-Medicare) 7.0% / 7.0% 7.0% / 5.0%
Medical trend - ultimate 5.00% 5.00%
Year ultimate medical trend is reached 2001 2000
Measurement date 12/31/98 12/31/97
Compontents of net periodic benefit cost
Service cost at end of year $ 228,000 $ 185,000
Interest cost 50,000 31,000
Amortization of unrecognized:
Prior service cost (175,000) (175,000)
Net actuarial loss 55,000 50,000
------------- --------------
Net periodic benefit cost $ 158,000 $ 91,000
------------- --------------
------------- --------------
Key assumption as of measurement date
Discount rate 7.00% 7.50%
Medical trend - valuation year (pre-Medicare/ post-Medicare) 7.0% / 5.0% 8.0% / 6.0%
Medical trend - ultimate (beginning year 2000) 5.00% 5.00%
Measurement date 01/01/98 01/01/97
Effect of a 1% change in health care cost assumption
Effect on total of service cost and
interest cost components in fiscal 1998 $ 61,000 $ (49,000)
Effect on benefit obligation (APBO) as of 1/2/99 $ 226,000 $(183,000)
------------- --------------
</TABLE>
Certain non-US employees participate in a statutory profit sharing
plan. The amounts owed to the employees under the profit sharing plan are based
on a formula prescribed by law. The liability for profit sharing was $1,509,208
and $1,194,000 at January 2, 1999 and December 31,1997, respectively.
The Company has recorded a liability amounting to $100,382 and $285,000
as of January 2, 1999 and December 31, 1997, which represents the actuarially
determined pension liability for lump sum payments due to certain non-US
employees at normal retirement age.
F-17
<PAGE>
The Company sponsors an employee savings plan for certain U.S.
employees, which conforms to the provisions of Section 401(k) of the Internal
Revenue Code. The Company also provides certain defined pension benefits (based
on years of service) to certain categories of employees. The Company's
obligation under these plans for 1998 was approximately $80,000. The Company's
obligation under these plans in 1997 and 1996 were not material to the
Consolidated Financial Statements.
9. STOCK OPTION PLANS
In September 1997, in connection with the Acquisition, the Company
assumed the DH Technology, Inc. 1992 Stock Plan (the "1992 Plan") and the
Director Warrant Plan. Under the 1992 Plan, the Board of Directors may grant
incentive stock options to purchase common stock at prices which are not less
than fair market value at the date of grant and non-qualified stock options at
prices which are to be determined by the Compensation Committee of the Board of
Directors. Stock options generally become exercisable in four equal annual
installments commencing one year from the date of grant and expire within either
five or eight years from the date of grant. There is a 1,050,000-share limit on
the number of options and stock appreciation rights (SARs) that may be granted
under the plan to an employee in any fiscal year.
The Company had a Director Warrant Plan (the "Warrant Plan"), however;
all warrants outstanding under the Warrant Plan were purchased from the
directors in connection with the Acquisition. The Company terminated the Warrant
Plan in 1998.
In September 1997, in connection with the Acquisition an officer of the
Company was granted options to purchase 231,118 shares of the Company's Common
Stock at an exercise price of $7.15 per share to replace stock options that were
granted in 1996 and subsequently canceled in connection with the Acquisition.
The fair market value of the Company's common stock was $17 per share on the
date of grant, resulting in compensation expense totaling $2,277,000. The
Company's Consolidated Statement of Operations for the year ended January 2,
1999 and December 31, 1997 includes a $442,000 charge related to the options
that vested in each year.
F-18
<PAGE>
Information with respect to activity under the plans is set forth below:
<TABLE>
<CAPTION>
NUMBER NUMBER OF WEIGHTED
OF SHARES OF OPTIONS/ AVERAGE
AVAILABLE WARRANTS PRICE PER EXERCISE AGGREGATE
FOR GRANT OUTSTANDING SHARE PRICE PRICE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1996 - 250,605 $6.54 $6.54 $1,638,957
Options authorized 231,118
Options/warrants granted (231,118) 231,118 $7.15 $ 7.15 1,652,494
Options acquired in acquisition 421,271 514,160 $11.17-23.75 $16.25 8,356,260
Options/warrants canceled 9,750 (260,355) $6.54-23.50 $6.95 (1,810,752)
Options/warrants exercised - - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 431,021 735,528 $6.54-23.75 $13.37 9,836,959
Options authorized
Options/warrants granted (333,000) 333,000 $8.125-13.125 $11.76 3,915,614
Options/warrants canceled 307,172 (307,172) $11.16-23.75 $16.08 (4,937,820)
Options/warrants exercised - (6,375) $11.16-11.16 $11.16 (71,187)
- ----------------------------------------------------------------------------------------------------------------------------
Balance - January 2, 1999 405,193 754,981 $7.15-23.75 $11.58 $8,743,566
-----------------------------------------------------------------------------------
</TABLE>
Information with respect to options outstanding and exercisable by exercise
price range at January 2, 1999 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------- --------------------------------------
OUTSTANDING EXERCISABLE
- ------------------------------------------------------------------------------------- --------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------------- ------------- --------------------- ---------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
$7.13-9.50 322,118 7.2 $7.43 92,447 $7.15
$9.51-11.87 8,063 3.2 $11.16 8,063 $11.17
$11.88-$14.25 246,875 7.3 $13.14 2,437 $15.48
$14.26-$16.63 114,000 3.5 $15.46 66,000 $15.50
$16.64-$21.38 49,425 3.5 $18.41 30,674 $18.46
$21.39-$24.00 14,500 5.1 $23.75 8,000 $23.75
</TABLE>
At January 2 1999, the number of options exercisable was 207,621, and
the weighted-average exercise price of those options and warrants was $12.35.
The per share weighted-average fair value of stock options and warrants
granted during 1998 and 1997 was $11.76 and $12.23 respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield 0.0%, risk-free
interest rate of 6.50%, stock volatility rate of 73.73%, and an expected life of
6 years; 1997 - expected dividend yield 0.0%, risk-free interest rate of 6.50,
stock volatility rate of 68.44%, and an expected life 8 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have been adjusted to the pro forma amounts
indicated below:
F-19
<PAGE>
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 31, DECEMBER 31,
1999 1997 1996
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income (loss) As reported ($30,937,000) ($39,458,000) 6,804,000
Pro forma ($31,899,000) ($39,888,000) $6,455,000
Earnings per share As reported ($4.75) ($6.06) $1.08
Pro forma ($4.89) ($6.12) $1.03
</TABLE>
Pro forma net income (loss) reflects only options granted in 1998 and
1997. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of 4 years and compensation cost for options granted prior to January 1,
1996 is not considered.
10. GEOGRAPHIC AND INDUSTRY SEGMENT INFORMATION
The following information is presented in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for
reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers.
The Company operates in one industry segment: the design, manufacture,
and distribution of transaction printers and other printer related products.
The Company maintains sales offices in the United States, France,
Germany, the United Kingdom, Australia, Taiwan, China and Japan and also sells
through distributors in 32 countries in order to reach its worldwide customer
base. The following table identifies total revenues by country:
<TABLE>
<CAPTION>
EXTERNAL INTERNAL PERCENTAGE OF
COUNTRY SALES SALES ELIMINATION'S TOTAL TOTAL SALES
------- ----------- ------------ ------------- ----- -----------
<S> <C> <C> <C> <C> <C>
United States $135,464,000 $26,061,000 ($26,061,000) $135,464,000 58.5%
United Kingdom 22,084,000 3,157,000 (3,157,000) 22,084,000 9.6%
Germany 14,568,000 - - 14,568,000 6.3%
All Others 58,895,000 5,143,000 (5,143,000) 58,895,000 25.6%
------------------- ------------------- -------------------- ------------------- --------------------
TOTAL $231,011,000 $34,361,000 ($34,361,000) $231,011,000 100.0%
------------------- ------------------- -------------------- ------------------- --------------------
</TABLE>
Geographic net sales are allocated based on the location of the
customer. All others is inclusive but not limited to sales to: France, Canada,
Brazil/ South America, Australia, Singapore, Sweden, India, New Zealand, China,
Italy, Japan, Poland, Taiwan, Switzerland, Netherlands, Mexico, Argentina, and
Puerto Rico.
CUSTOMER RELATED INFORMATION
Sales to NCR, the Company's largest customer represented 25% and 35%,
respectively, of net sales for the years ended January 2, 1999 and December 31,
1997. No other customer accounted for more than 10% of net sales for the year
ended January 2, 1999 or December 31, 1997. On September 2, 1997, the Company
entered into a three-year contract with NCR (the "NCR Contract"). The NCR
Contract provides that NCR and the Company intend and expect that NCR will
purchase from the Company substantially all of its requirements for transaction
printers of the type manufactured by the Company (the "Covered Products"). In
case there is reason to believe that NCR is purchasing less than 75% of its
requirements for Covered Products from the Company 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.
11. SHAREHOLDERS' EQUITY
On May 14, 1997, the Company declared a cash dividend of $1.8 million
on common stock, which was paid to shareholders of record on May 14, 1997. In
connection with the
F-20
<PAGE>
Share Exchange Offer in October 1997, $12.2 million in cash was paid to the
shareholders of the Company and has been reflected as dividends in the
accompanying consolidated financial statements.
The Company has authorized 1,000,000 shares of no par preferred stock
and 28,500,000 shares of no par common stock. The terms and conditions of the
preferred stock, of which no shares have been issued, are set by the Board of
Directors of the Company.
12. RELATED PARTIES
Axiohm S.A. leases office space from SNC La Noire. SNC La Noire, which
is owned by three directors of the Company, has historically provided and is
expected to continue to provide real estate and office management services to
Axiohm S.A. For the year ended January 2, 1999, the Company paid rent expenses
of $398,000, and management services of $217,000 to SNC La Noire. For the year
ended December 31, 1997 the Company paid $132,000 for rent and $247,000 for
services rendered by SNC La Noire. The terms of such transactions approximate
those of an arm's length transaction with an unrelated party.
The Company purchased from Dardel Technologies, services including
insurance coverage, telecommunications, legal and management assistance and
office management services. These services amounted to $683,000, $991,000 in the
first six months of 1997, and in fiscal year 1996 respectively. In addition,
Dardel Technologies sub-leases to Axiohm S.A. office space that it leases from a
company owned by three directors of Axiohm S.A.R.L. These sub-lease payments to
Dardel Technologies amounted to $216,000 in the first six months of 1997 and
$279,000, in 1996, respectively.
Axiohm provided selling and commercial services to Enerdis S.A., a
subsidiary of Dardel Technologies for an amount of $132,000 in the year ended
December 31, 1996. The terms of such transactions approximate those of an arm's
length transaction with an unrelated party.
In 1996 Axiohm participated in a cash pooling agreement with Dardel
Technologies allowing it to borrow or loan cash as considered necessary. At
December 31, 1996, Axiohm S.A. had an outstanding loan with Dardel Technologies
amounting to $1,832,000, and bearing interest at 6.42% that was recorded in
other current assets. This loan was reimbursed in April 1997 and the cash
pooling agreement has been subsequently terminated. The terms of such
transactions approximate those of an arm's length transaction with an unrelated
party.
13. SUPPLEMENTARY INCOME STATEMENT DISCLOSURE
OTHER INCOME:
The Company recorded insurance proceeds of $ 1.0 million in
compensation for the loss of revenue and commercial damage as other income in
1996.
14. INCOME TAXES
Components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------- ---------------------- ---------------------- ------------------
<S> <C> <C> <C>
United States $(28,983,000) $(41,884,000) $6,934,000
Foreign 1,531,000 8,210,000 4,276,000
---------------------- ---------------------- ------------------
$(27,452,000) $(33,674,000) $11,210,000
---------------------- ---------------------- ------------------
---------------------- ---------------------- ------------------
</TABLE>
F-21
<PAGE>
14. INCOME TAXES (CONTINUED)
The Company's income taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------- --------------------- --------------------- --------------------
<S> <C> <C> <C>
Current income taxes (benefit):
Federal $(420,000) $3,100,000 $2,396,000
State 615,000 670,000 393,000
Foreign 2,285,000 3,796,000 1,159,000
Deferred income taxes (benefit) 1,005,000 (1,782,000) 458,000
--------------------- --------------------- --------------------
Total income taxes $3,485,000 $5,784,000 $4,406,000
--------------------- --------------------- --------------------
--------------------- --------------------- --------------------
</TABLE>
The following table summarizes the difference between the effective income tax
rate and the amount computed by applying the U.S. federal income tax rate of 34%
in 1998, 1997, and 1996 to income before income taxes:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------- --------------- ------------------ -------------------
<S> <C> <C> <C>
Statutory federal income tax rate (34.0%) (34.0%) 36.7%
Effect of tax rate in foreign jurisdictions 1.7% 1.9% 1.1%
Valuation allowance on foreign entities
loss carry forward 0.6% 0.5% -
Tax research credit - (0.6%) -
Effect of permanent differences 44.6% 46.3% -
Effect of internal capital gains - 0.6% -
Effect of tax rate change - 0.5% -
Tax on foreign branch income (1.9%) 0.8% -
State taxes net of federal 1.5% 1.0% -
Non utilized foreign entity loss - - 1.7%
Other, net 0.2% 0.2% (0.2%)
--------------- ------------------ -------------------
EFFECTIVE INCOME TAX RATE 12.7% 17.2% 39.3%
--------------- ------------------ -------------------
</TABLE>
F-22
<PAGE>
The tax effects of significant temporary differences, which comprise deferred
tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, 1999 DECEMBER 31, 1997
- ------------------------------------------------------------------------ -------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $470,000 $453,000
Inventory 2,640,000 2,739,000
Depreciation and amortization 1,379,000 1,335,000
Self insurance 74,000 105,000
Accrued warranty 533,000 426,000
Accrued payroll and vacation 513,000 695,000
Post-retirement benefit obligation 803,000 795,000
Profit sharing 202,000 339,000
Investment grants 455,000 464,000
Stock options 336,000 3,265,000
Operating loss carry forwards 164,000 186,000
Foreign tax credit 2,586,000 -
Other accruals 266,000 -
Other reserves 342,000 -
Covenant not to compete 539,000 -
Debt issuance costs 274,000 -
Other 1,177,000 219,000
-------------------- --------------------
Gross deferred tax assets 12,753,000 11,021,000
Deferred tax valuation allowance (133,000) (154,000)
-------------------- --------------------
12,620,000 10,867,000
-------------------- --------------------
-------------------- --------------------
Deferred tax liabilities:
Long-term tax investment 1,617,000 1,516,000
Depreciation and amortization 1,308,000 -
Allowance for long-term receivable 700,000 538,000
Capital gains 10,000 193,000
Deferred interest 23,000 -
Corporate recruiting / moving 583,000 -
Other 882,000 -
-------------------- --------------------
Total deferred tax liabilities 5,123,000 2,247,000
-------------------- --------------------
Net deferred tax asset $7,497,000 $ 8,620,000
-------------------- --------------------
-------------------- --------------------
Reflected on the accompanying consolidated balance sheet as:
Current deferred tax asset, net $7,664,000 $8,751,000
Non current deferred tax liability, net (167,000) (131,000)
-------------------- --------------------
Net deferred tax asset $7,497,000 $ 8,620,000
-------------------- --------------------
-------------------- --------------------
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1998
and 1997 was $133,000 and $154,000, respectively. The net change in the total
valuation allowance for the years ended January 2, 1999 and December 31,1997 was
a decrease of $22,000 and a decrease of $234,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods, which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences.
F-23
<PAGE>
15. 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.
The condensed consolidating financial information presents condensed
financial statements as of January 2, 1999 and for the year ended January 2,
1999 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 (Axiohm S.A.R.L., Axiohm
Investissements S.A.R.L., Axiohm IPB, Inc., Cognitive L.L.C.,
Cognitive Solutions, Inc., Dardel Technologies E.U.R.L. and
Stadia Colorado Corp.)
c) the Non-Guarantor Subsidiaries (DH Technology Plc, DH
Technology Pty, DH Technologia, Axiohm Ltd. (Hong Kong), and
Axiohm Japan Inc.),
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 as of December 31, 1997 and for the years ended
December 31, 1997 and 1996 of:
a) the Guarantor Subsidiaries which were in existence and were
within the Company's consolidated structure as of December 31,
1996 (Axiohm S.A.R.L. and Axiohm IPB, Inc., but excluding
Dardel Technologies E.U.R.L.),
b) The Non-Guarantor Subsidiaries which were in existence and
were within the Company's consolidated structure as of
December 31, 1996, (Axiohm Ltd. (Hong Kong) and Axiohm Japan
Inc.),
c) elimination entries necessary to consolidate such Guarantor
and Non-Guarantor Subsidiaries, and
d) such Guarantor and Non-Guarantor Subsidiaries on a
consolidated basis.
F-24
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 2, 1999
----------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 4,055 $ (831) $ (3,317) $ 995 $ -- $ 902
RESTRICTED CASH -- -- -- -- -- --
ACCOUNTS RECEIVABLE, NET 10,573 4,255 14,702 3,831 -- 33,361
INVENTORIES 6,438 7,205 15,556 4,665 (654) 33,361
PREPAID EXPENSES AND OTHER CURRENT ASSETS 9,494 826 557 426 173 11,476
INTERCOMPANY (18,753) 2,889 15,538 (4,989) 5,315 --
--------- --------- -------- ------- -------- ---------
TOTAL CURRENT ASSETS 11,807 14,344 43,036 4,928 4,834 78,949
FIXED ASSETS, NET OF ACCUMULATED DEPRECIATION 4,239 4,229 10,650 1,438 -- 20,556
INTANGIBLE ASSETS 59,922 412 3,098 (21) -- 63,411
OTHER ASSETS 6,163 366 2,253 28 -- 8,810
INVESTMENT IN SUBSIDIARIES 45,029 8,752 -- -- (53,781) --
--------- --------- -------- ------- -------- ---------
TOTAL ASSETS $ 127,160 $ 28,103 $ 59,037 $ 6,373 $(48,947) $171,726
--------- --------- -------- ------- -------- ---------
--------- --------- -------- ------- -------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 3,397 $ 6,847 $ 8,679 $ 1,789 $ -- $ 20,712
CURRENT PORTION OF LONG-TERM DEBT 8,839 214 21 11 -- 9,085
CURRENT PORTION OF GOVERNMENT GRANT OBLIGATIONS -- 760 34 19 -- 813
ACCRUED PAYROLL, PAYROLL TAXES AND BENEFITS 1,534 1,912 1,580 341 -- 5,367
ACCRUED EXPENSES 4,578 994 1,199 180 -- 6,951
INCOME TAXES PAYABLE (2,538) (1,462) 4,232 (232) -- --
DEFERRED REVENUE (39) 1,203 746 -- -- 1,910
RABBI TRUST -- -- -- -- -- --
OTHER CURRENT LIABILITIES 3,015 -- -- -- -- 3,015
--------- --------- -------- ------- -------- ---------
TOTAL CURRENT LIABILITIES 18,786 10,468 16,491 2,108 -- 47,853
NON-CURRENT LIABILITIES:
LONG-TERM DEBT 165,376 1,552 18 88 -- 167,034
GOVERNMENT GRANT OBLIGATIONS -- 858 516 -- -- 1,374
OTHER LONG-TERM LIABILITIES -- 1,609 1,687 -- -- 3,296
DEFERRED TAX LIABILITY (2,475) 2,327 315 -- -- 167
--------- --------- -------- ------- -------- ---------
TOTAL LIABILITIES 181,687 16,814 19,027 2,196 -- 219,724
--------- --------- -------- ------- -------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
PREFERRED SHARES, NO PAR VALUE
AUTHORIZED: 1,000,000 SHARES, NONE ISSUED -- -- -- -- -- --
COMMON STOCK 17,567 11,009 -- 505 (4,714) 24,367
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 118 380 -- (416) (235) (153)
RETAINED EARNINGS (ACCUMULATED DEFICIT) (72,212) (100) 40,010 4,088 (43,998) (72,212)
--------- --------- -------- ------- -------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (54,527) 11,289 40,010 4,177 (48,947) (47,998)
--------- --------- -------- ------- -------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $127,160 $ 28,103 $ 59,037 $ 6,373 $(48,947) $ 171,726
--------- --------- -------- ------- -------- ---------
</TABLE>
F-25
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 2, 1999
-----------------------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ---------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 58,324 $ 46,642 $ 134,747 $ 25,659 $ (34,361) $231,011
COST OF NET SALES 37,472 30,785 98,148 20,310 (35,786) 150,929
-------- -------- ---------- --------- ----------- -----------
GROSS MARGIN 20,852 15,857 36,599 5,349 1,425 80,082
OPERATING EXPENSES:
SELLING, GENERAL & ADMINISTRATIVE 11,102 5,271 16,486 4,897 -- 37,756
RESEARCH AND DEVELOPMENT 4,380 3,563 7,319 563 -- 15,825
PLANT CLOSING EXPENSES 1,565 -- -- -- -- 1,565
ACQUISITION RELATED AMORTIZATION 35,470 -- -- -- -- 35,470
-------- -------- ---------- --------- ----------- -----------
TOTAL OPERATING EXPENSES 52,517 8,834 23,805 5,460 -- 90,616
-------- -------- ---------- --------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (31,665) 7,023 12,794 (111) 1,425 (10,534)
INTEREST AND OTHER INCOME 9,776 (1,129) (4,456) (577) (3,436) 178
INTEREST AND OTHER EXPENSE 15,460 5,088 13 18 (3,483) 17,096
EQUITY EARNINGS IN SUBSIDIARIES 3,932 -- -- -- (3,932) --
-------- -------- ---------- --------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (33,417) 806 8,325 (706) (2,460) (27,452)
INCOME TAXES (2,480) 2,586 2,913 (158) 624 3,485
-------- -------- ---------- --------- ----------- -----------
NET INCOME (LOSS) $ (30,937) $ (1,780) $ 5,412 $ (548) $ (3,084) $(30,937)
-------- -------- ---------- --------- ----------- -----------
</TABLE>
F-26
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 2, 1999
---------------------------------------------------------------------
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 $ (7,835) $ 297 $ 11,443 $ 95 $ 141 $ 4,141
CASHFLOWS FROM INVESTING ACTIVITIES:
PAYMENT FOR ACQUISITION OF BUSINESS AND OTHER
INTANGIBLES (4,308) (443) (1,729) -- -- (6,480)
CAPITAL EXPENDITURES AND OTHER (2,366) (1,516) (1,322) (228) -- (5,432)
-------- ------- -------- ------- ------ --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (6,674) (1,959) (3,051) (228) -- (11,912)
CASHFLOWS FROM FINANCING ACTIVITIES:
NET BORROWINGS UNDER LINE OF CREDIT 8,124 -- -- -- -- 8,124
PRINCIPAL REPAYMENTS UNDER LONG TERM DEBT (3,571) (126) (43) -- -- (3,740)
EXERCISE OF STOCK OPTIONS 73 -- -- -- -- 73
-------- ------- -------- ------- ------ --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,626 (126) (43) -- -- 4,457
EFFECT OF EXCHANGE RATE CHANGES ON CASH 78 819 -- (417) (141) 339
-------- ------- -------- ------- ------ --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (9,805) (969) 8,349 (550) -- (2,975)
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 $ 4,055 $ (831) $ (3,317) $ 995 $ -- $ 902
-------- ------- -------- ------- ------ --------
</TABLE>
F-27
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED 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
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 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 $ 169,289 $ 25,822 $ 48,252 $ 6,409 $ (45,728) $ 204,044
---------- ---------- ---------- --------- ----------- ---------
</TABLE>
F-28
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 20,304 $ 15,242 $ 113,807 $ 9,657 $ (5,262) $153,748
COST OF NET SALES 14,405 (1,291) 87,008 7,715 (5,237) 102,600
--------- ------- ------- ---- -------- --------
GROSS MARGIN 5,899 16,533 26,799 1,942 (25) 51,148
OPERATING EXPENSES:
SELLING, GENERAL & ADMINISTRATIVE 2,527 5,431 9,555 1,626 -- 19,139
RESEARCH AND DEVELOPMENT 1,351 3,235 5,290 157 -- 10,033
IN-PROCESS TECHNOLOGY 34,236 -- -- -- -- 34,236
INTANGIBLE AMORTIZATION 11,299 (99) 274 -- -- 11,474
--------- ------- ------- ---- -------- --------
TOTAL OPERATING EXPENSES 49,413 8,567 15,119 1,783 -- 74,882
--------- ------- ------- ---- -------- --------
INCOME (LOSS) FROM OPERATIONS (43,514) 7,966 11,680 159 (25) (23,734)
INTEREST AND OTHER INCOME 1,540 158 112 57 (1,282) 585
INTEREST EXPENSE (8,749) (2,632) (348) (78) 1,282 (10,525)
EQUITY EARNINGS IN SUBSIDIARIES 9,835 -- (9,835) --
--------- ------- ------- ---- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (40,888) 5,492 11,444 138 (9,860) (33,674)
PROVISION FOR INCOME TAXES (1,430) 2,608 4,576 55 (25) 5,784
--------- ------- ------- ---- -------- --------
NET INCOME (LOSS) $ (39,458) $ 2,884 $ 6,868 $ 83 $ (9,835) $(39,458)
--------- ------- ------- ---- -------- --------
</TABLE>
F-29
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR
PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------ -- ------------ ------------ ------------
CASHFLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,395 18,309 (4,579) (847) -- 16,278
CASHFLOWS FROM INVESTING ACTIVITIES:
PAYMENT FOR ACQUISITION OF BUSINESS
AND OTHER INTANGIBLES (147,995) (552) -- -- (148,547)
CAPITAL EXPENDITURES AND OTHER (556) (1,591) (3,605) (230) -- (5,982)
------- -------- -------- -------- -------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (148,551) (2,143) (3,605) (230) -- (154,529)
CASHFLOWS FROM FINANCING ACTIVITIES:
NET REPAYMENT UNDER LINE OF CREDIT 149 -- (1,260) (16) -- (1,127)
PROCEEDS FROM MERGER FINANCING 172,000 -- 172,000
PRINCIPAL REPAYMENTS UNDER LONG-TERM
DEBT (4,285) (494) (3,826) (593) -- (9,198)
PROCEEDS FROM GOVERNMENT GRANT
OBLIGATIONS -- -- 550 -- -- 550
REPAYMENT UNDER GOVERNMENT GRANT
OBLIGATIONS -- (612) -- -- -- (612)
DEBT ISSUANCE COSTS (8,137) -- -- -- -- (8,137)
PAYMENT OF DIVIDENDS (12,198) (1,768) -- -- -- (13,966)
MERGER COSTS 2,023 -- (2,023) -- -- -
LOANS (TO)/FROM RELATED PARTIES -- (1,135) 2,848 -- -- 1,713
------- -------- -------- -------- -------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 149,552 (4,009) (3,711) (609) -- 141,223
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS (225) (666) -- (43) -- (934)
------- -------- ---------- -------- -------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 4,171 11,491 (11,895) (1,729) -- 2,038
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR -- 1,494 230 115 -- 1,839
------- -------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 4,171 $ 12,985 $(11,665) $ (1,614) $ -- $ 3,877
------- -------- -------- -------- -------- ---------
</TABLE>
F-30
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR
FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ -- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,494 $ 230 $ 115 $ 1,839
Accounts receivable, net 6,223 4,035 294 10,552
Inventories 5,198 8,613 89 13,900
Prepaid expenses and other current assets 806 3,487 59 (1,066) 3,286
----- ----- -- ------
Total current assets 13,721 16,365 557 (1,066) 29,577
Fixed assets, net of accumulated depreciation 3,725 7,488 22 11,235
Other assets 7,606 3,348 20 (7,808) 3,166
----- ----- -- ------ -----
Total assets $ 25,052 $ 27,201 $ 599 $ (8,874) $ 43,978
-------- -------- ----- -------- --------
-------- -------- ----- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 5,233 1,834 413 7,480
Current portion of long-term debt 312 1,077 17 1,406
Current portion of government grant obligations 916 916
Accrued payroll, payroll taxes and benefits -- --
Accrued expenses -- --
Income taxes payable -- --
Deferred revenue -- --
Rabbi Trust -- --
Other current liabilities 1,121 4,539 1,109 (1,066) 5,703
-------- -------- ----- -------- --------
TOTAL CURRENT LIABILITIES 6,666 8,366 1,539 (1,066) 15,505
Non-current liabilities:
Long-term debt 2,288 4,076 6,364
Government grant obligations 1,846 -- 1,846
Other long-term liabilities 2,621 1,208 1 3,830
-------- -------- ----- -------- --------
TOTAL LIABILITIES 13,421 13,650 1,540 (1,066) 27,545
-------- -------- ----- -------- --------
Shareholders' equity (deficit):
Common stock 4,167 7,500 308 (7,808) 4,167
Foreign currency translation adjustment 8 -- 109 117
Retained earnings (accumulated deficit) 7,456 6,051 (1,358) 12,149
-------- -------- ----- -------- --------
Total shareholders' equity (deficit) 11,631 13,551 (941) (7,808) 16,433
-------- -------- ----- -------- --------
Total liabilities and shareholders' equity $ 25,052 $ 27,201 $ 599 $ (8,874) $ 43,978
-------- -------- ----- -------- --------
</TABLE>
F-31
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
------------------------ NON-GUARANTOR
FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ -- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 21,465 $ 73,625 $ 1,310 $ (1,098) $ 95,302
Cost of net sales 10,162 56,128 1,198 (1,098) 66,390
------ ------ ----- ------ ------
Gross margin 11,303 17,497 112 - 28,912
Operating expenses:
Selling, general & administrative 4,639 5,817 557 -- 11,013
Research and development 2,781 3,867 -- -- 6,648
Goodwill amortization - 200 -- -- 200
------ ------ ----- ------ ------
Total operating expenses 7,420 9,884 557 -- 17,861
------ ------ ----- ------ ------
Income (loss) from operations 3,883 7,613 (445) -- 11,051
Interest (expense)/income, net (201) (616) (57) -- (874)
Other income 1,095 (62) -- 1,033
------ ------ ----- ------ ------
Income (loss) before income taxes 4,777 6,935 (502) -- 11,210
Provision for income taxes (1,734) (2,670) (2) (4,406)
------ ------ ----- ------ ------
Net income (loss) $ 3,043 $ 4,265 $ (504) $ -- $ 6,804
------ ------ ----- ------ ------
</TABLE>
F-32
<PAGE>
AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------
GUARANTOR SUBSIDIARIES
---------------------- NON-GUARANTOR
FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ -- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cashflows from operating activities:
Net cash provided by (used in) operating activities $ 6,983 $ 5,110 $ (356) $ -- $ 11,737
------- ------- ------ ------ --------
Cashflows from investing activities:
------- ------- ------ ------ --------
Net cash provided by (used in) investing activities (1,006) (1,983) (8) -- (2,997)
------- ------- ------ ------ --------
Cashflows from financing activities:
Net cash provided by (used in) financing activities (4,778) (3,354) 469 -- (7,663)
Effect of foreign exchange rate changes on cash
and cash equivalents 126 -- -- -- 126
------- ------- ------ ------ --------
Net increase in cash and cash equivalents 1,325 (227) 105 -- 1,203
Cash and cash equivalents at beginning of year 169 457 10 -- 636
------- ------- ------ ------ --------
Cash and cash equivalents at end of year $ 1,494 $ 230 $ 115 $ -- $ 1,839
------- ------- ------ ------ --------
</TABLE>
F-33
<PAGE>
16. RESTRUCTURING RESERVE
As part of a restructuring program designed to streamline operations
and improve manufacturing efficiencies, the Company indicated that it
would incur approximately $6 million of costs to fully implement this
plan. This final program was the result of an assessment that began at
the time of the acquisition of DH Technology. During the 2nd quarter of
1998, the Company recorded approximately $3.0 million in additional
goodwill relating primarily to severance and relocation charges
associated with the restructuring of the Riverton, Wyoming and Paso
Robles, California manufacturing facilities. Through January 2, 1999, the
Company has incurred $296,000 in charges against the reserve. The balance
is expected to be incurred until the manufacturing locations are closed.
The Company also recorded $1.6 million in expenses during the year ended
January 2, 1999, 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 staying bonuses to be paid to
employees upon completion of integration duties.
17. LEGAL PROCEEDINGS
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. The New York action has been stayed pending resolution of the
California action, in which discovery is presently being conducted.
The Company strongly believes that its position is meritorious, and
that Mr. Newmark's claims are without merit. However, there can be no
assurance that the Company will ultimately prevail in the suits with
Mr. Newmark.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTERS ENDED IN FISCAL 1998
---------------------------------------------------------------
April 4, July 4, October 3, January 2,
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenue 57,069 58,617 59,038 56,286
Gross margin 20,074 21,533 20,505 17,970
Loss before income taxes (5,561) (4,860) (7,390) (9,641)
Net loss (6,736) (6,286) (8,450) (9,465)
Basic and diluted net loss
per share (1.03) (0.96) (1.30) (1.45)
Shares used in per share calculation 6,517 6,519 6,519 6,519
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED IN 1997
---------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenue 24,891 31,724 42,943 54,190
Gross margin 7,567 10,246 14,767 18,568
Income (loss) before income taxes 2,724 5,468 (49,206) 7,340
Net Income (loss) 1,625 3,355 (51,478) 7,040
Basic and diluted net income (loss)
per share 0.25 0.52 (7.90) 1.08
Shares used in per share calculation 6,513 6,513 6,513 6,513
</TABLE>
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of Axiohm Transaction
Solutions, Inc.
Under date of March 16, 1999, we reported on the consolidated balance
sheets of Axiohm Transaction Solutions, Inc. and subsidiaries as of
January 2, 1999 and December 31, 1997, and the related consolidated
statements of earnings, retained earnings, and cash flows for the
years then ended. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related
consolidated financial statement schedule, as of January 2, 1999 and
December 31, 1997 as listed in the accompanying index (Item 14). This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our Opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth
therein.
KPMG LLP
Philadelphia, Pennsylvania
March 16,1999
F-35
<PAGE>
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS 1998, 1997 AND 1996
Description
<TABLE>
<CAPTION>
Beginning Charge to Recoveries Ending
Allowance for Doubtful Accounts Balance Cost / Expense (deductions) Balance
- ------------------------------- ------- -------------- ------------ -------
<S> <C> <C> <C> <C>
1998 205,000 222,000 35,000 462,000
1997 139,000 49,000 17,000 205,000
1996 139,000 110,000 (110,000) 139,000
</TABLE>
F-36
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities 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: /s/ Walter S. Sobon
--------------------------------
Walter S. Sobon
CHIEF FINANCIAL OFFICER
Date: March 25, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Walter S. Sobon, as attorneys-in-fact, with the
power of substitution, for each other in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her respective substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Nicolas Dourassoff Chief Executive Officer, Director March 25, 1999
- -------------------------------------------
Nicolas Dourassoff
/s/ Patrick Dupuy* Co-Chairman of the Board March 25, 1999
- -------------------------------------------
Patrick Dupuy
/s/ Gilles Gibier* Co-Chairman of the Board March 25, 1999
- -------------------------------------------
Gilles Gibier
/s/ Walter S. Sobon Chief Financial Officer March 25, 1999
- -------------------------------------------
Walter S. Sobon
/s/ Carmen Conicelli Corporate Controller March 25, 1999
Chief Accounting Officer
- -------------------------------------------
Carmen Conicelli
/s/ William H. Gibbs* Director March 25, 1999
- -------------------------------------------
William H. Gibbs
/s/ Don M. Lyle* Director March 25, 1999
- -------------------------------------------
Don M. Lyle
March 25, 1999
* /s/ Walter S. Sobon
- -------------------------------------------
Walter S. Sobon
ATTORNEY-IN-FACT
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Axiohm Transaction Solutions, Inc.
We consent to the incorporation by reference in the registration
statements (Nos. 33-5110; 33-29911; 33-50532; 333-58507 and 33-75798) on
Form S-8 and the registration statement No. 333-52371 on Form S-3 of Axiohm
Transaction Solutions, Inc. and subsidiaries, of our report dated March 16,
1999, relating to the consolidated balance sheets of Axiohm Transaction
Solutions, Inc. and subsidiaries as of January 2, 1999, and December 31, 1997
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the years then ended, which report appears in
the January 2, 1999 annual report on Form 10-K of Axiohm Transaction
Solutions, Inc.
We also consent to the use of our report on the financial statement
schedule as of January 2, 1999 and December 31, 1997 included herein.
KPMG LLP
Philadelphia, PA
March 26, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (Nos. 333-04299, 333-58507 and 33-50532
and the Registration Statement No. 333-52371 on Form S-3) of Axiohm
Transaction Solutions, Inc. of our report dated September 12, 1997 relating
to the consolidated financial statements of Axiohm S.A. appearing on page F-2
of this Form 10-K.
PricewaterhouseCoopers
Paris, France
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> JAN-02-1999
<CASH> 902
<SECURITIES> 0
<RECEIVABLES> 33,823
<ALLOWANCES> 462
<INVENTORY> 33,210
<CURRENT-ASSETS> 78,949
<PP&E> 38,237
<DEPRECIATION> 17,681
<TOTAL-ASSETS> 171,726
<CURRENT-LIABILITIES> 47,853
<BONDS> 0
0
0
<COMMON> 24,367
<OTHER-SE> 72,365
<TOTAL-LIABILITY-AND-EQUITY> 171,726
<SALES> 231,011
<TOTAL-REVENUES> 231,011
<CGS> 150,929
<TOTAL-COSTS> 241,545
<OTHER-EXPENSES> (178)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,096
<INCOME-PRETAX> (27,452)
<INCOME-TAX> 3,485
<INCOME-CONTINUING> (30,937)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,937)
<EPS-PRIMARY> (4.75)
<EPS-DILUTED> (4.75)
</TABLE>
