-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IpbWymTHrqlLATauJLWoY50ImzYyhOV8l4shiFVthaHWi9xsKqnXpNClKqR2iJyG z41DBMkuRQHMeXVnxc8WQg== 0001047469-98-040188.txt : 19981202 0001047469-98-040188.hdr.sgml : 19981202 ACCESSION NUMBER: 0001047469-98-040188 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXIOHM TRANSACTION SOLUTIONS INC CENTRAL INDEX KEY: 0000728376 STANDARD INDUSTRIAL CLASSIFICATION: 3679 IRS NUMBER: 942917470 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13459 FILM NUMBER: 98744496 BUSINESS ADDRESS: STREET 1: 16 SENTRY PARK WEST, SUITE 450 STREET 2: 1787 SENTRY PARKWAY WEST CITY: BLUE BELL STATE: PA ZIP: 19422 BUSINESS PHONE: 2155910940 MAIL ADDRESS: STREET 1: 16 SENTRY PARK WEST, SUITE 450 STREET 2: 1787 SENTRY PARKWAY WEST CITY: BLUE BELL STATE: PA ZIP: 19422 FORMER COMPANY: FORMER CONFORMED NAME: DH TECHNOLOGY INC DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1998, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO _________ COMMISSION FILE NUMBER: 0-13459 AXIOHM TRANSACTION SOLUTIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-2917470 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 16 SENTRY PARK WEST, SUITE 450 1787 SENTRY PARKWAY WEST BLUE BELL, PA 19422 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 591-0940 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES XXX NO --- --- AS OF NOVEMBER 9, 1998, THERE WERE 6,519,301 SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING. AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES INDEX
PART I. FINANCIAL INFORMATION PAGE NO. ITEM 1 - FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS 1 OCTOBER 3, 1998 AND DECEMBER 31, 1997 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 30, 1997 2 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 30, 1997 3 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 PART II. OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS 23 SIGNATURES 24 EXHIBITS INDEX 25
PART 1 - FINANCIAL INFORMATION ITEM 1 - Financial Statements AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except share data)
October 3, December 31, 1998 1997 ---------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents 1,919 3,877 Restricted cash -- 8,594 Accounts receivable, net 36,652 30,515 Inventories 31,997 30,103 Prepaid expenses and other current assets 12,518 11,015 ------- ------- Total current assets 83,086 84,104 Fixed assets, net of accumulated depreciation 21,760 21,535 Intangible assets 72,483 92,371 Other assets 7,806 6,034 ------- ------- Total assets 185,135 204,044 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable 18,892 17,351 Current portion of long-term debt 6,901 5,948 Current portion of government grant obligations 884 649 Accrued payroll, payroll taxes and benefits 6,930 6,194 Accrued expenses 6,671 4,645 Income taxes payable 276 1,937 Deferred revenue 2,121 2,056 Rabbi Trust -- 8,594 Other current liabilities 298 4,481 ------- ------- Total current liabilities 42,973 51,855 Non-current liabilities: Long-term debt 175,181 165,564 Government grant obligations 1,334 1,569 Other long-term liabilities 4,053 3,137 ------- ------- Total liabilities 223,541 222,125 ------- ------- Shareholders' equity (deficit): Preferred shares, no par value Authorized: 1,000,000 shares, none issued -- -- Common shares: Common stock, authorized: 28,500,000 shares; issued and outstanding: 6,519,301 shares in 1998 and 6,513,301 in 1997 24,257 23,852 Comprehensive Income 86 (658) Accumulated deficit (62,749) (41,275) ------- ------- Total shareholders' equity (deficit) (38,406) (18,081) ------- ------- Total liabilities and shareholders' equity (deficit) 185,135 204,044 ------- ------- ------- -------
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 1 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In thousands, except per share data)
Three Months Ended Nine Months Ended October 3, September 30, October 3, September 30, 1998 1997 1998 1997 --------------------------------- --------------------------------- (Unaudited) (Unaudited) Net sales $59,038 $ 42,943 $174,725 $ 99,558 Cost of net sales 38,533 28,176 112,613 66,978 ------- -------- -------- -------- Gross margin 20,505 14,767 62,112 32,580 Operating expenses: Selling, general and administrative 10,024 5,285 28,306 10,984 Research and development 3,869 2,575 11,825 6,198 Plant closing expenses 799 -- 799 -- In-process technology -- 50,831 -- 50,831 Acquisition related intangible amortization 8,970 2,894 25,892 2,894 ------- -------- -------- -------- Total operating expenses 23,662 61,585 66,822 70,907 ------- -------- -------- -------- Loss from operations (3,157) (46,818) (4,710) (38,327) Interest and other income 100 327 230 390 Interest and other expense 4,333 2,715 13,333 3,077 ------- -------- -------- -------- Loss before income taxes (7,390) (49,206) (17,813) (41,014) ------- -------- -------- -------- Income taxes 1,060 2,272 3,661 5,484 ------- -------- -------- -------- Net loss ($8,450) ($51,478) ($21,474) ($46,498) ------- -------- -------- -------- ------- -------- -------- -------- Basic and diluted: Net loss per share $(1.30) $(7.90) $(3.29) $(7.14) Shares used in per share calculation 6,519 6,513 6,519 6,513
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 2 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands)
Nine Months Ended October 3, September 30, 1998 1997 ----------- ------------- (Unaudited) (Unaudited) Cashflows from operating activities: Net loss ($21,474) ($46,498) Adjustments to reconcile net loss to net cash provided by (used in) operations: Write off of acquired in-process technology -- 50,831 Depreciation and amortization 30,978 5,369 Other non-cash items 332 450 Changes in assets and liabilities, net of effects of acquisition of business: Accounts receivable (6,137) (8,909) Inventories (1,894) (1,323) Accounts payable and accrued expenses (162) 3,962 Other current assets (1,503) 4,819 Other current liabilities (4,183) -- -------- --------- Net cash provided (used in) by operating activities (4,043) 8,701 Cashflows from investing activities: Payment for acquisition of business, net of cash acquired (5,647) (148,074) Capital expenditures and other (4,571) (3,670) -------- --------- Net cash used in investing activities (10,218) (151,744) Cashflows from financing activities: Proceeds from tender financing -- 186,979 Net borrowings under line of credit 14,029 (1,051) Principal repayments under long term debt (2,543) (5,000) Exercise of Stock Options 73 -- Payments of dividends -- (1,768) Debt issuance costs -- (2,799) Net loans to related parties -- 1,713 -------- --------- Net cash provided by financing activities 11,559 178,074 Effect of exchange rate changes on cash 744 (622) -------- --------- Net increase (decrease) in cash and cash equivalents (1,958) 34,409 Cash and cash equivalents at beginning of period 3,877 1,839 -------- --------- Cash and cash equivalents at end of period $ 1,919 $ 36,248 -------- --------- -------- --------- Supplemental Cashflow Disclosures: Cash paid during the year for: Interest $ 15,489 $ 488 Income taxes $ 5,192 $ 4,723 Schedule of non-cash investing and financing activities: Fair value of assets acquired, net of cash acquired $ 5,647 $ 134,480 In-process technology -- $ 50,831 Liabilities assumed -- ($17,995) Fair value of non-tendered stock -- ($19,242) -------- --------- Cash paid, net of cash acquired $ 5,647 $ 148,074
The accompanying notes are an integral part of these condensed consolidated financial statements Page 3 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (OCTOBER 3, 1998 - UNAUDITED) NOTE 1: UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended October 3, 1998 are not necessarily indicative of the results which may be expected for the year ending January 2, 1999 or any other period. Reference is made to the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 31, 1998 as amended on April 15, 1998. In May 1998, Axiohm Transaction Solutions, Inc. (the "Company") changed its fiscal year from the twelve-month period ended December 31 to the 52 or 53-week period that ends on the Saturday nearest December 31, effective for fiscal year 1998. As a result, the Company's third quarter of 1998 represents the thirteen-week period ended on October 3, 1998, the nine-month period represents the thirty-nine week and three day period ended on October 3, 1998 and the Company's 1998 fiscal year will end on January 2, 1999. Fiscal year 1998 will have fifty-three weeks. The quarter ended September 30, 1997, contained 13 weeks and the nine-month period ended September 30, 1997 contained 39 weeks. The difference between the comparable periods is not material in terms of sales and net loss. NOTE 2: BASIS OF PRESENTATION The financial statements of the Company include the accounts of its wholly owned subsidiaries in the United States, France, Mexico, the United Kingdom, Australia, Hong Kong and Japan. All intercompany accounts and transactions have been eliminated. On August 21, 1997, pursuant to an Agreement and Plan of Merger dated as of July 14, 1997 (the "Agreement of Merger"), AX Acquisition Corporation ("AX" or the "Purchaser"), an indirect wholly-owned subsidiary of Axiohm S.A., a private French Corporation, acquired approximately 88%, or 7,000,000 shares, of the outstanding Common Stock of DH Technology, Inc. ("DH") through a public tender offer to the shareholders of DH at a price of $25 per share (the "Tender Offer"). On October 2, 1997, pursuant to the Agreement of Merger, AX acquired, directly or indirectly, 100% of the outstanding Common Stock of Axiohm S.A. in exchange for 5,518,524 shares of DH Common Stock and $12.2 million in cash (the "Share Exchange Offer"). Simultaneously with the Share Exchange Offer, DH purchased all of the outstanding shares of AX in exchange for the assumption of approximately $190 million of debt (the "Acquisition Financing") incurred by AX to finance the Tender Offer. As part of the Acquisition Financing the Company completed a private placement (the "Senior Notes Offering") of $120 million of its 9.75% Senior Subordinated Notes due 2007. The notes were exchanged in March 1998 for new, substantially identical notes, which have been registered under the Securities Act of 1933, as amended (the "Notes"). The Company's payment obligation under the Notes is jointly and severally fully and unconditionally guaranteed on a senior subordinated basis by certain of the Company's subsidiaries (the "Guarantor Subsidiaries"), all of which are directly or indirectly wholly owned by the Company. Immediately after the Share Exchange Offer, AX was merged with and into DH (the "Merger"), the surviving legal entity, and the company changed its name from "DH Technology, Inc." to "Axiohm Transaction Solutions, Inc.". In connection with the Merger, Axiohm S.A. changed its tax filing status and was renamed Axiohm S.A.R.L. Immediately after the Merger, approximately 85% of DH's outstanding Common Stock were held by the former shareholders of Axiohm S.A.R.L. and approximately 15% were held by the former public shareholders of DH. Page 4 The Tender Offer, the Share Exchange Offer and the Merger (collectively the "Acquisition") have been accounted for in a manner similar to a reverse acquisition, in which Axiohm S.A.R.L. was treated as the acquirer for accounting purposes. Accordingly, the historical financial information for periods prior to August 31, 1997 is that of Axiohm S.A.R.L. The effective date of the Acquisition and Merger of DH for accounting purposes was August 31, 1997, and, accordingly, the capital structure of the Company has been retroactively restated to reflect the number of shares and options outstanding as a result of the Acquisition. NOTE 3: INVENTORIES The composition of inventories at October 3, 1998 and December 31, 1997 was as follows:
October 3, 1998 December 31, 1997 --------------- ----------------- Raw materials $23,374,000 $20,014,000 Work in process 2,473,000 2,328,000 Finished goods 6,150,000 7,761,000 ----------- ----------- Total Inventories $31,997,000 $30,103,000 ----------- ----------- ----------- -----------
NOTE 4: COMPREHENSIVE INCOME In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 requires the disclosure of comprehensive income to reflect changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income for the nine months ended October 3, 1998 and September 30, 1997 presented below includes foreign currency translation items. There was no tax expense or tax benefit associated with the foreign currency translation items.
October 3, 1998 September 30, 1997 --------------- ------------------ Net loss (21,474) ($46,498) Foreign currency translation adjustments 744 (622) Comprehensive loss ($20,730) ($47,120) -------- -------- -------- --------
NOTE 5: GUARANTORS AND FINANCIAL INFORMATION The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Separate financial statements and other disclosures with respect to the Guarantor Subsidiaries are not presented because the Company believes that such financial statements and other information would not provide additional information that is material to investors. There are no contractual restrictions, under the Notes or otherwise, upon the ability of the Guarantor Subsidiaries to make distributions or pay dividends to their respective equity-holders. Directly or indirectly, the Company is the sole equity-holder of all of the Guarantor Subsidiaries. The Company's payment obligation under the Notes is jointly and severally fully and unconditionally guaranteed on a senior subordinated basis by the Guarantor Subsidiaries, all of which are directly or indirectly wholly owned by the Company. Page 5 The condensed consolidating financial information presents condensed financial statements as of October 3, 1998 and December 31, 1997 and for the nine month period ended October 3, 1998 of: a) the Company on a parent company only basis ("Parent") (carrying its investments in the subsidiaries under the equity method), b) the Guarantor Subsidiaries separated as to French Guarantors (Axiohm S.A.R.L., Dardel Technologies E.U.R.L., Axiohm Investissements S.A.R.L.), and U.S. Guarantors (Axiohm IPB, Inc., Cognitive L.L.C., Cognitive Solutions, Inc., and Stadia Colorado Corp.), c) the Non-Guarantor Subsidiaries (DH Technology Plc, DH Technology Pty, DH Technologia, Axiohm Ltd. (Hong Kong), Axiohm Japan Inc. and AP Print S.A.R.L), d) elimination entries necessary to consolidate the Parent Company and its subsidiaries, and e) the Company on a consolidated basis. The condensed consolidating financial information also presents condensed financial statements for the nine-month period ended September 30, 1997. a) the Company on a parent company only basis ("Parent") (carrying its investments in the subsidiaries under the equity method), b) the Guarantor Subsidiaries separated as to French Guarantors (Axiohm S.A.R.L., Dardel Technologies E.U.R.L., Axiohm Investissements S.A.R.L.), and U.S. Guarantors (Axiohm IPB, Inc., Cognitive L.L.C., Cognitive Solutions, Inc., and Stadia Colorado Corp.), c) the Non-Guarantor Subsidiaries (DH Technology Plc, DH Technology Pty, DH Technologia, Axiohm Ltd. (Hong Kong), Axiohm Japan Inc. d) elimination entries necessary to consolidate the Parent Company and its subsidiaries, and e) the Company on a consolidated basis. Page 6 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET (IN THOUSANDS)
OCTOBER 3, 1998 (UNAUDITED) ------------------------------------------------------------------------------------ GUARANTOR SUBSIDIARIES -------------------- NON-GUARANTOR PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------- ------- ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 4,321 $ (237) $(3,235) $ 1,070 $ -- $ 1,919 Accounts receivable, net 9,717 3,823 19,156 3,956 -- 36,652 Inventories 7,446 6,675 14,581 3,978 (683) 31,997 Prepaid expenses and other current assets 9,975 1,412 436 496 199 12,518 Intercompany (7,910) (3,230) 11,832 (3,029) 2,337 -- -------- ------- ------- ------- -------- -------- Total current assets 23,549 8,443 42,770 6,471 1,853 83,086 Fixed assets, net of accumulated depreciation 4,073 4,368 11,767 1,552 -- 21,760 Intangible assets 69,119 459 2,955 (50) -- 72,483 Other assets 5,770 482 1,482 72 -- 7,806 Investment in Subsidiaries 45,029 8,752 -- -- (53,781) -- -------- ------- ------- ------- -------- -------- Total assets $147,540 $22,504 $58,974 $ 8,045 $(51,928) $185,135 -------- ------- ------- ------- -------- -------- -------- ------- ------- ------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable 3,484 4,974 8,523 1,911 -- 18,892 Current portion of long-term debt 6,650 229 20 2 -- 6,901 Current portion of government grant obligations (1) 865 -- 20 -- 884 Accrued payroll, payroll taxes and benefits 2,783 1,821 1,931 395 -- 6,930 Accrued expenses 4,914 354 1,216 187 -- 6,671 Income taxes payable (3,704) 399 3,244 337 -- 276 Deferred revenue 192 1,232 697 -- -- 2,121 Other current liabilities 297 1 -- -- -- 298 -------- ------- ------- ------- -------- -------- Total current liabilities 14,615 9,875 15,631 2,852 -- 42,973 Non-current liabilities: Long-term debt 173,411 1,633 24 113 -- 175,181 Government grant obligations -- 784 550 -- -- 1,334 Other long-term liabilities -- 2,106 1,646 -- -- 3,752 Deferred tax liability (2,168) 2,154 315 -- -- 301 -------- ------- ------- ------- -------- -------- Total liabilities 185,858 16,552 18,166 2,965 -- 223,541 -------- ------- ------- ------- -------- -------- Shareholders' equity (deficit): Common stock 24,257 4,167 -- 505 (4,672) 24,257 Comprehensive Income 174 580 -- (95) (573) 86 Retained earnings (accumulated deficit) (62,749) 1,205 40,808 4,670 (46,683) (62,749) -------- ------- ------- ------- -------- -------- Total shareholders' equity (deficit) (38,318) 5,952 40,808 5,080 (51,928) (38,406) -------- ------- ------- ------- -------- -------- Total liabilities and shareholders' equity (deficit) $147,540 $22,504 $58,974 $ 8,045 $(51,928) $185,135 -------- ------- ------- ------- -------- -------- -------- ------- ------- ------- -------- --------
Page 7 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (IN THOUSANDS)
NINE MONTHS ENDED OCTOBER 3, 1998 (UNAUDITED) ------------------------------------------------------------------------------------ GUARANTOR SUBSIDIARIES --------------------- NON-GUARANTOR PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------- -------- ------------ ------------ ------------ Net Sales $ 46,575 $34,903 $100,368 $17,353 $(24,474) $174,725 Cost of net sales 30,922 22,057 72,008 13,461 (25,835) 112,613 -------- ------- -------- ------- -------- -------- Gross margin 15,653 12,846 28,360 3,892 1,361 62,112 Operating expenses: Selling, general & administrative 8,708 4,108 12,134 3,356 -- 28,306 Research and development 3,236 2,629 5,538 422 -- 11,825 Plant closing expenses 799 -- -- -- -- 799 Acquisition related intangible amortization 25,892 -- -- -- -- 25,892 -------- ------- -------- ------- -------- -------- Total operating expenses 38,635 6,737 17,672 3,778 -- 66,822 -------- ------- -------- ------- -------- -------- Income (loss) from operations (22,982) 6,109 10,688 114 1,361 (4,710) Interest and other income 3,980 51 12 105 (3,918) 230 Interest and other expense 12,975 4,043 208 18 (3,911) 13,333 Equity earnings in subsidiaries 6,541 -- -- -- (6,541) -- -------- ------- -------- ------- -------- -------- Income (loss) before income taxes (25,436) 2,117 10,492 201 (5,187) (17,813) Income taxes (benefit) (3,963) 2,592 4,283 167 582 3,661 -------- ------- -------- ------- -------- -------- Net income (loss) $(21,473) $ (475) $ 6,209 $ 34 $ (5,769) $(21,474) -------- ------- -------- ------- -------- -------- -------- ------- -------- ------- -------- --------
Page 8 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED OCTOBER 3, 1998 (UNAUDITED) ------------------------------------------------------------------------------------ GUARANTOR SUBSIDIARIES --------------------- NON-GUARANTOR PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------- -------- ------------ ------------ ------------ Cashflows from operating activities: Net cash provided by (used in) operating activities $(15,962) $ 678 $ 11,207 $ (356) $ 390 $ (4,043) Cashflows from investing activities: Payment for acquisition of business and other intangibles (3,929) (733) (934) (51) -- (5,647) Capital expenditures and other (1,443) (1,314) (1,842) 28 -- (4,571) -------- ------- -------- ------ ----- -------- Net cash provided by (used in) investing activities (5,372) (2,047) (2,776) (23) -- (10,218) Cashflows from financing activities: Net borrowings under line of credit 14,029 -- -- -- -- 14,029 Principal repayments under long term debt (2,400) (143) -- -- -- (2,543) Exercise of stock options 73 -- -- -- -- 73 -------- ------- -------- ------ ----- -------- Net cash provided by (used in) financing activities 11,702 (143) -- -- -- 11,559 Effect of exchange rate changes on cash 93 1,137 -- (96) (390) 744 -------- ------- -------- ------ ----- -------- Net increase in cash and cash equivalents (9,539) (375) 8,431 (475) -- (1,958) Cash and cash equivalents at beginning of period 13,860 138 (11,666) 1,545 -- 3,877 -------- ------- -------- ------ ----- -------- Cash and cash equivalents at end of period $ 4,321 $ (237) $ (3,235) $1,070 $ -- $ 1,919 -------- ------- -------- ------ ----- -------- -------- ------- -------- ------ ----- --------
Page 9 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 1997 ------------------------------------------------------------------------------------ GUARANTOR SUBSIDIARIES ------------------------ NON-GUARANTOR PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- --------- -------- ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 13,860 $ 138 $(11,666) $ 1,545 $ -- $ 3,877 Restricted cash 8,594 -- -- -- -- 8,594 Accounts receivable, net 10,388 3,760 15,209 3,099 (1,941) 30,515 Inventories 3,611 4,995 17,140 4,600 (243) 30,103 Prepaid expenses and other current assets 4,235 9,759 437 (3,316) (100) 11,015 Intercompany (14,259) 2,612 11,514 (1,761) 1,894 -- ------------ ------------ ------------ ----------- ---------- ----------- Total current assets 26,429 21,264 32,634 4,167 (390) 84,104 Fixed assets, net of accumulated depreciation 3,847 4,052 11,679 1,957 -- 21,535 Intangible assets 88,555 93 3,521 202 -- 92,371 Other assets 5,428 413 418 83 (308) 6,034 Investment in Subsidiaries 45,030 -- -- -- (45,030) -- ------------ ------------ ------------ ----------- ---------- ----------- Total assets $169,289 $25,822 $ 48,252 $ 6,409 $(45,728) $204,044 ------------ ------------ ------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable 2,511 6,569 6,767 1,504 -- 17,351 Current portion of long-term debt 5,689 227 32 -- -- 5,948 Current portion of government grant obligations -- 649 -- -- -- 649 Accrued payroll, payroll taxes and benefits 689 3,558 1,947 -- -- 6,194 Accrued expenses 1,620 1,196 2,113 (284) -- 4,645 Income taxes payable 1,937 174 (174) -- -- 1,937 Deferred revenue 416 1,121 519 -- -- 2,056 Rabbi Trust 8,594 -- -- -- -- 8,594 Other current liabilities 4,481 -- -- -- -- 4,481 ------------ ------------ ------------ ----------- ---------- ----------- Total current liabilities 25,937 13,494 11,204 1,220 -- 51,855 Non-current liabilities: Long-term debt 162,903 2,014 600 47 -- 165,564 Government grant obligations -- 1,569 -- -- -- 1,569 Other long-term liabilities (2,168) 3,455 1,850 -- -- 3,137 ------------ ------------ ------------ ----------- ---------- ----------- Total liabilities 186,672 20,532 13,654 1,267 -- 222,125 ------------ ------------ ------------ ----------- ---------- ----------- Shareholders' equity (deficit): Common stock 23,852 4,167 -- 360 (4,527) 23,852 Comprehensive Income 40 (557) -- 2 (143) (658) Retained earnings (accumulated deficit) (41,275) 1,680 34,598 4,780 (41,058) (41,275) ------------ ------------ ------------ ----------- ---------- ----------- Total shareholders' equity (deficit) (17,383) 5,290 34,598 5,142 (45,728) (18,081) ------------ ------------ ------------ ----------- ---------- ----------- Total liabilities and shareholders' equity (deficit) $169,289 $25,822 $48,252 $6,409 $(45,728) $204,044 ------------ ------------ ------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------- -----------
Page 10 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) ------------------------------------------------------------------------------------- GUARANTOR SUBSIDIARIES ---------------------- NON-GUARANTOR PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------ ---- ------------ ------------ ------------ Net Sales $ 6,166 $ 33,558 $ 80,230 $ 4,040 $ (24,436) $ 99,558 Cost of net sales 4,160 20,968 61,531 3,415 (23,096) 66,978 -------- -------- -------- ------- --------- -------- Gross margin 2,006 12,590 18,699 625 (1,340) 32,580 Operating expenses: Selling, general & administrative 3,457 3,683 5,716 730 292 13,878 Research and development 322 2,371 3,513 44 (52) 6,198 In-process technology 50,831 -- -- -- -- 50,831 -------- -------- -------- ------- --------- -------- Total operating expenses 54,610 6,054 9,229 774 240 70,907 -------- -------- -------- ------- --------- -------- Income (loss) from operations (52,604) 6,536 9,470 (149) (1,580) (38,327) Interest and other income 284 151 (62) 17 -- 390 Interest and other expense 3,588 161 (673) 1 -- 3,077 Equity earnings in subsidiaries 9,209 -- -- -- (9,209) -- -------- -------- -------- ------- --------- -------- Income (loss) before income taxes (46,699) 6,526 10,081 (133) (10,789) (41,014) Income taxes (benefit) (201) 2,862 3,530 (51) (656) 5,484 -------- -------- -------- ------- --------- -------- Net income (loss) $(46,498) $ 3,664 $ 6,551 $ (82) $ (10,133) $(46,498) -------- -------- -------- ------- --------- -------- -------- -------- -------- ------- --------- --------
Page 11 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) ------------------------------------------------------------------------------------- GUARANTOR SUBSIDIARIES ---------------------- NON-GUARANTOR PARENT FRENCH US SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------ ---- ------------ ------------ ------------ Cashflows from operating activities: Net cash provided by (used in) operating activities 4,169 7,313 (669) (1,997) (115) 8,701 Cashflows from investing activities: Payment for acquisition of business and other intangibles (147,522) -- (552) -- -- (148,074) Capital expenditures and other (15) (1,494) (2,161) -- -- (3,670) --------- -------- --------- ------- ----- --------- Net cash provided by (used in) investing activities (147,537) (1,494) (2,713) -- -- (151,744) Cashflows from financing activities: Proceeds from tender financing 186,979 -- -- -- -- 186,979 Net repayment under line of credit -- 157 (1,174) (34) -- (1,051) Principal repayments under long term debt -- (1,102) (3,892) (6) -- (5,000) Payments of dividends -- (1,768) -- -- -- (1,768) Debt issuance costs (1,050) -- (1,749) -- -- (2,799) Net loans to related parties (728) 712 (745) 2,474 -- 1,713 --------- -------- --------- ------- ----- --------- Net cash provided by (used in) financing activities 185,201 (2,001) (7,560) 2,434 -- 178,074 Effect of exchange rate changes on cash (682) (601) 546 -- 115 (622) --------- -------- --------- ------- ----- --------- Net increase in cash and cash equivalents 41,151 3,217 (10,396) 437 -- 34,409 Cash and cash equivalents at beginning of period -- 1,494 230 115 -- 1,839 Cash and cash equivalents at end of period $ 41,151 $ 4,711 $ (10,166) 552 $ -- $ 36,248 --------- -------- --------- ------- ----- --------- --------- -------- --------- ------- ----- --------- Page 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included herein. BACKGROUND The Company was formed from the combination of Axiohm S.A. a French corporation ("Axiohm") and DH Technology, Inc. ("DH"). On August 21, 1997, AX Acquisition Corporation, an indirect wholly-owned subsidiary of Axiohm ("Purchaser"), acquired 7,000,000 shares of the Common Stock of DH (approximately 88%) through a tender offer to the shareholders of DH ("the Tender Offer"), resulting in a change in control of DH. On October 2, 1997, the Purchaser exchanged 5,518,524 shares of the Common Stock it had acquired in the Tender Offer and approximately $12.2 million in cash for certain of the outstanding shares of capital stock of Axiohm and all of the outstanding shares of capital stock of Dardel Technologies S.A. ("Dardel"), which held the remaining shares of capital stock of Axiohm. Immediately after this exchange, DH purchased from Axiohm IPB all of Purchaser's outstanding capital stock in exchange for the assumption by DH of the obligations incurred in financing the Tender Offer. Purchaser was then merged with and into DH (the "Merger"), and the remaining 1,481,476 shares of DH's Common Stock acquired in the Tender Offer and held by Purchaser at the time of the Merger were canceled in the Merger. Simultaneously, DH changed its name to Axiohm Transaction Solutions, Inc. The aggregate initial purchase price of $209.1 million consisted of cash for DH shares and stock options, transaction costs and the fair value of DH shares not tendered. The above transactions were financed with (i) borrowings of approximately $57.0 million, under a new $85 million credit facility that provides term loans in the aggregate principal amount of $50.0 million (the "Term Loan Facility), and revolving loans and letters of credit of up to $35.0 million (the "Revolving Credit Facility", and together with the Term Loan Facility, the "New Credit Facility") (ii) the proceeds of the Offering of $120,000,000 of its 9 3/4% Senior Subordinated Notes due in 2007, which were exchanged in March 1998 for equivalent notes which have been registered under the Securities Act (the "Notes"). Although DH was the surviving legal entity, the transaction was accounted for as a purchase of DH by Axiohm. For the third quarter of 1997 and first nine months of 1997, the following discussion includes the complete results of operations of Axiohm, and one month of DH for comparative purposes. While the effective date of the Merger was October 2, 1997 for legal purposes, the effective date of the acquisition of DH for accounting purposes was August 31, 1997. In connection with the foregoing transactions, the Company recorded approximately $102.1 million of goodwill and other intangibles which is being amortized over three years using the straight line method, which is the period estimated to be benefited. On July 28, 1998 the Company announced a major restructuring program designed to streamline operations and improve manufacturing efficiencies. As part of this program, the Company will consolidate its Paso Robles, California and Riverton, Wyoming manufacturing operations principally into its Ithaca, New York manufacturing operation. The Company expects that these actions will result in the reduction of approximately 200 jobs in the closing locations and the addition of approximately 100 jobs in Ithaca, New York. This final program is a result of an assessment that began at the time of the acquisition of DH Technology. The Company expects that when the consolidation moves are completed by late 1999, pre-tax operating costs will be reduced by approximately $3.5 million a year. The Company expects to incur approximately $6 million of costs to fully implement the plan by the end of 1999, of which approximately $3 million was recorded in the second quarter of 1998 as an adjustment of the purchase price of DH Technology, Inc. thereby increasing goodwill and other intangibles from $102.1 million to $105 million. The company was reorganized into two divisions during the third quarter of 1998: transaction products, based in Blue Bell, Pennsylvania and identification products, based in Denver, Colorado. Transaction products account for approximately 85-90% of the revenue of the business and identification products Page 13 represent the balance of the revenue of the business. This reorganization was undertaken to better serve customer needs. RESULTS OF OPERATIONS THREE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 NET SALES. Net Sales of $59.0 million for the third quarter of 1998 increased 37.5%, or $16.1 million, compared to net sales of $42.9 million for the same period last year. Slightly more than 85% of the increase was the result of the inclusion of sales of DH; the balance was due to growth in the existing business which reflects increased unit volume of transaction printers and printer mechanisms partially offset by a decline in average selling prices. COST OF NET SALES. Cost of net sales of $38.5 million remained relatively constant at 65.3% of net sales for the third quarter of 1998 compared to 65.6% of net sales for the same period of 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and administrative expenses of $10.0 million increased to 17.0% of net sales in the third quarter of 1998 from 12.3% in the same period in 1997. The majority of the increase was due to the inclusion of expenses of DH and costs related to the acquisition of DH; the balance was primarily the result of higher staffing levels and expenses needed to support higher sales. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses as a percentage of net sales increased to 6.6% in the third quarter of 1998 compared to 6.0% in the third quarter of 1997. Total dollars expended for research and development increased $1.3 million to $3.9 million in the third quarter of 1998 compared to $2.6 million in the third quarter of 1997 primarily due to the inclusion of expenses of DH. In addition, the Company believes that continued timely development of new products and enhancements to existing products are essential to maintaining the Company's competitive position. Accordingly, the Company anticipates that such expenses will continue to increase in absolute dollar terms for the foreseeable future. PLANT CLOSING EXPENSES. The Company recorded $0.8 million in expenses in the third quarter of 1998, relating to the relocation of operations from the Paso Robles, California and Riverton, Wyoming facilities to the company's Ithaca, New York facility, primarily for the accrual of bonuses to be paid to employees upon completion of integration duties. ACQUISITION RELATED INTANGIBLE AMORTIZATION. The Company anticipates that, on a quarterly basis through the third quarter of 2000, operating expenses will include approximately $8.9 million in non-cash acquisition related charges which principally includes non-cash intangibles amortization. LOSS FROM OPERATIONS. Loss from operations for the third quarter of 1998 was $3.2 million, compared to a loss from operations of $46.8 million in the same period for 1997. The loss from operations in the third quarter of 1998 was primarily due to the acquisition related amortization charges discussed above. The loss in the third quarter 1997 was due primarily to the one time charge of $50.8 million for in-process technology, relating to the acquisition. INTEREST AND OTHER EXPENSE. Interest expense increased to $4.3 million in the third quarter of 1998 from $2.7 million for the same period in 1997. This was primarily due to higher average outstanding debt balances, couple with longer outstanding periods related to the New Credit Facility and Notes. INCOME TAXES. Provision for income taxes of $1.1 million in the third quarter of 1998 decreased $1.2 million from $2.3 million in 1997. Although the company reported a loss before income taxes, a provision for income taxes was recorded because goodwill amortization was not deductible for income tax purposes. In addition the company pays income taxes in foreign countries, principally France, on income earned in those countries. Income taxes as a percentage of income before taxes, excluding the effect of acquisition related charges, was approximately 45.0% in 1998 compared to 46.0% in 1997, and 39% in Page 14 the second quarter of 1998. The increase from the second quarter is the result of higher than anticipated pretax income outside the United States. NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 NET SALES. Net Sales of $174.7 million for the first nine months of 1998 increased 75.5%, or $75.2 million, compared to net sales of $99.6 million for the same period last year. Approximately 80% of the increase was the result of the inclusion of sales of DH since the acquisition; the balance was due to growth in the existing business which reflects increased unit volume of transaction printers and printer mechanisms partially offset by a decline in average selling prices. COST OF NET SALES. Cost of net sales of $112.6 million decreased to 64.5% of net sales for the first nine months of 1998 from 67.3% of net sales for the same period of 1997, due primarily to the following four factors: a favorable impact of the exchange rate between the U.S. dollar and the French franc for products manufactured in France and sold in the U.S.; lower purchase prices of components and parts; continuing technology improvements; and higher absorption of relatively fixed overhead costs partially offset by a decrease in average selling prices. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and administrative expenses of $28.3 million increased to 16.2% of net sales in the first nine months of 1998 from 11.0% in the same period in 1997. The vast majority of the increase was due to the inclusion of expenses of DH and costs related to the acquisition of DH; the balance was primarily the result of recruiting, severance and other expenses needed to support higher sales. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses as a percentage of net sales increased to 6.8% in the first nine months of 1998 compared to 6.2% in the first nine months of 1997. Total dollars expended for research and development increased $5.6 million to $11.8 million in the first nine months of 1998 compared to $6.2 million in the same period of 1997 primarily due to the inclusion of expenses of DH. PLANT CLOSING EXPENSES. The Company recorded $0.8 million in expenses in the first nine months of 1998, relating to the relocation of operations from the Paso Robles, California and Riverton, Wyoming facilities to the company's Ithaca, New York facility, primarily for the accrual of bonuses to be paid to employees upon completion of integration duties. ACQUISITION RELATED INTANGIBLE AMORTIZATION. The Company anticipates that, on a quarterly basis through the third quarter of 2000, operating expenses will include approximately $8.9 million in non-cash acquisition related charges which principally includes non-cash intangible amortization. LOSS FROM OPERATIONS. Loss from operations for the first nine months of 1998 was $4.7 million, compared to a loss from operations of $38.3 million in the same period for 1997. The loss from operations in the first nine months of 1998 was primarily due to the acquisition related amortization charges discussed above. The loss in 1997 is inclusive of a one-time charge of $50.8 for in-process technology. INTEREST AND OTHER EXPENSE. Interest expense increased to $13.3 million in the first nine months of 1998 from $3.1 million for the same period in 1997 due to interest payments on the New Credit Facility and Notes. INCOME TAXES. Provision for income taxes of $3.7 million in the first nine months of 1998 decreased $1.8 million from $5.5 million in 1997. Although the company reported a loss before income taxes, a provision for income tax was recorded because goodwill amortization was not deductible for federal income tax purposes. In addition the company pays income taxes in foreign countries, principally France, where historically the tax rate is higher than that of the U.S., on income earned in those countries. Income taxes as a percentage of income before taxes, excluding the effect of acquisition related charges, was approximately 44.8% for 1998 compared to 41.8% for 1997. Page 15 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS The risk factors set forth below are important factors that may affect future results and that could cause actual results to differ materially from those projected in forward-looking statements that may be made by the Company from time to time, including the forward-looking statements included in this report. SUBSTANTIAL LEVERAGE AND DEBT SERVICE. On October 3, 1998, the Company's total debt (net of cash) was $182.4 million and the Company had a shareholders' deficit of $38.4 million. Required principal payments under the New Credit Facility and Notes (excluding the Revolver) are as follows: $0.8 million remaining in 1998; $7.8 million in 1999; $7.8 million in 2000; $9.1 million in 2001; $5.6 million in 2002; $12.25 million in 2003; and $120.0 million in 2007. In 1998, it is anticipated that capital expenditures will not exceed the limit of $10.5 million permitted under the New Credit Facility. The Company's ability to make scheduled payments of principal, or to pay the premium, if any, interest or liquidated damages, if any, thereon, or to refinance its indebtedness, or to fund planned capital expenditures, will depend upon its future performance, which, in turn, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. There can be no assurance that the Company's business will generate cash flow at or above anticipated levels or that the Company will be able to borrow funds under the New Credit Facility in an amount sufficient to enable the Company to service its indebtedness or make anticipated capital expenditures. If the Company is unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service its debt, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing indebtedness or obtain additional financing. There can be no assurance that any such refinancing would be available on commercially reasonable terms, or at all, or that any additional financing could be obtained, particularly in view of the Company's high level of indebtedness, the restrictions on the Company's ability to incur additional indebtedness under the New Credit Facility and the indenture under which the Notes were issued (the "Indenture"), and the fact that substantially all of the Company's and its subsidiaries' assets have been pledged to secure obligations under the New Credit Facility. In addition, the Indenture and the New Credit Facility contain financial and other restrictive covenants that limit, among other things, the ability of the Company to borrow additional funds. Failure by the Company to comply with such covenants could result in events of default under the Indenture and the New Credit Facility which, if not cured or waived, could permit the indebtedness thereunder to be accelerated which would have a material adverse effect on the Company's business, financial condition and results of operations. FUTURE OPERATING RESULTS SUBJECT TO FLUCTUATION. The Company's operating results may fluctuate in the future as a result of a number of factors, including the timing of customer orders, timing of completion of existing customer contracts, variations in the Company's sales channels or the mix of products it sells, changes in pricing policies by the Company's suppliers, fluctuations in manufacturing yields, market acceptance of new and enhanced versions of the Company's products and the timing of acquisitions of other businesses, products and technologies and any associated charges to earnings. In addition, the Company periodically evaluates the possible impairment of goodwill to determine whether events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Further, the Company's expense levels are based in part on expectations of future revenues. If anticipated sales and shipments in any quarter do not occur when expected, operating expenses and inventory levels could be disproportionately high and the Company's operating results for that quarter, and potentially for future quarters, would be adversely affected. The Company's operating results could also be affected by general economic conditions. Fluctuations in operating results are likely to cause volatility in the price of the Company's Common Stock. Axiohm has historically experienced, and the Company expects to continue to experience, relatively lower levels of sales of existing point of sale transaction printers during the period from mid-November to the end of December primarily in the United States. The Company believes that this seasonality has been caused by the fact that some of its POS customers do not install new systems in their facilities between Thanksgiving and Christmas, so as not to disturb their sales flow during this heavy selling period. The Company's customers encounter uncertain and changing demand for their products. They typically Page 16 order products from the Company based on their forecasts. If demand falls below customers' forecasts, or if customers do not control their inventories effectively, they may cancel or reschedule shipments previously ordered from the Company. The Company has in the past experienced, and may at any time and with minimal notice in the future experience, cancellations and postponements of orders. DEPENDENCE ON PRINCIPAL CUSTOMER. Sales to NCR Corporation ("NCR"), the Company's largest customer, for the nine months ended October 3, 1998 were 25% of total revenue. Net sales for the years ended December 31, 1997 and 1996 were 35% and 52% respectively. No other customer accounted for more than 10% of net sales for the year ended December 31, 1996 or December 31, 1997. On September 2, 1997, Axiohm IPB entered into a three-year contract with NCR (the "NCR Contract"). The NCR Contract provides that NCR and Axiohm IPB intend and expect that NCR will purchase from Axiohm IPB substantially all of its requirements for transaction printers of the type manufactured by Axiohm IPB (the "Covered Products"). In case there is reason to believe that NCR is purchasing less than 75% of its requirements for Covered Products from Axiohm IPB at any time during the term of the agreement, there is an obligation for both parties to work together in good faith to eliminate such deficiency. The NCR Contract provides that NCR's purchase commitment is subject to Axiohm IPB's ability to meet NCR's specifications and requirements for price, performance, quality, service and delivery with respect to such Covered Products. Any failure by NCR to continue purchasing products from the Company at historical levels or the termination of the NCR Contract would have a material adverse effect on the Company's business, financial condition and operating results. Sales of certain products in 1998 not covered by its contract with NCR are expected to approximate 1997's level of approximately 5% of combined pro-forma revenues assuming companies were combined from January 1st, of $212 million, and the Company does not anticipate significant revenue from these products in 1999. In the second quarter Solectron Corp. was assigned the NCR business as part of the sale of certain NCR manufacturing operations to Solectron Corp. and is expected to be the Company's largest customer in 1998. The company currently expects that this assignment will not have a material adverse impact on its financial position or results of operations. COMPETITION. The Company has a number of significant domestic and foreign competitors for its transaction printer, bar code printer and card reader products. Many of the Company's competitors have significantly greater financial, technical and marketing resources than does the Company. To remain competitive, the Company believes that it will be required to maintain a high level of technological expertise and deliver reliable cost-effective products on a timely basis. There can be no assurance that the Company will have sufficient resources to continue to make the investments necessary to maintain its competitive position or that other competitors with substantially greater financial resources, including other manufacturers of non-transaction printers, will not attempt to enter the market. A failure to remain competitive would have a material adverse effect on the Company's business, financial condition and results of operations. INTEGRATION OF OPERATIONS. The integration of the administrative, finance and manufacturing operations of Axiohm and DH, the coordination of their respective sales and marketing staffs and the implementation of appropriate operational, financial and management systems and controls will require significant financial resources and substantial attention from management. During the second quarter of 1998, as part of the strategy to achieve purchasing, manufacturing and other synergies begun with the acquisition of DH, the Company finalized its plan to consolidate two of its manufacturing operations principally into its Ithaca, New York manufacturing operation as discussed above. The Company expects to incur $6 million in costs through 1999 related to consolidation of these two facilities and expects to realize annual savings of approximately $3.5 million by the end of 1999. The company recorded $3 million in additional goodwill in the second quarter related to the closure of the two former DH manufacturing operations. Any inability of the Company to integrate these operations successfully in a timely and efficient manner could have a material adverse effect on the Company's business, financial condition and results of operations and would adversely affect its ability to realize its planned cost savings or would require additional expenditures to realize such cost savings. In addition, even if the businesses of Axiohm and DH are successfully integrated, no assurance can be given that future expenses can be reduced by the expected cost savings. The Company's prospects should be considered in light of the numerous risks commonly encountered in business combinations. In addition, the historical financial statements presented in this Report may not necessarily be indicative of the results that would have been attained had the Company actually operated on a combined basis. Page 17 TECHNOLOGICAL CHANGE; COMPETITION; DEPENDENCE ON NEW PRODUCTS. The markets for some of the Company's products are characterized by frequent new product introductions and declining average selling prices over product life cycles. The Company's future success is highly dependent upon the timely completion and introduction of new products at competitive price/performance levels. In addition, the Company must respond to current competitors, who may choose to increase their presence in the Company's markets, and to new competitors, who may choose to enter those markets. If the Company is unable to make timely introduction of new products or respond to competitive threats, its business and operating results could be materially adversely affected. INTERNATIONAL SALES AND OPERATIONS. The Company expects that international sales will continue to represent a significant portion of its net sales. Although the Company's net sales are denominated in U.S. dollars, its international business may be affected by changes in demand resulting from fluctuations in exchange rates as well as by risks such as tariff regulations and difficulties in obtaining export licenses. In addition, historically the French operations of Axiohm S.A.R.L. have incurred a majority of Axiohm S.A.R.L.'s expenses in French francs, while a substantial majority of Axiohm S.A.R.L.'s revenues have been in U.S. dollars. Any material appreciation in the French franc relative to the U.S. dollar would, absent any effects associated with hedging or currency trading transactions, detrimentally affect the financial performance of the Company's French operations. The Company attempts to limit its exposure to French franc currency fluctuation compared to the U.S. dollar by entering into various financial instruments, including forward exchange contracts, to offset its French franc denominated expenses with associated U.S. dollar denominated revenue, if, in the opinion of the Company, to do so would mitigate foreign exchange losses. The forward exchange contracts the Company has entered into are marked to market, with any exchange gains or losses and associated costs recognized in the income statement. The Company cannot predict the effect of exchange rate fluctuations upon future operating results. INTELLECTUAL PROPERTY RIGHTS. The Company holds various U.S. and foreign patents on impact printheads, transaction printers, magnetic card readers and bar code products and has applied for additional domestic and foreign patents. The basic technology for many of the Company's products is based upon these patents and on manufacturing expertise. There can be no assurance that any issued patents will provide the Company with competitive advantages or will not be challenged by third parties, or that the patents of others will not have a material adverse effect on the Company's ability to do business, or that others will not independently develop similar products, duplicate the Company's products, or design around the patents issued to the Company. The Company has in the past been, and may in the future be, notified that it may be infringing intellectual property rights possessed by third parties. In addition, the Company has in the past commenced, and may in the future, commence litigation against third parties for infringement of the Company's intellectual property rights. Any such litigation initiated by the Company or by others is, at a minimum, costly, and can divert the efforts and attention of the Company's management and technical personnel, which can have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, there can be no assurance that other infringement claims by third parties or other claims for indemnification by customers or end-users of the Company's products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not have a material adverse effect on the Company's business, financial condition and results of operations. If any such claims are asserted against the Company, the Company may seek to obtain a license under the third party's intellectual property rights. There can be no assurance, however, that a license will be available on commercially reasonable terms, if at all. The Company could decide, in the alternative, to resort to litigation to challenge such claims or to design around the patented technology. Such actions could be costly and would divert the efforts and attention of the Company's management and technical personnel, which could have a material adverse effect on the Company's business, financial condition and results of operations. Page 18 MANAGEMENT OF FUTURE ACQUISITIONS. Historically, the Company has achieved a portion of its growth through acquisitions of other businesses, and the Company intends to pursue additional acquisitions as part of its growth strategy. There are a number of risks associated with any acquisition, including the substantial time and attention required from management of the Company in connection with such transactions, the difficulty of predicting whether the operations will perform as expected and other problems inherent with any transition of one business organization into another. There can be no assurance that the Company will be able to consummate any beneficial acquisitions in the future or that the anticipated benefits of any acquisition will be realized. If any such acquisitions are consummated, a failure by the Company to manage any such acquisitions successfully could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, there may be future acquisitions that could result in potentially dilutive issuance of equity securities, the occurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets associated with the acquisitions of other businesses, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. FUTURE SALE OF AXIOHM EXCHANGE SHARES. In May 1998, the Company registered with the SEC an aggregate of 5,515,858 shares of Common Stock held by the former shareholders of Axiohm S.A.R.L. and Dardel for sale by such shareholders from time to time in the open market or in private transactions. Such sales, or the potential for such sales, could have a material adverse effect on the market price for the Company's Common Stock. YEAR 2000 COMPLIANCE. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. YEAR 2000-STATE OF READINESS The Company recognizes the need for addressing the "Year 2000" issue and has developed an oversight committee to ensure compliance prior to December 31, 1999. Representatives from each operating location, both domestic and international, have been identified and assigned the task of evaluating the state of readiness of each respective location. In addition, the Company has recently employed a Chief Information Officer to oversee the Company's Year 2000 compliance issues. Information systems ("IT") which are considered to be non-compliant are expected to be modified or replaced with systems that are Year 2000 compliant. Similar actions are being taken with respect to non-IT systems, primarily those systems embedded in equipment and systems used in manufacturing and other facilities. In addition, the teams have been given the responsibility of determining the state of readiness of customers and vendors and other third parties that may have a material impact on the Company, and develop contingency plans where necessary. The Company thus far has primarily used, and expects to continue to primarily use, internal resources to implement its readiness plan and to upgrade or replace systems affected by the Year 2000 issue. As part of the Company's Year 2000 project, the Company has completed the awareness phase of all IT and non-IT systems pertaining to the Year 2000 issue. The Company has completed its initial evaluation of current computer systems hardware, including software and embedded technologies. Evaluation of IT systems is approximately 75% complete and is expected to be 100% complete during the fourth quarter of 1998. The Company expects to begin and complete its evaluation of the "state of readiness" of both vendors and customers with a material relationship during the fourth quarter 1998. The following table summarizes the current status of the Company's position in addressing Year 2000 issues. Page 19
- - ------------------------------------------------------------------ % PROJECT COMPLETION DATE PHASE COMPLETED DURING THE QTR. ENDING - - ------------------------------------------------------------------ Awareness 100% - - ------------------------------------------------------------------ Evaluation 75% 3/31/99 - - ------------------------------------------------------------------ Renovation 50% 6/30/99 - - ------------------------------------------------------------------ Validation 50% 9/30/99 - - ------------------------------------------------------------------ Implementation 50% 12/31/99 - - ------------------------------------------------------------------
Based on the evaluation process thus far, the Company has identified the primarily non-compliant issue to reside within the company's accounting and manufacturing software. The Company has purchased the necessary hardware and software and is currently in the process of implementing firm wide an Oracle based enterprise resource planning system ("ERP"). To date, Version 10.6 has been implemented in several locations. Although Version 10.6 does not fully address Year 2000 requirements, the Company believes that Oracle ERP Version 10.7 does. Such Version 10.7 has already been released by Oracle, and the Company has begun testing and implementation with those divisions currently working with 10.6. The Company anticipates 75% completion of the Oracle conversion by second quarter 1999, and 100% completion to be achieved by the third quarter 1999. Failure to implement Oracle ERP Version 10.7 or some other form of enterprise software that addresses Year 2000 requirements prior to the year 2000 might result in significant difficulties in the Company's administration of invoicing and payables and other processes. Such difficulties could have a material adverse effect on the Company's business, financial condition and results of operations. While the Company has not completed its evaluation of non-IT systems, it is believed that such items which are not Year 2000 compliant can easily be remedied through the purchase of "over the counter" products. A material effect on the company's performance is not expected. YEAR 2000-COSTS TO ADDRESS ISSUES Incremental costs associated with Year 2000 compliance are expected to approximate $3.0 million through December 31, 1999. Of which, the Oracle conversion is expected to be the largest portion totaling $2.0 million. Through October 3, 1998, the company has spent $1.0 million associated with the Oracle conversion or 50% of the total. This estimate assumes that the Company will not incur significant costs associated with Year 2000 compliance on behalf of vendors, customers or other third parties. YEAR 2000-RISKS OF ISSUES The Company's failure to resolve Year 2000 issues on or before December 31, 1999 could result in systems failure or miscalculations causing disruptions in operations, including a temporary inability to process transactions, send invoices, or engage in normal business activities. Such failures could materially and adversely affect the liquidity and financial performance of the company. Dependent on the readiness of suppliers, delays in supplies could directly correlate to reduced shipments and lost sales. In addition, a similar result can be suggested, in the event major customers do not meet Year 2000 compliance. YEAR 2000-CONTINGENCY PLAN The Company has not, to date, implemented a contingency plan regarding Year 2000 non-compliance. It is the Company's goal to have the foundation developed by the first quarter 1999. A completed plan is to be achieved by the end of the second quarter 1999. The Company believes that in-house problems can be addressed through the use of alternative resources and manual processes. However, due to the uncertainty of third party factors, the Company believes a detailed contingency plan is needed. The costs and timetables in which the Company plans to complete the Year 2000 readiness activities, as well as potential outcomes of non-compliance are based on management's best estimates. These estimates were derived using numerous assumptions of future events including continuing factors. Page 20 Evaluation of Year 2000 issues is a continuous process. There can be no assurance that these estimates will be achieved. Failure to achieve these estimates, or complete the Company's Year 2000 readiness plan and activities, could have a material effect on the company's financial condition and operating results. EURO. On January 1, 1999, eleven of fifteen member countries of the European Union are scheduled to establish fixed conversion rates between their existing currencies ("legacy currencies") and one common currency - the Euro. The Euro will then trade on currency exchanges and may be used in business transactions. The conversion to the Euro will eliminate currency exchange risk between the member countries. Beginning in January 2002, new Euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The Company has recognized this situation and is currently in the process of developing a plan to address any issue being raised by the currency conversion. Possible issues include, but are not limited to, the need to adapt computer and financial systems to recognize Euro- denominated transactions, as well as the impact of one common European currency on pricing. The Company anticipates that any unaddressed issues will be resolved during 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's primary anticipated sources of capital are cash flow from operations and borrowings under the New Credit Facility. For the nine months ending October 3, 1998, cash used by operating activities was $4.0 million, which is primarily the result of an increase in working capital of $13.6 million in excess of the net loss plus depreciation and amortization. The Company's primary capital requirements include debt service, capital expenditures and working capital. The Company's ability to make scheduled payments of principal and interest to refinance its indebtedness, or to fund planned capital expenditures, will depend upon its future performance, which, in turn, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. At the time of the acquisition of DH, the Company implemented a plan to achieve purchasing, manufacturing and other synergies. As part of this plan, the Company announced a major restructuring program that will consolidate two of its former DH manufacturing operations principally into its Ithaca, New York manufacturing operation as discussed above. Required principal payments under the New Credit Facility and Notes (excluding the Revolver) are as follows: $0.8 million remaining in 1998; $7.8 million in 1999; $7.8 million in 2000; $9.1 million in 2001; $5.6 million in 2002; $12.25 million in 2003; and $120 million in 2007. It is anticipated that capital expenditures in 1998 will not exceed the maximum permitted under the New Credit Facility of $10.5 million. There can be no assurance, however, that the Company's business will generate cash flow at or above anticipated levels or that the Company will be able to borrow funds under the New Credit Facility in an amount sufficient to enable the Company to service its indebtedness, or make anticipated capital expenditures. In particular, there can be no assurance that anticipated revenue growth will be achieved at the levels currently anticipated or at all. If the Company is unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service its debt, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing indebtedness, or obtain additional financing. There can be no assurance that any such refinancing would be available on commercially reasonable terms, or at all, or that any additional financing could be obtained, particularly in view of the Company's high level of debt. At October 3, 1998, the Company's total debt (net of cash) including government grant obligations was $182.4 million, including $13.5 million under the revolving credit facility. Debt levels increased since December 31, 1997 due to borrowings against the line of credit to fund payments made to former officers of $3.5 million, the payment of $11.8 million of subordinated interest expense and working capital requirements in excess of net income plus depreciation and amortization. The New Credit Facility and the Notes, and other debt instruments of the Company may, impose various restrictions and covenants on the Company which could potentially limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments, to raise additional debt or equity capital, or to take advantage of business opportunities. The New Credit Facility includes various financial covenants of the Company, including covenants with respect to the maximum capital expenditures, a Page 21 maximum ratio of debt to EBITDA, a minimum interest coverage ratio and a minimum fixed charge coverage ratio. As indicated above, the company's future compliance with these covenants will depend on future performance which, in turn, is subject to general economic, financial, competitive, legislative, regulatory and other factors, which are beyond its control. Its compliance depends on the timing of orders from customers, timing of new product introductions, capital expenditures, working capital requirements, gross margins and expense levels. The New Credit Facility subjects the Company to certain negative covenants, including without limitation covenants that restrict, subject to specified exceptions: the occurrence of additional indebtedness and other obligations and the granting of additional liens; mergers and acquisitions, investments and acquisitions and dispositions of assets; the occurrence of capitalized lease obligations; investments, loans and advances; dividends, stock repurchases and redemption's; prepayment or repurchase of other indebtedness and other provisions. Effective September 25, 1998, the Company renegotiated the conditions of its bank agreement. Modifications mainly affect the covenant levels within the agreement. See attached amendment, Exhibit. 10.1 The Company has entered into a $20 million interest rate swap agreement with a major financial institution. This swap agreement has the effect of converting certain variable rate debt to defined rate obligations and expires in November, 1999. Net amounts paid or received are accrued on a settlement basis as adjustments to interest expense. The Company incurred indebtedness of $120 million in connection with the issuance of the Notes. The indebtedness evidenced by the Notes is subordinated to the Company's obligations under the New Credit Facility. Interest is payable semi-annually on the unpaid principal at 9.75% per annum. The first payment of $5.9 million was paid April 1, 1998. A subsequent payment of $5.9 million was made on October 1, 1998. The Indenture contains covenants regarding restricted payments, occurrence of indebtedness, liens, dividends, merger, consolidation or sale of assets, and transactions with affiliates. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement standardizes the accounting for derivative instruments, including derivative instruments embedded in contracts, by requiring that the entity recognize those items as assets of liabilities in the statement of financial position and measure them at fair value. The statement is effective for fiscal year beginning after June 15, 1999. Management has not yet determined the impact that the adoption of this statement may have on earnings, financial condition or liquidity of the Company. The Company plans to adopt SFAS No. 133 as permitted by this accounting standard by January 1, 2000. In June 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company plans to adopt SFAS No. 131 in connection with the preparation of the January 2, 1999 consolidated financial statements, as permitted by the pronouncement. The adoption of these standards is not expected to have a material impact on consolidated results, financial condition, or long-term liquidity. In March 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. In April 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-5, "Reporting for the costs of Start-Up Activities." This SOP provides guidance on the financial reporting of start-up cost and organization costs. The SOP requires costs related to start-up activities and organizational costs to be expensed as incurred. The statement is effective for financial statements for fiscal year beginning after December 15, 1998. The Company plans to adopt these statements in connection with the preparation of the December 31, 1999 consolidated financial statements, as permitted by each statement, SOP 98-1, and 98-5. The adoption of these standards is not expected to have a material impact on consolidated results, financial condition, or long-term liquidity. Page 22 RESTRICTIONS ON DISTRIBUTIONS BY GUARANTORS TO THE COMPANY There are no contractual restrictions, under the New Credit Facility or otherwise, upon the ability of the Guarantor Subsidiaries to make distributions or pay dividends to their respective equityholders. Directly or indirectly, the Company is the sole equity-holder of all of the Guarantor Subsidiaries. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During the third quarter of 1998 the Company settled a pending claim associated with a complaint which was filed by Axiohm S.A. on June 17, 1997 in the Central District of California alleging infringement of Axiohm's U.S. Patent No. 5,579,043 by Seiko Epson and Epson America. On December 22, 1997, Seiko Epson and Epson America had filed an answer to Axiohm's complaint as well as counterclaims against both Axiohm and Axiohm IPB. In their response, Seiko Epson and Epson America denied the validity of Axiohm S.A.'s Patent No. 5,579,043 and infringement thereof, and sought declaratory relief to that effect. Seiko Epson and Epson America further alleged that Axiohm and Axiohm IPB had infringed and were infringing Seiko Epson's U.S. Patent Nos. 5,437,004 5,594,653 and 5,555,349, and sought injunction relief, treble damages and attorney's fees. The settlement agreement does not require any payments by any of the companies. In September 1998, Andrew Newmark filed a complaint against the Company in the United States District Court, Southern District of California, claiming rights to a finders fee of up to $2,187,500 in connection with the 1997 acquisition of the Company by Axiohm S.A. Also in September, the Company filed an action in the United States District Court for the Southern District of New York against Mr. Newmark, seeking a judgement that Mr. Newmark is not entitled to any fee. Motions have been presented by each party in each suit regarding the appropriateness of the respective forums. Although the Company believes that its position is meritorious, the litigation may be costly and time consuming. There can be no assurance that the Company will ultimately prevail in suits with Mr. Newmark. Page 23 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. AXIOHM TRANSACTION SOLUTIONS, INC. BY: NOVEMBER 6, 1998 /s/ WALTER S. SOBON ---------------- ---------------------------------------- DATE WALTER S. SOBON, CHIEF FINANCIAL OFFICER (CHIEF FINANCIAL OFFICER) Page 24 AXIOHM TRANSACTION SOLUTIONS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED OCTOBER 3, 1998
EXHIBIT DESCRIPTION ------- ----------- 10.1 FOURTH AMENDMENT, dated as of September 25, 1998 to the CREDIT AGREEMENT, dated as of October 2, 1997, among the Company, as Borrower, the several Lenders from time to time Parties thereto, Lehman Brothers Inc. as Arranger, Lehman Commercial Paper Inc, as Syndication Agent and Union Bank of California, N.A. as Administrative Agent, as amended by the Global Amendment and Assignment and Acceptance, dated as of October 20, 1997. 27.1 Financial Data Schedule
Page 25 EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 FOURTH AMENDMENT, dated as of September 25, 1998 (this "AMENDMENT"), to the CREDIT AGREEMENT, dated as of October 2, 1997, as amended by the Global Amendment and Assignment and Acceptance, dated as of October 20, 1997, the Second Amendment, dated as of March 13, 1998, and the Third Amendment, dated as of May 8, 1998 (as further amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among AXIOHM TRANSACTION SOLUTIONS, INC. (f/k/a DH Technology, Inc.), a California corporation (the "BORROWER"), the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "LENDERS"), LEHMAN BROTHERS INC., as arranger, LEHMAN COMMERCIAL PAPER INC., as syndication agent (in such capacities, the "SYNDICATION AGENT"), and UNION BANK OF CALIFORNIA, N.A., as administrative agent (the "ADMINISTRATIVE AGENT"). W I T N E S S E T H : WHEREAS, the Borrower, the Syndication Agent, the Administrative Agent and the Lenders are parties to the Credit Agreement; and WHEREAS, the parties wish to amend the Credit Agreement to effectuate certain changes requested by the Borrower and the Administrative Agent, all as set forth in this Amendment; NOW THEREFORE, in consideration of the premises, the parties hereto agree as follows: SECTION 1. DEFINITIONS. 1.1 DEFINED TERMS. Unless otherwise defined herein and except as set forth in this Amendment, terms defined in the Credit Agreement are used herein as therein defined. SECTION 2. AMENDMENT OF CREDIT AGREEMENT. 2.1 AMENDMENTS TO SECTION 1.1 OF THE CREDIT AGREEMENT. (a) The following definitions are hereby added to Section 1.1 of the Credit Agreement in their proper alphabetical order: "'FQE 1', 'FQE 2' or 'FQE 3' shall mean, respectively, the last day of the Borrower's first, second and third fiscal quarters. The first fiscal quarter of each fiscal year begins on the Sunday closest to the last day of the prior calendar year, and continues for 13 calendar weeks. The second and third fiscal quarters continue for successive periods of 13 weeks each, and the fourth fiscal quarter continues for the period of 13 or 14 weeks, as the case may be, until the end of such fiscal year." "'FYE' shall mean the end of the designated fiscal year of the Borrower. Each fiscal year ends on the Saturday following closest to the last day of the designated year (which Saturday may fall in the succeeding calendar year)." (b) The definition of the term "Applicable Margin" is hereby amended by deleting such definition in its entirety and by substituting in lieu thereof the following: "'APPLICABLE MARGIN': for each Type of Loan, the rate per annum set forth under the relevant column heading below: Page 26
Base Rate Eurodollar Loans Loans ----- ----- Revolving Credit Loans and Swing Line Loans 2.00% 3.00% Tranche A Term Loans 2.00% 3.00% Tranche B Term Loans 2.25% 3.25%
; PROVIDED, that on and after the first Adjustment Date occurring at least one year after the Merger, the Applicable Margin with respect to Revolving Credit Loans, Swing Line Loans, Tranche A Term Loans and Tranche B Term Loans will be determined pursuant to the relevant Pricing Grid." (c) The definition of the term "Consolidated Fixed Charge Coverage Ratio" is hereby amended by deleting such definition in its entirety and by substituting in lieu thereof the following: "'CONSOLIDATED FIXED CHARGE COVERAGE RATIO': for any period, the ratio of (a) Consolidated EBITDA for such period less the aggregate amount actually paid by the Borrower and its Subsidiaries in cash during such period on account of Capital Expenditures (excluding the principal amount of Indebtedness incurred in connection with such expenditures) to (b) Consolidated Fixed Charges for such period." (d) The definition of the term "Consolidated Fixed Charges" is hereby amended by deleting such definition in its entirety and by substituting in lieu thereof the following: "'CONSOLIDATED FIXED CHARGES': for any period, the sum (without duplication) of (a) Consolidated Interest Expense for such period and (b) scheduled payments made during such period on account of principal of Indebtedness (other than Indebtedness of the types described in clauses (f), (g) and (k) of the definition thereof) of the Borrower or any of its Subsidiaries (including scheduled principal payments in respect of the Term Loans), minus any Net Cash Proceeds received by the Borrower during such period in connection with an Asset Sale." (e) The definition of the term "Consolidated EBITDA" is hereby amended by deleting "1998" in clause (g) thereof and by replacing it with "1999." (f) The definition of the term "Net Cash Proceeds" is hereby amended by deleting clause (b) thereof and by substituting in lieu thereof the following: "(b) in connection with any issuance or sale of equity securities or debt securities or instruments or the incurrence of loans, the cash proceeds received by the Borrower from such issuance or incurrence, net of attorneys' fees, investment banking fees, accountants' fees and other professional fees, underwriting discounts and commissions and other reasonable fees and expenses actually incurred in connection therewith." (g) The definition of the term "Pricing Grid" is hereby amended by deleting such definition in its entirety and by substituting in lieu thereof the following: "'PRICING GRID': the pricing grids attached hereto as Annex A." 2.2 AMENDMENT TO SECTION 2.10 OF THE CREDIT AGREEMENT. Section 2.10(a) of the Credit Agreement is hereby amended by deleting such Section 2.10(a) in its entirety and by substituting in lieu thereof the following: "(a) Unless the Required Prepayment Lenders shall otherwise agree, if any Capital Stock or Indebtedness shall be issued or Incurred by the Borrower or any of its Subsidiaries (excluding any Indebtedness Incurred in accordance with Section 7.2 or Capital Stock issued in accordance with Section 7.9), an amount equal to 100% of the Net Cash Proceeds of any Indebtedness Incurred and 50% of the Net Cash Proceeds of any Capital Stock issued shall be applied on the date of such issuance or Incurrence toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in Section 2.10(d)." Page 27 2.3 AMENDMENT TO SECTION 2.16(b) OF THE CREDIT AGREEMENT. Section 2.16(b) of the Credit Agreement is hereby amended by deleting such Section 2.16(b) in its entirety and by substituting in lieu thereof the following: "(b) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Term Loans shall be made PRO RATA according to the respective outstanding principal amounts of the Term Loans then held by the Term Loan Lenders (except as otherwise provided in Section 2.16(d)). The amount of each principal prepayment of the Term Loans shall be applied to reduce the then remaining installments of the Tranche A Term Loans and Tranche B Term Loans, as the case may be, in the inverse order of their respective maturities. Notwithstanding the foregoing, in the case of principal prepayments of the Term Loans with Net Cash Proceeds of any Capital Stock issued by the Borrower or any of its Subsidiaries in accordance with Section 2.10(a), such prepayments shall be applied to reduce the then remaining installments of the Tranche A Term Loans and Tranche B Term Loans, as the case may be, PRO RATA based upon the then remaining principal amount thereof. Amounts prepaid on account of the Term Loans may not be reborrowed." 2.4 AMENDMENT TO SECTION 7.1 OF THE CREDIT AGREEMENT. Section 7.1 of the Credit Agreement is hereby amended by deleting such Section 7.1 in its entirety and by substituting in lieu thereof the following: "7.1 FINANCIAL CONDITION COVENANTS. (a) CONSOLIDATED LEVERAGE RATIO. Permit the Consolidated Leverage Ratio as at the last day of any period of four consecutive fiscal quarters of the Borrower (or, if less, the number of full fiscal quarters subsequent to the Closing Date) ending with any fiscal quarter set forth below to exceed the ratio set forth below opposite such fiscal quarter:
Consolidated Fiscal Quarter Leverage Ratio -------------- -------------- FYE 1997 5.50 to 1.00 FQE 1 1998 5.50 to 1.00 FQE 2 1998 5.50 to 1.00 FQE 3 1998 5.50 to 1.00 FYE 1998 5.50 to 1.00 FQE 1 1999 5.75 to 1.00 FQE 2 1999 5.75 to 1.00 FQE 3 1999 5.50 to 1.00 FYE 1999 5.25 to 1.00 FQE 1 2000 5.25 to 1.00 FQE 2 2000 5.25 to 1.00 FQE 3 2000 5.25 to 1.00 FYE 2000 4.75 to 1.00 FQE 1 2001 4.75 to 1.00 FQE 2 2001 4.75 to 1.00 FQE 3 2001 4.75 to 1.00 FYE 2001 3.75 to 1.00 FQE 1 2002 3.75 to 1.00 FQE 2 2002 3.75 to 1.00 FQE 3 2002 3.75 to 1.00 FYE 2002 3.00 to 1.00 Thereafter 3.00 to 1.00
; PROVIDED, that for the purposes of determining the ratio described above for the fiscal quarters of the Borrower ending FYE 1997, FQE 1 1998 and FQE 2 1998, Consolidated EBITDA for the relevant period shall be deemed to equal Consolidated EBITDA for such fiscal quarter (and, in the case of the latter two such determinations, each previous fiscal quarter commencing after the Closing Date) MULTIPLIED BY 4, 2 and 4/3, respectively. Page 28 (b) CONSOLIDATED INTEREST COVERAGE RATIO. Permit the Consolidated Interest Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower (or, if less, the number of full fiscal quarters subsequent to the Closing Date) ending with any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter:
Consolidated Interest Fiscal Quarter Coverage Ratio -------------- -------------- FYE 1997 1.75 to 1.00 FQE 1 1998 1.50 to 1.00 FQE 2 1998 1.70 to 1.00 FQE 3 1998 1.90 to 1.00 FYE 1998 1.80 to 1.00 FQE 1 1999 1.75 to 1.00 FQE 2 1999 1.75 to 1.00 FQE 3 1999 1.80 to 1.00 FYE 1999 1.90 to 1.00 FQE 1 2000 1.90 to 1.00 FQE 2 2000 1.90 to 1.00 FQE 3 2000 1.90 to 1.00 FYE 2000 2.00 to 1.00 FQE 1 2001 2.00 to 1.00 FQE 2 2001 2.00 to 1.00 FQE 3 2001 2.00 to 1.00 FYE 2001 2.50 to 1.00 FQE 1 2002 2.50 to 1.00 FQE 2 2002 2.50 to 1.00 FQE 3 2002 2.50 to 1.00 FYE 2002 3.00 to 1.00 Thereafter 3.00 to 1.00
(c) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Permit the Consolidated Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower ending with any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter:
Consolidated Fixed Fiscal Quarter Charge Coverage Ratio -------------- --------------------- FQE 3 1998 1.45 to 1.00 FYE 1998 1.25 to 1.00 FQE 1 1999 1.15 to 1.00 FQE 2 1999 1.05 to 1.00 FQE 3 1999 1.05 to 1.00 FYE 1999 1.05 to 1.00 FQE 1 2000 1.05 to 1.00 FQE 2 2000 1.05 to 1.00 FQE 3 2000 1.05 to 1.00 FYE 2000 1.10 to 1.00 FQE 1 2001 1.10 to 1.00 FQE 2 2001 1.10 to 1.00 FQE 3 2001 1.10 to 1.00 FYE 2001 1.15 to 1.00 FQE 1 2002 1.15 to 1.00 FQE 2 2002 1.15 to 1.00 FQE 3 2002 1.15 to 1.00 FYE 2002 1.25 to 1.00 Thereafter 1.25 to 1.00"
Page 29 2.5 AMENDMENT TO SECTION 7.12 OF THE CREDIT AGREEMENT. Section 7.12 of the Credit Agreement is hereby amended by deleting such Section 7.12 in its entirety and by substituting in lieu thereof the following: "7.12 LIMITATION ON CHANGES IN FISCAL PERIODS. Permit the fiscal year of the Borrower to end on a day other than as described in the definition of "FYE" or change the Borrower's method of determining fiscal quarters." 2.6 AMENDMENT TO ANNEX A OF THE CREDIT AGREEMENT. Annex A of the Credit Agreement is hereby amended by deleting such Annex A in its entirety and by substituting in lieu thereof the following: "PRICING GRID FOR REVOLVING CREDIT LOANS, SWING LINE LOANS AND TRANCHE A TERM LOANS
- - --------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------- Consolidated Leverage Ratio Applicable Margin Applicable Margin for for Eurodollar Loans Base Rate Loans - - --------------------------------------------------------------------------------------------------------- Greater than or equal to 5.00 to 1.00 3.00% 2.00% - - --------------------------------------------------------------------------------------------------------- Less than 5.00 to 1.00 but greater than 2.75% 1.75% or equal to 4.25 to 1.00 - - --------------------------------------------------------------------------------------------------------- Less than 4.25 to 1.00 but greater than 2.50% 1.50% or equal to 3.50 to 1.00 - - --------------------------------------------------------------------------------------------------------- Less than 3.50 to 1.00 but greater than 2.25% 1.25% or equal to 3.00 to 1.00 - - --------------------------------------------------------------------------------------------------------- Less than 3.00 to 1.00 but greater than 2.00% 1.00% or equal to 2.50 to 1.00 - - --------------------------------------------------------------------------------------------------------- Less than 2.50 to 1.00 1.75% 0.75% - - --------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------
PRICING GRID FOR TRANCHE B TERM LOANS
- - --------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------- Consolidated Leverage Ratio Applicable Margin Applicable Margin for for Eurodollar Loans Base Rate Loans - - --------------------------------------------------------------------------------------------------------- Greater than or equal to 5.00 to 1.00 3.25% 2.25% - - --------------------------------------------------------------------------------------------------------- Less than 5.00 to 1.00 3.00% 2.00% - - --------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------
Changes in the Applicable Margin with respect to Revolving Credit Loans, Tranche A Term Loans and Tranche B Term Loans resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the "ADJUSTMENT DATE") on which financial statements are delivered to the Lenders pursuant to Section 6.1 (but in any event not later than the 45th day after the end of each of the first three quarterly periods of each fiscal year or the 90th day after the end of each fiscal year, as the case may be) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements referred to above are not delivered within the time periods specified above, then, until such financial statements are delivered, the Consolidated Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes of this definition be deemed to be greater than 5.00 to 1.00. In addition, at all times while an Event of Default shall have occurred and be continuing, the Consolidated Leverage Ratio shall for the purposes of this definition be deemed to be greater than 5.00 to 1.00. Each determination of the Consolidated Leverage Ratio pursuant to this definition shall be made with respect to the period of four consecutive fiscal quarters of the Borrower ending at the end of the period covered by the relevant financial statements." Page 30 SECTION 3. MISCELLANEOUS. 3.1 EFFECTIVENESS. This Amendment shall become effective as of the date hereof (the "EFFECTIVE DATE") when (i) the Administrative Agent shall have received counterparts of this Amendment, duly executed and delivered by the Borrower, the Administrative Agent and the Required Lenders and (ii) each Lender shall have received an amendment fee equal to 0.375% of the total Commitment as of the date hereof paid on a PRO RATA basis to each Lender. 3.2 REPRESENTATIONS AND WARRANTIES. After giving effect to the amendments contained herein, on the Effective Date, the Borrower hereby (i) confirms, reaffirms and restates the representations and warranties set forth in Section 4 of the Credit Agreement; PROVIDED that each reference in such Section 4 to "this Agreement" shall be deemed to be a reference both to this Amendment and to the Credit Agreement as amended by this Amendment and (ii) confirms that no Default or Event of Default shall have occurred and be continuing. 3.3 CONTINUING EFFECT; NO OTHER AMENDMENTS. Except as expressly amended or waived hereby, all of the terms and provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect. The amendments contained herein shall not constitute an amendment or waiver of any other provision of the Credit Agreement or the other Loan Documents or for any purpose except as expressly set forth herein. 3.4 COUNTERPARTS. This Amendment may be executed in any number of counterparts by the parties hereto, each of which counterparts when so executed shall be an original, but all the counterparts shall together constitute one and the same instrument. 3.5 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 3.6 EXPENSES. The Borrower agrees to pay or reimburse the Administrative Agent for all of its out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Amendment, including, without limitation, the fees and disbursements of counsel to the Administrative Agent. Page 31 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date first above written. AXIOHM TRANSACTION SOLUTIONS, INC. By: Title: UNION BANK OF CALIFORNIA, N.A., as Administrative Agent and as a Lender By: Title: LEHMAN COMMERCIAL PAPER INC., as Syndication Agent and as a Lender By: Title: SOUTHERN PACIFIC BANK By: Title: BHF-BANK AKTIENGESELLSCHAFT By: Title: By: Title: BSB BANK & TRUST COMPANY By: Title: Page 32 IMPERIAL BANK, A CALIFORNIA BANKING CORPORATION By: Title: MELLON BANK, N.A. By: Title: SOCIETE GENERALE By: Title: BANQUE NATIONALE DE PARIS By: Title: BALANCED HIGH-YIELD FUND I LTD. By: BHF-Bank Aktiengesellschaft, acting through its New York Branch, as attorney-in-fact By: Name: Title: By: Name: Title: EX-27 3 EXHIBIT 27
5 1,000 9-MOS JAN-02-1999 JAN-01-1998 OCT-03-1998 1919 0 36652 0 31997 83086 38720 16960 185135 42973 0 0 0 24257 (62663) 185135 174725 174725 112613 179435 (69) 0 13172 (17813) 3661 (21474) 0 0 0 (21474) (3.29) (3.29)
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