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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-9859
BANCTEC, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-1559633
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2701 East Grauwyler 75061
Irving, Texas (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (972) 579-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------------------------ ---------------------
Common Stock, $.01 Par Value Privately Held
Class A common stock, $.01 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
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: [x] No: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K.
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date.
Number of Shares Outstanding at
Title of Each Class February 29, 2000
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Common Stock, $.01 Par Value 17,003,838
Class A common stock, $.01 Par Value 1,181,946
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BancTec, Inc.
Annual Report
on
Form 10-K
Twelve Months Ended December 31, 1999
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PART I
ITEM 1. The Company
Overview
BancTec, Inc., a Delaware corporation, (the "Company") is a worldwide
systems integration and services company that delivers solutions which solve
complex data and paper-intensive business problems using advanced imaging,
workflow, and business technologies. The Company is also a leading provider of
maintenance services for major computer companies, government and corporate
customers. The Company employs approximately 3,900 people and is headquartered
in Dallas, Texas.
Founded in 1972, the Company operates worldwide (with international sales
in 1999 representing approximately one-third of total revenues) and has served
over 5,000 customers in over 50 countries.
In July 1999, the Company was taken private by Welsh, Carson, Anderson &
Stowe ("WCAS"), a New York-based private investment firm, which now holds a
93.5% interest in the Company. WCAS is strategically focused on the acquisition
of information services and health care companies, traditionally investing for
growth. The firm manages more than $8.0 billion for corporate and public pension
funds, university endowment funds and other institutional investors. The
remaining 6.5% interest is held by Convergent Equity Partners, L.P.
("Convergent"), a Dallas-based private investment firm.
The Company markets its products and services to specific target markets in
which it believes it has extensive business process expertise and certain
competitive advantages and is able to maintain or achieve a leadership
position.
Reporting Structure
The Company's operations historically have been organized into three
business segments as follows: Manufacturing and Supplies, U.S. Maintenance and
Service ("USMS"), and Worldwide Systems ("WS"). In the 1998 fourth quarter, the
Company announced a reorganization of its operations into two primary
businesses, Worldwide Financial Systems ("WFS") and Computer and Network
Services ("CNS"). The operations of WFS include financial transaction
processing, manufacturing and supplies, installation and maintenance of BancTec
manufactured equipment, integrated systems, and Plexus /R/, while the CNS
operations include personal computer warranty repair services and administration
of third party extended warranties. Subsequently, the Company decided to
separate WFS into two reportable segments which are managed separately based on
geographical areas, North American Systems ("NAS") and International Systems
("INTL"). INTL consists of operations throughout the world excluding North
America. See also Note M to the Consolidated Financial Statements for additional
information regarding the Company's reportable segments.
North American Systems and International Systems. Both NAS and INTL offer
similar systems integration and business process services and solutions and
market to similar types of customers. The solutions offered primarily involve
high volume transaction processing using advanced technologies and processes.
Key applications include payment and check processing, document imaging and
workflow, and ongoing service and support. The Company's powerful, high-volume
integrated systems deliver important benefits to some of the world's largest
credit card companies and major airlines. In addition, these segments provide
their products and services to other customers, including banks, financial
services companies and
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insurance providers, as well as utility companies, governmental agencies and
transportation firms.
The Company combines its extensive business application knowledge with a
full range of software and equipment offerings for high volume, complex
transaction processing environments. The Company's integrated systems generally
incorporate advanced applications software developed by the Company and may also
include hardware developed and manufactured by the Company.
For high volume processors, the Company provides image systems that
capture, digitize and process check and other document images, including
utility, telephone, retail and credit card bills, mortgage coupons, sales
drafts, airline tickets, tax notices, and other financial documents. The
Company's imaging systems are also used by banks for high volume check
processing applications such as proof-of-deposit and image statement
preparation. Other Company offerings provide image-based solutions for check
exception handling, enabling financial institutions that handle large volumes of
checks to reprocess more efficiently items that were rejected in normal
operating cycles.
The Company is expanding the scope of customer solutions with the addition
of web-enabled workflow and long-term image storage to increase productivity, to
improve customer service capabilities and to replace microfilm for long-term
storage. The Company's ImageFIRST OpenARCHIVE solution is a multi-tiered
archival system designed for high-speed digital archiving of financial and other
documents and related transaction data. The Company image archive systems are
further targeted to support industry efforts to reduce and eventually eliminate
the multiple handling of checks and documents through truncation and electronic
check presentment initiatives.
In addition, the Company is working with customers and industry partners to
integrate electronic billing and payment capabilities into customers' existing
processing operations.
The Company's financial document imaging products utilize an Open Systems
Architecture platform, which enables customers to add industry standard
hardware and software components to improve processing capabilities. The
Company typically sells these products to end-users and offers a warranty for
30 days from the date of installation.
Plexus Document Imaging and Workflow Software Products. The Company offers
a complete family of internet-enabled document imaging and workflow software
products under the Plexus brand designed for high-volume, complex and
distributed environments. Plexus software products offer workflow, image
storage, data management, forms processing and health claims processing
capabilities that enable users to automate, coordinate and streamline business
processes. Plexus software products can be deployed in organizations ranging
from single sites for departmental workflow, storage and retrieval applications
to enterprise-wide applications across multiple hardware platforms and over the
Internet.
Now in use in more than 1,300 sites worldwide, Plexus software products are
sold directly to end-users by the Company's own sales force, through the Company
sales channels and through various value-added resellers and systems integrators
worldwide. Plexus software products are also incorporated into the Company's
application solutions to enhance functionality and provide competitive
distinction.
Document and Check Processing Equipment Products. The Company manufactures
low, medium and high-speed document reader/sorters and related components that
read magnetic ink character recognition and optical character recognition data
from financial documents and sort the documents according to established
patterns. The Company's high-speed, full-page scanners utilize photo-optical
technology, gray scale image capture capabilities, character recognition
software and high precision document transports to scan and digitize full-sized
business documents such as invoices, statements and business forms. The Company
markets its products and solutions to end-users, to other manufacturers and to
various resellers and systems integrators throughout the world.
The Company markets a full range of consumable supplies that complement the
Company's document processing systems. The Company also manufactures and
markets microfilm cameras, image cameras,
3
MICR encoders, ink jet components and various peripheral equipment. The
Company's original equipment manufacturer ("OEM") products are sold with a
90-day warranty from the date of shipment.
Installation and Maintenance of the Company's Products. The Company
installs and maintains its own equipment products including document
reader/sorters and scanners. At February 29, 2000, the Company employed
approximately 700 customer service engineers located in the United States and
international locations to service the Company's installed equipment. The
Company's maintenance contracts typically include both parts and labor and
generally are three to five years in duration.
Computer and Network Services. The Company is a leading provider of
personal computer repair services in the United States for many companies,
including Dell, Compaq, Galileo International, and many Fortune 100 companies.
BancTec's CNS segment is structured around the following three customer areas:
Strategic alliances (outsource and system integration partners): Strategic
alliances focus on establishing and maintaining partnerships with industry-
recognized providers of outsourcing services as well as with system integrators
offering specific support to their customer base. The partnerships with these
organizations enable BancTec to provide services consistent with its core
competencies for desktop/enterprise applications, while enabling the strategic
alliance partners to focus on program management and specific services.
OEM partner relationships: The focus of the BancTec OEM partner
relationship group is on providing warranty fulfillment services and related
support to manufacturers of desktop/enterprise products. BancTec's
relationship with these OEMs allows access to BancTec's pervasive national
field service organization, while enabling the OEMs to focus on customer needs
and demands for responsive and effective resolution to product defects and/or
application issues.
Fortune and retail market accounts: The Fortune and retail accounts group
is chartered with serving those customers that have support needs consistent
with their core competencies in desktop/enterprise applications while
leveraging BancTec's nationwide service organization. Typical customers
require national service in order to support their operational sites. The
Service Level Agreements of these customers require flexibility to manage
support needs ranging from high-priority mission-critical systems to office
automation with lower-priority support requirements.
Product Development
The Company has an active research and development program to maintain the
Company's leadership position in payment and document processing technology.
The Company is engaged in ongoing software and hardware product development
activities for both new and existing products, employing approximately 281
people for such activities as of February 29, 2000.
The following table sets forth certain information regarding the Company's
product development expenditures for the indicated periods:
Twelve Months Ended
December 31,
----------------------------
1999 1998 1997
----------------------------
(Dollars in thousands)
Product development expenditures $15,917 $17,732 $17,850
Percent of total revenue 3.0% 3.2% 3.2%
Current expenditures are concentrated on developing new applications for
the Company's product lines and improving and expanding existing products, as
described below:
Software and Systems Development. In addition to ongoing software
enhancements, the Company has focused its development efforts on electronic
commerce technologies and a new generation of web-
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enabled products for both the check and remittance markets. Each of these major
new applications will be further developed and deployed during 2000. Continued
development in the areas of workflow integration, web client components and
Internet processing frameworks has allowed the Company to begin to reduce
customer system delivery time, contain ongoing support costs and leverage
developer knowledge in new software development by using the latest
technologies.
Plexus Document Imaging and Workflow. The Company's Plexus unit continues
to develop new web-enabled software products and implement changes to current
software products to further strengthen its competitive position in the
business, imaging and workflow software markets. The Company expects that each
of Plexus' major products will receive significant feature enhancements during
the year. The Company is also conducting projects to build horizontal and
vertical applications using Plexus' core imaging and workflow technology
including integrating these into a new generation of BancTec item applications,
as well as new vertical application solutions. These applications are intended
to provide more complete customer solutions, allowing rapid deployment and more
rapid customer return on investment.
Equipment Technology Development. In 2000, the Company plans to continue
development and enhancements to what it believes to be the industry's most
complete portfolio of document transport products. Key development efforts
remain focused on character recognition, image improvements (gray scale
snippeting, character engine improvements, wavelet compression, improved gray
scale and color quality and delivery) and Image Quality Assurance for real-time
reading to improve monitoring and detection of image quality in the Company's
transport and scanner product lines.
There can be no assurance that the Company's development efforts will
result in successful commercial products. Many risks exist in developing new
product concepts, adapting new technology and introducing new products to the
market.
Sales and Distribution
For systems integration and CNS sales, the Company relies on its internal
sales forces. For its document and check processing products, the Company's
distribution strategy is to employ multiple sales channels to achieve the widest
possible distribution. The Company's products are sold to end-users,
distributors, OEMs, value-added resellers and systems integrators.
International sales are subject to various risks, including fluctuations in
exchange rates, import controls and the need for export licenses. See Note N of
the Notes to the Consolidated Financial Statements for financial information
concerning the Company's international operations.
Customer Diversification
In 1999, no single customer accounted for more than 10% of the total
revenue of the Company. The Company's ten largest customers accounted for 25%
of the Company's revenues in 1999.
Competition
In marketing its products and services, the Company encounters aggressive
competition from a wide variety of companies, some of which have substantially
greater financial and other resources than the Company. The Company believes
that performance, quality, service and price are important competitive factors
in the markets in which it competes. Generally, the Company emphasizes industry
knowledge, unique product features, quality and service, and flexibility to
configure unique systems from standard components in its competitive efforts.
While the Company believes that its offerings compete favorably based on each of
these elements, the Company could be adversely affected if its competitors
introduce innovative or technologically superior solutions or offer their
products at significantly lower prices than the Company. No assurance can be
given that the Company will have the resources, marketing and service
capability, or technological knowledge to continue to compete successfully.
5
Backlog
The Company's backlog of orders believed to be firm for its products at
December 31, 1999, 1998, and 1997 was approximately $89.9 million, $82.8
million, and $65.3 million, respectively.
The Company's backlog excludes CNS contracts, recurring hardware and
software maintenance contracts, and also excludes contracts for sales of
supplies. The Company is also able to fulfill many of its customers' requests
for immediate delivery, which therefore has no effect on ending backlog. The
Company's backlog is subject to fluctuation due to various factors, including
the size and timing of orders for the Company's products and exchange rate
fluctuations, and is not necessarily indicative of the level of future revenue.
Manufacturing
The Company's hardware and systems products are assembled using various
standard purchased components such as PC monitors, minicomputers, encoders,
communications equipment and other electronic devices. Certain products are
purchased from sole source suppliers. The Company generally has contracts with
these suppliers that are renewed periodically. If the supply of certain
components or subassemblies was interrupted without sufficient notice, the
result could be an interruption of product deliveries. The Company has not
experienced, nor does it foresee, any difficulty in obtaining necessary
components or subassemblies.
Patents
The Company owns numerous U.S. and foreign patents and holds licenses under
numerous patents owned by others. The Company also owns a number of registered
and common-law trademarks in the U.S. and other countries relating to the
Company's trade names and product names.
The validity of any patents issued or that may be issued to the Company may
be challenged by others and the Company could encounter legal difficulties in
enforcing its patent rights against infringement. In addition, there can be no
assurance that other technology cannot or will not be developed or that patents
will not be obtained by others that would render the Company's patents
obsolete. Management does not consider the Company's patents to be essential to
the ongoing operations of the Company.
Employees
At February 29, 2000, the Company employed approximately 3,900 full-time
employees and considers its employee relations to be good. None of the
Company's employees is represented by a labor union. The Company has never
experienced a work stoppage.
Year 2000
The Company's Year 2000 ("Y2K") disclosure is included under the heading,
"Year 2000 Considerations" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7, hereof.
ITEM 2. Properties
During the second quarter of 2000, the Company plans to move its corporate
headquarters from leased space in Dallas, Texas, to its Irving, Texas
facilities. The currently leased corporate space of approximately 30,000
square feet has been sublet effective May 1, 2000.
6
The Company owns or leases numerous facilities throughout the world to
support its operations. The Company believes that these facilities are adequate
to meet its ongoing needs. The loss of any one facility could have an adverse
impact on operations in the short term.
The Company has the option to renew all leases on principal facilities at
the end of the lease terms.
The Irving manufacturing facility, which the Company owns, is the primary
location for all Company assembly and manufacturing activities. Heatstrip/R/
and BancStrip/R/ products are manufactured in Puerto Rico.
ITEM 3. Legal Proceedings
None
ITEM 4. Submission of Matters to a Vote of Securities Holders
None
7
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PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
None
ITEM 6. Selected Financial Data
Five-Year Summary of Selected Financial Data
Twelve Months Nine Months
Ended Ended
--------------------------------------------------------------- ------------
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands)
For the period:
Revenue $ 534,590 $ 556,097 $ 560,996 $ 511,903 $ 352,074
Income (loss) from continuing
Operations before income taxes (35,842) 11,546 69,353 31,736 (67,737)
Income (loss) before extraordinary item (11,197) 4,813 42,614 37,101 (53,481)
Net income (loss) (11,197) 4,813 42,152 37,101 (53,481)
At period-end:
Total assets 473,105 520,312 498,343 455,703 428,939
Working capital 130,448 144,405 61,335 78,438 37,173
Long-term debt, less current maturities 350,500 150,352 11,854 65,891 82,972
Stockholders' equity (deficit) (21,738) 220,081 260,523 204,720 156,201
In September 1999, the Company completed the sale of its community banking
business to Jack Henry and Associates. For financial statement purposes, the
sale was treated as a discontinued operation, and accordingly, the financial
data above has been restated to reflect the continuing operations of the
Company.
In December 1995, the Company changed its fiscal year end from a 52/53-week
year, which ended on or about March 31, to a calendar year-end of December 31.
This resulted in a nine-month transitional period ending December 31, 1995.
8
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
BancTec has experienced a number of changes during 1999. Among the more
significant of these changes were the Company's merger with WCAS, a focus on
the on-going changes in strategic direction of the Company, and the sale of
BancTec's community banking business to Jack Henry and Associates ("JHA").
The Merger. On July 22, 1999, the Company was acquired by WCAS and
Convergent. WCAS, Convergent, and their respective related entities are now the
sole shareholders of BancTec, with WCAS owning 17,003,838 shares of New Common
Stock and Convergent owning 1,181,946 shares of Class A common stock. The
transaction was accounted for as a re-capitalization in which the historical
basis of the Company's assets and liabilities were not affected and no new
goodwill related to the merger was created. See also Notes C and P to the
Consolidated Financial Statements.
Focus on On-going Change in Strategic Direction. The slowdown in the
Company's U.S. systems business and the ongoing transition underway in its
services business prompted a detailed evaluation in 1998 of the Company's
organizational structure and long-term growth strategies, facilitated by the
management consulting firm of Booz-Allen & Hamilton. Prior to the evaluation,
the Company's operations historically had been organized into three business
segments as follows: Manufacturing and Supplies, U.S. Maintenance and Service
and Worldwide Systems. As a result of the evaluation, in the fourth quarter of
1998, BancTec initiated a reorganization of its operations into two primary
businesses - WFS and CNS. The purpose of the reorganization was to give greater
visibility to the Company's personal computer services business and, at the
same time, to create a single organization to serve the needs of its
traditional transaction processing customer base. The reorganization will also
allow the Company to focus future investments in areas of the business that
offer attractive potential for growth and profitability. The operations of WFS
include manufacturing and supplies, financial transaction processing,
installation and maintenance of BancTec equipment, integrated systems, and
Plexus, while the CNS operations include personal computer warranty repair
services and administration of third party extended warranties. Subsequently,
the Company decided to separate WFS into two reportable segments which are
managed separately based on geographical areas, North American Systems and
International Systems. INTL consists of operations throughout the world
excluding North America. See also Note M to the Consolidated Financial
Statements for additional information regarding the Company's reportable
segments.
Sale of Community Banking Business. In line with the revised strategic
focus on its core competencies, on September 9, 1999, BancTec sold
substantially all of the net assets of its community banking business to JHA of
Monett, Missouri. The Company received proceeds of $50.0 million in cash from
the sale and recorded a pre-tax gain of approximately $20.3 million. See also
Note D to the Consolidated Financial Statements.
Based on fiscal 2000 expected business conditions, the Company believes
that the same factors that affected 1999 warrant a cautious outlook for the
Company's near-term revenue and earnings growth prospects. While the short-
term outlook remains cautious, management believes that a number of dynamics
point toward a more positive outlook for the second half of 2000 and beyond.
These factors include certain planned new solution introductions such as
additions to the PayCourier series which provide payment processing solutions,
the ImageFIRST OpenARCHIVE products for high-speed digital archiving of
transaction data, and the new X-Series Single-Step Reject Repair System. Other
factors pointing toward a more favorable outlook include additional investments
in sales and marketing accomplished through strategic hiring in these
disciplines, and completion of customer Year 2000 remediation projects. These
new offerings leverage BancTec's already-extensive business application
knowledge and business process expertise with the Company's broad range of
solutions.
9
Comparison of Twelve Months Ended December 31, 1999 and Twelve Months Ended
December 31, 1998
Consolidated revenue of $534.6 million for the twelve months ended December
31, 1999 decreased by $21.5 million or 3.9% from the prior twelve-month period.
In 1999, NAS revenue decreased by 8.5% to $251.7 million compared to the prior
year due a decline in revenues for maintenance on BancTec-manufactured products
compared to 1998 and customer spending cautions related to Y2K concerns. CNS
revenues decreased by 10.4% to $109.7 million for the same period due primarily
to contract expirations and non-renewals. International revenues increased by
9.2% to $173.2 million in 1999 compared to 1998 due to increased shipments to
worldwide customers of financial transaction and document management systems.
Due to the lack of comparative data for the new segments, the Company has
included below, as supplemental comparative information, a discussion using
historical segment data.
Revenue from Manufacturing and Supplies decreased by $2.4 million to $47.4
million compared to the prior year due to customer spending cautions related to
Y2K concerns. Revenue for WS increased by approximately $9.6 million to $277.4
million due primarily to increased shipments of financial transaction and
document management systems to worldwide customers and increased Plexus
software sales. Offsetting the WS increase was a revenue decrease in USMS of
$28.6 million to $209.7 million as compared to the prior year. The decrease was
mainly attributable to the non-renewal of some large contracts and the
expiration of some maintenance contracts on older document processing systems.
Now that the Y2K event has ended, management believes a higher rate of revenue
growth should occur in the future. A major equipment maintenance and
installation project for Galileo International is expected to return revenues
for personal computer services to 1998 levels in 2000.
Consolidated gross profit of $104.0 million decreased by $19.4 million or
15.7% from the prior twelve-month period. Gross profit for Manufacturing and
Supplies was $13.8 million, representing an increase of $8.9 million from the
prior year, and gross profit for WS of $76.7 million increased $11.4 million
from the prior year. The increases in gross profit were due primarily to
charges incurred in connection with the 1998 reorganization that were not
incurred in 1999 and to improved product mix. Gross profit for USMS of $13.5
million decreased by $39.7 million due primarily to lower revenues,
particularly related to non-renewals of two strategic contracts and the decline
in revenues for maintenance on BancTec-manufactured products, without a
corresponding decrease in fixed costs. Based on management's belief that the
current profit declines are temporary, management made no significant
mitigating adjustments to the fixed cost structure to compensate for the
revenue decrease.
Operating expenses of $118.3 million increased $12.0 million or 11.3%
compared to the prior twelve-month period. Product development expenses of
$15.9 million decreased by $1.8 million from the comparative prior year due to
completion of certain new product developments and a refocus on a narrower set
of strategic initiatives. Sales and marketing expenses of $47.3 million
increased by $2.7 million or 6.0% due to management's decision to increase its
marketing efforts. General and administrative expenses of $48.8 million
increased by $13.5 million or 38.2% primarily due to $6.4 million of merger-
related expenses, $4.5 million in additional provisions for accounts
receivable, and a full year of amortization related to the implementation costs
of a new internal information system. The increased expense for doubtful
accounts was due to the increasingly competitive environment in which the
Company operates. Goodwill amortization of $6.2 million decreased $2.4 million
or 27.8% due primarily to the prior year $4.1 million write-off related to the
Company's Canadian subsidiary. The decrease was offset by a current year
write-down of $2.1 million associated with the discontinuance of a product line
previously sold by the Company's United Kingdom ("UK") subsidiary, BancTec
Limited.
Interest income of $0.5 million decreased $0.8 million from the prior
twelve-month period primarily due to the use of excess cash in 1999 in
conjunction with the merger.
Interest expense of $22.7 million increased $13.7 million from the prior
year due to additional debt incurred by the Company in the July 1999 merger and
to interest expense on the $150.0 million Senior Notes issued in May 1998. The
Senior Notes replaced $105.0 million of bank debt with a lower effective
interest
10
rate.
Sundry income of $0.5 million decreased $1.6 million primarily due to
foreign currency activity, which resulted in losses of $0.4 million in 1999
compared to gains of $1.0 million in 1998.
A pre-tax loss from continuing operations of $35.8 million for the twelve-
month period ended December 31, 1999 resulted in an income tax benefit of $13.3
million as compared to an income tax provision of $4.2 million on pre-tax
income from continuing operations of $11.5 million for the corresponding prior
year. The effective tax rates are 37% and 36% for the twelve-month periods
ended December 31, 1999 and 1998, respectively.
Comparison of Twelve Months Ended December 31, 1998 and Twelve Months Ended
December 31, 1997
Consolidated revenue of $556.1 million for the twelve months ended December
31, 1998 decreased slightly by $4.9 million from the prior year. During the
fourth quarter of 1998, the Company reversed approximately $5.5 million of
revenue as a result of the cancellation of a systems contract related to a
discontinued product. In 1998, NAS revenue decreased by $22.0 million to
$274.9 million compared to the prior year due primarily to the decline in
demand for large software systems in the U.S and to the expiration of some
maintenance contracts on older document processing systems. While the volume
of the systems integration business had been somewhat variable, the Company
believed that additional factors contributed to the lower revenues, including
bank mergers and consolidations and ongoing competitive pressures. CNS
revenues increased by $21.6 million to $122.5 million for the same period due
to continued growth in in the CNS warranty and repair services. INTL revenues
decreased slightly by $4.5 million to $158.7 million due also to the lower
demand for large systems. Due to the lack of comparative data for the new
segments, the Company has included below, as supplemental comparative
information, a discussion using historical segment data.
Revenue from Manufacturing and Supplies decreased by $7.3 million to $49.9
million compared to the prior year, and revenue for WS decreased by
approximately $16.0 million to $267.9 million for the period. The decreases
were due to ongoing competitive pressures, lower demands for large systems,
particularly in the U.S., customer spending commitments to address Y2K
compliance, and bank mergers and consolidations. Offsetting these decreases was
an increase in USMS revenue of $18.4 million to $238.3 million as compared to
the prior year. The increase was due to an increase in personal computer
services revenues of $21.6 million, partially offset by the expiration of some
maintenance contracts on older BancTec document processing systems.
Consolidated gross profit of $123.4 million decreased by $46.3 million or
27.3% from the prior twelve-month period. Gross profit for manufacturing and
supplies decreased by $20.3 million to $4.9 million for the period, and WS
gross profit decreased $18.3 million to $65.3 million during the same period.
The decreases were due to lower sales volumes and sales of less profitable
systems upgrades, rather than the more profitable new integrated systems. Also
contributing significantly was a $13.6 million write-off of inventory items for
products that were discontinued in conjunction with the Company's
reorganization in the fourth quarter of 1998. Also during the fourth quarter of
1998, the Company recorded approximately $5.6 million in charges, primarily
related to severance, obsolete inventory and closure of the Company's
operations in Australia. Substantially all severance costs had been paid by the
1999 year-end, and the Australian operations were closed early in the 1999
third quarter. The $5.6 million in charges was comprised primarily of the
following: $1.2 million in severance costs as a result of the reorganization,
$3.6 million in obsolete inventory costs, and $0.8 million related to the
closure of the Company's operations in Australia. Gross profit for USMS of
$53.2 million decreased by $7.7 million due to a change in the mix of services
being provided and the effect of start-up costs on certain new long-term
service contracts, partially offset by an increase in personal computer
services revenue.
Operating expenses of $106.3 million increased $13.7 million or 14.8%
compared to the prior twelve-month period. Product development expenses were
comparable to the prior year. Sales and marketing expenses of $44.6 million
increased by $1.4 million or 3.3% due to a higher level of operating
11
activities. General and administrative expenses of $35.4 million increased by
$7.8 million or 28.2% due to the amortization of six months of costs incurred
for the implementation of a new internal information system, certain functional
modules of which became substantially operational in July 1998, and
approximately $4.7 million in charges during the fourth quarter of 1998,
consisting primarily of $2.2 million in severance costs. Goodwill amortization
of $8.6 million increased $4.6 million primarily due to the write-off of $4.1
million of goodwill associated with the Company's Canadian subsidiary, BancTec
Canada, also in conjunction with the Company's reorganization in the fourth
quarter of 1998.
Interest income of $1.3 million increased $0.6 million from the prior
twelve months due to the investment of excess cash from the proceeds of the
$150.0 million debt offering in May 1998.
Interest expense of $9.0 million increased $1.3 million from the prior
twelve months primarily due to the increase in outstanding debt and a higher
interest rate on the new Senior Notes compared to the rate on the bank debt
retired in May 1998, partially offset by the capitalization of interest expense
on capital expenses incurred to implement a new internal information system
during the twelve months ended December 31, 1998.
Sundry income of $2.1 million increased $2.9 million from the prior twelve-
month period primarily due to foreign currency gains of $1.0 million in 1998
compared to $0.7 million in foreign exchange losses 1997.
The provision for income taxes of $4.2 million decreased by $20.8 million
from the prior year due to a decrease in pre-tax income from continuing
operations of $57.8 million. The income tax provision, as a percentage of
income before income taxes is 36.0%, which is consistent with the effective
rate for 1997.
Liquidity and Capital Resources
Cash and cash equivalents, as of December 31, 1999, were $20.3 million
compared to $25.3 million as of December 31, 1998. Total borrowings were
$365.8 million as of December 31, 1999, compared to $156.3 million as of
December 31, 1998. Total working capital decreased to $130.4 million as of
December 31, 1999 from $144.4 million as of December 31, 1998. The $17.0
million decrease in working capital was primarily due to the decrease in
accounts receivable resulting from lower revenues and improved collections.
Cash provided by operations was $19.5 million in 1999, compared to $57.6
million in 1998. The decreased cash flow in 1999 was due primarily to lower
net income from continuing operations offset by a decrease in working capital
as compared to 1998. See the discussion in "Comparison of Twelve Months Ended
December 31, 1999 and Twelve Months Ended December 31, 1998" for the factors
contributing to the decrease in net income.
Cash and cash equivalents, as of December 31, 1998 were $25.3 million
compared to $21.7 million as of December 31, 1997. Total borrowings were
$156.3 million as of December 31, 1998, compared to $107.9 million as of
December 31, 1997. Total working capital increased to $144.4 million as of
December 31, 1998, from $61.3 million as of December 31, 1997. The $83.1
million increase in working capital was primarily due to the retirement of
short-term debt from the proceeds of the long-term debt and to the increase in
the current deferred tax asset.
Cash provided by operations was $57.6 million in 1998, compared to $54.7
million in 1997. The increased cash flow in 1998 was due primarily to a lower
increase in working capital as compared to 1997. See the discussion in
"Comparison of Twelve months Ended December 31, 1998 and Twelve Months Ended
December 31, 1997" for the factors contributing to the decrease in net income.
The Company believes that it has sufficient financial resources available
to support its anticipated requirements to fund operations and interest
obligations on debt, and is not aware of any trends, demands or commitments
that would have a material impact on the Company's long or short-term
liquidity.
12
On July 22, 1999, the merger of the Company with WCAS was completed.
Subsequent to, and as a result of the merger, the following debt instruments
were put into place: 1) $75.0 million Tranche A Term Loan due June 2004 payable
to a bank in sixteen consecutive quarterly installments beginning September 30,
2000, bearing interest, at the Company's option, of either London Interbank
Offered Rate ("LIBOR") plus 2.75% or prime plus 1.75% (10.25% at December 31,
1999), and 2) $160.0 million subordinated unsecured "Sponsor" notes due 2009,
bearing interest at 10.0%. The $160.0 million is payable to WCAS, a related
party. The Company used $30.0 million of the cash proceeds from the sale of its
community banking business to pay down the term loan to $45.0 million in the
fourth quarter of 1999. Collateral for the term loan includes all tangible and
intangible assets of the Company.
On May 22, 1998, the Company sold $150.0 million of 7.5% Senior Notes due
June 1, 2008 in a Rule 144A private offering. On August 28, 1998, the Senior
Notes were registered as public debt. Interest is due and payable in semi-
annual installments beginning December 1, 1998. The notes contain covenants
placing limitations on the Company's ability to permit subsidiaries to incur
certain debts, incur certain loans and engage in certain sale and leaseback
transactions. The Company is in compliance with all covenants.
At December 31, 1999, the Company has a secured credit agreement with
financial institutions, which provides for a $50.0 million short-term revolving
credit facility (the "agreement", or the "revolver"). The agreement contains
restrictive covenants which also apply to the Tranche A Term Loan. The
covenants have variable parameters which, among other things, restrict payment
of dividends, require the Company to maintain a minimum EBITDA to interest
expense ratio, as defined, limit the maximum debt to EBITDA, restrict the
minimum fixed charge to interest expense ratio and limit capital expenditures.
At December 31, 1999, the Company is in compliance with all covenants required
under the agreement. The revolver bears interest at the lender's prime
commercial rate plus 1.75%, or at the Company's option, the LIBOR on
Eurocurrency borrowings plus 2.75%, depending on the Company's debt to
capitalization ratio (10.25% at December 31, 1999). A commitment fee of 0.5% on
the unused revolving credit facility is payable quarterly. The Company had an
outstanding balance of $9.0 million under the agreement at December 31, 1999.
Also outstanding as of December 31, 1999, were foreign credit agreements in
the amount of $1.5 million payable in Japanese yen. The terms on the
agreements range from three months to one year at interest rates up to 1.75%.
There are no restrictive covenants related to these agreements.
On December 5, 1997, the Company redeemed substantially all $43.7 million
of its 7.25% convertible subordinated debentures for cash at par plus accrued
interest. Holders of $60,000 face amount of the debentures elected to convert
to the Company's common stock at an exchange rate of 35.224 shares per $1,000
bond.
The Company spent $3.8 million, $13.5 million, and $14.4 million during
1999, 1998, and 1997 for computer hardware, software and consulting to
implement a new information system for the Company. Primary functionality of
the new information system became operational during July 1998. This new
system will meet the foreseeable needs of the Company and is Y2K compliant.
As part of its stock repurchase program, the Company bought 2,506,600
shares and 200,000 shares during the twelve months ended December 31, 1998 and
1997, respectively.
Inflation has not had a material effect on the operating results of the
Company.
Year 2000 Considerations
With the exception of a few minor issues that have been or are being
resolved, BancTec, its customers and suppliers have all reported business as
usual since the rollover of the clock from 1999 to 2000 (millennium rollover)
and February to March 2000 (leap year rollover). Following is a detailed
account of BancTec's Y2K preparations.
13
During 1998, the Company developed a master plan to assess and address
potential risks it faced as a result of Y2K issues. The plan provided strategic
guidance for all products, services, systems, relationships, and infrastructure
that may encounter a Y2K issue. A corporate Y2K compliance team was formed to
assist these various project teams in implementing their individual Y2K plans
under the master plan. The compliance team reports to a senior officer of the
Company.
During the third quarter of 1998, the Company substantially completed the
implementation of SAP, an enterprise resource planning information system, for
use in all the Company's domestic operations, which is represented to be Y2K
compliant by the software vendor. The implementation of this system cost
approximately $31.7 million and the cost cannot reasonably be allocated to the
portion attributable to Y2K issues. SAP replaced accounting, manufacturing,
purchasing, sales and distribution, and human resources systems. A new customer
service electronic data interchange system that interfaces with SAP was
implemented in 1999. The system cost about $1.2 million and the portion
attributable to Y2K issues is not identifiable. Internationally, the Company
has implemented Y2K compliant management information systems and service
management systems, the costs of which are included in the amounts below.
The implementation cost of the Y2K master plan is estimated at $7.0 million,
of which $4.0 million relates to non-recurring internal (mostly non-incremental)
employee costs. Another $1.8 million was for new systems and upgrades. The
remaining $1.2 million relates to the incremental costs of software,
consultants, and other Y2K-related expenses. This estimate may not include all
internal costs of employees working on Y2K issues, as these costs were not
tracked separately. As a result of implementing the master plan during 1999,
the Company does not expect to incur future significant costs as a result of Y2K
issues.
The process of ensuring that the Company's major vendors are addressing
their Y2K concerns is complete. Nearly all vendors (over 1,000) and key
customers were evaluated and no significant concerns have been identified.
Alternate vendors and strategies were considered and would have been implemented
if necessary.
Notwithstanding the Company's Y2K compliance efforts to date and in the
future, achieving Y2K compliance is dependent on many factors, some of which are
not completely within the Company's control. Should either the Company's
systems or the systems of one or more significant customers, vendors, or
suppliers fail to achieve Y2K compliance, the Company is at risk as the business
and financial condition could be materially adversely affected.
BancTec has business continuity and contingency plans ("BCCPs") for Y2K.
The purpose of our BCCPs is to ensure that, should unexpected Y2K failures occur
or outside suppliers fail, a minimum acceptable level of processes and services
will be functioning for the business on a short-term basis until permanent fixes
are implemented.
NOTICE: This information is a "Year 2000 Readiness Disclosure" and conforms
to the Year 2000 Information and Readiness Disclosure Act of 1998.
ITEM 7(A). Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain market risk primarily related to
fluctuations in interest rates. The following discussion summarizes the
Company's financial instruments, which are subject to such risks.
The Company's $160.0 million in Sponsor notes were issued in U.S. dollars at
a fixed interest rate of 10.0%. Interest is due and payable quarterly beginning
September 30, 1999. The notes mature in July 2009. The fair market value of the
Sponsor notes approximates its carrying value as of December 31, 1999.
The Company's $150.0 million in Senior Notes were issued in U.S. dollars at
a fixed interest rate of 7.5%. Interest is due and payable in semi-annual
installments beginning December 1, 1998. The notes mature on June 1, 2008. As
of December 31, 1999, the Senior Notes have a market value of approximately
$130.0 million based on an estimated yield of 10.0%.
14
The Company also has Japanese yen-denominated foreign credit agreements in
the amount of $1.5 million as of December 31, 1999. The terms on the agreements
range from three months to one year at interest rates up to 1.75%. The fair
market value on the yen-denominated foreign debt approximates its carrying value
of as December 31, 1999.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks and generally consist of interest rate swap
and/or interest rate cap agreements. There were no instruments in place at
December 31, 1999.
15
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
BancTec, Inc.:
We have audited the accompanying consolidated balance sheets of BancTec,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BancTec, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Dallas, Texas
February 16, 2000
(except with respect to the matters discussed in Note P,
as to which the date is February 25, 2000).
16
BANCTEC, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
December 31,
-----------------------------------
1999 1998
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $2,694
at December 31, 1999 $ 20,292 $ 25,313
Short-term investments 440 837
Accounts receivable, less allowance for doubtful accounts of
$12,790 at December 31, 1999 and $9,333 at December 31,
1998 143,745 166,554
Inventories 64,193 66,590
Current deferred tax asset 26,803 20,762
Other 11,851 9,157
------------- -------------
Total current assets 267,324 289,213
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land 2,860 3,030
Field support spare parts 117,010 102,262
Systems and software 62,809 53,150
Machinery and equipment 54,454 53,436
Furniture, fixtures and other 27,262 23,151
Buildings 29,637 28,848
------------- -------------
294,032 263,877
Less accumulated depreciation 168,130 141,154
------------- -------------
Net property, plant and equipment 125,902 122,723
GOODWILL, less accumulated amortization of $28,200 at
December 31, 1999 and $22,448 at December 31, 1998 54,903 60,818
OTHER ASSETS 24,976 13,133
NET ASSETS OF DISCONTINUED OPERATIONS -- 34,425
------------- -------------
TOTAL ASSETS $ 473,105 $ 520,312
============= =============
See notes to consolidated financial statements.
17
BANCTEC, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
December 31,
---------------------------------
1999 1998
------------ ------------
CURRENT LIABILITIES:
Revolving credit facilities $ 10,468 $ 5,024
Current maturities of long-term debt 4,854 878
Trade accounts payable 24,978 23,052
Other accrued expenses and liabilities 61,181 76,267
Deferred revenue 29,420 31,519
Income taxes 5,975 8,068
------------ ------------
Total current liabilities 136,876 144,808
LONG-TERM DEBT, less current maturities 350,500 150,352
OTHER LIABILITIES 7,467 5,071
COMMITMENTS AND CONTINGENCIES (Note L)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - authorized, 1,000,000 new shares and 1,000
old shares of $.01 par value at December 31, 1999 and 1998:
Series A - no shares issued and outstanding - -
Series B - no shares issued and outstanding - -
Common stock authorized, 32,000,000 new shares and
45,000,000 old shares of $.01 par value at December 31,
1999 and 1998, respectively
Old Common stock-issued and outstanding 19,373,000 shares
at December 31, 1998 - 194
New Common stock-issued and outstanding 17,003,838 shares
at December 31,1999 170 -
Class A common stock-issued and outstanding 1,181,946 shares
at December 31, 1999 12 -
Additional paid-in capital 137,180 170,318
Retained earnings (deficit) (155,296) 54,932
Foreign currency translation adjustments (3,804) (3,736)
Unearned compensation - (1,627)
------------ ------------
Total stockholders' equity (deficit) (21,738) 220,081
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 473,105 $ 520,312
============ ============
See notes to consolidated financial statements.
18
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Months Ended December 31,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
REVENUE $ 534,590 $ 556,097 $ 560,996
COST OF SALES 430,558 432,694 391,339
---------- ---------- ----------
Gross profit 104,032 123,403 169,657
OPERATING EXPENSES:
Product development 15,917 17,732 17,850
Selling, general and administrative 96,146 79,969 70,773
Goodwill amortization 6,188 8,568 3,929
---------- ---------- ----------
118,251 106,269 92,552
---------- ---------- ----------
Income (loss) from operations (14,219) 17,134 77,105
OTHER INCOME (EXPENSE):
Interest income 546 1,296 740
Interest expense (22,685) (9,024) (7,730)
Sundry, net 516 2,140 (762)
---------- ---------- ----------
(21,623) (5,588) (7,752)
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (35,842) 11,546 69,353
INCOME TAX PROVISION (BENEFIT) (13,262) 4,154 24,967
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (22,580) 7,392 44,386
LOSS FROM DISCONTINUED OPERATIONS, NET
OF TAX BENEFIT OF $830, $1,447 AND $996 at
DECEMBER 31, 1999, 1998 AND 1997,
RESPECTIVELY (1,415) (2,579) (1,772)
GAIN ON DISPOSAL OF BUSINESS UNIT, NET OF
TAX PROVISION OF $7,516 12,798 -- --
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (11,197) 4,813 42,614
EXTRAORDINARY ITEM, NET OF TAXES OF $260 -- -- (462)
---------- ---------- ----------
NET INCOME (LOSS) $ (11,197) $ 4,813 $ 42,152
========== ========== ==========
See notes to consolidated financial statements.
19
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended December 31,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ (22,580) $ 7,392 $ 44,386
Adjustments to reconcile net income (loss) to cash flows provided
by operating activities:
Depreciation and amortization 43,341 61,412 37,246
Deferred income tax (benefit) expense (17,913) (3,083) 5,453
Loss on disposition of property, plant and equipment 1,929 2,312 1,427
Other non-cash items 2,323 (1,032) 3,353
(Increase) decrease in accounts receivable 24,909 (23,711) (23,719)
(Increase) decrease in inventories 1,041 2,918 (2,802)
Increase in other assets (9,014) (5,334) (2,839)
Increase (decrease) in trade accounts payable 1,926 5,821 (969)
Increase (decrease) in deferred revenue (2,099) 4,604 (5,120)
Increase (decrease) in other accrued expenses and liabilities (4,386) 6,265 (1,720)
---------- ---------- ----------
Cash flows provided by operating activities 19,477 57,564 54,696
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (45,880) (51,378) (59,199)
Purchase of businesses, net of cash acquired (779) (2,041) (724)
Proceeds from disposal of business unit 50,000 -- --
Change in net assets of discontinued operations 3,324 (3,976) (731)
Investment in unconsolidated subsidiary (2,375) -- --
Other -- -- 53
---------- ---------- ----------
Cash flows provided by (used in) investing activities 4,290 (57,395) (60,601)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of current maturities of long-term debt and capital lease obligations (884) (11,970) (11,926)
Proceeds from long-term borrowings 228,851 150,000 2,294
Payments on long-term borrowing (30,000) (10,558) (43,722)
Proceeds from (payments on) short-term borrowings, net 5,584 (79,750) 53,591
Repurchase of common stock (370,497) (49,837) (4,692)
Net proceeds from sales and issuances of common stock 138,316 3,531 15,166
---------- ---------- ----------
Cash flows provided by (used in) financing activities (28,630) 1,416 10,711
EFFECT OF EXCHANGE RATE CHANGES ON CASH (158) 2,045 (2,325)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,021) 3,630 2,481
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR 25,313 21,683 19,202
---------- ---------- ----------
CASH AND CASH EQUIVALENTS--END OF YEAR $ 20,292 $ 25,313 $ 21,683
========== ========== ==========
See notes to consolidated financial statements.
20
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the twelve months ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
Foreign
Common Additional Retained Currency
Stock Paid Earnings Translation
Old New Capital (Deficit) Adjustments
--------------- ---------- --------- -----------
Balance at December 31, 1996
(includes 29,936 treasury shares) $ 208 $ - $ 201,006 $ 7,967 $ (1,612)
Common stock issued principally
under employee stock plan 10 - 15,013 - -
Common stock issued/cancelled
under restricted stock plans, net - - 83 - -
Repurchase of common stock - - - - -
Treasury stock cancelled - - (388) - -
Conversion of 7.25% debentures - - 60 - -
Tax benefit from exercise of
stock options - - 5,460 - -
Amortization of unearned
compensation - - - - -
Foreign currency translation
adjustments - - - - (3,517)
Net income - - - 42,152 -
--------------- ---------- --------- -----------
Comprehensive Income
Balance at December 31, 1997
(includes 200,000 treasury shares) 218 - 221,234 50,119 (5,129)
Common stock issued principally
under employee stock plan 3 - 1,988 - -
Common stock issued/cancelled
under restricted stock plan, net - - 1,077 - -
Amortization of unearned
compensation - - - - -
Repurchase of common stock - - - - -
Treasury stock cancelled (27) - (54,502) - -
Tax benefit from exercise of
stock options - - 521 - -
Foreign currency translation
adjustments - - - - 1,393
Net income - - - 4,813 -
--------------- ---------- --------- -----------
Comprehensive Income
Balance at December 31, 1998 194 - 170,318 54,932 (3,736)
Net proceeds from common
stock issued pursuant to merger - 182 137,180 - -
Common stock issued principally
under employee stock plans 1 - 866 - -
Common stock issued/cancelled
under restricted stock plan, net - - 87 - -
Amortization of unearned
compensation - - - - -
Repurchase of common stock (195) - (171,271) (199,031) -
Foreign currency translation
adjustments - - - - (68)
Net loss - - - (11,197) -
--------------- ---------- --------- -----------
Comprehensive Income (loss)
Balance at December 31, 1999 $ - $ 182 $ 137,180 $(155,296) $ (3,804)
=============== ========== ========= ===========
Compre-
Unearned hensive
Treasury Compen- Income
Stock sation Total (Loss)
--------------- ---------- --------- -----------
Balance at December 31, 1996
(includes 29,936 treasury shares) $ (388) $ (2,461) $ 204,720
Common stock issued principally
under employee stock plan - - 15,023
Common stock issued/cancelled
under restricted stock plans, net - - 83
Repurchase of common stock (4,692) - (4,692)
Treasury stock cancelled 388 - -
Conversion of 7.25% debentures - - 60
Tax benefit from exercise of
stock options - - 5,460
Amortization of unearned
compensation - 1,234 1,234
Foreign currency translation
adjustments - - (3,517) $ (3,517)
Net income - - 42,152 42,152
--------------- ---------- --------- -----------
Comprehensive Income $ 38,635
===========
Balance at December 31, 1997
(includes 200,000 treasury shares) (4,692) (1,227) 260,523
Common stock issued principally
under employee stock plan - - 1,991
Common stock issued/cancelled
under restricted stock plan, net - (930) 147
Amortization of unearned
compensation - 530 530
Repurchase of common stock (49,837) - (49,837)
Treasury stock cancelled 54,529 - -
Tax benefit from exercise of
stock options - - 521
Foreign currency translation
adjustments - - 1,393 $ 1,393
Net income - - 4,813 4,813
--------------- ---------- --------- -----------
Comprehensive Income $ 6,206
===========
Balance at December 31, 1998 - (1,627) 220,081
Net proceeds from common
stock issued pursuant to merger - - 137,362
Common stock issued principally
under employee stock plans - - 867
Common stock issued/cancelled
under restricted stock plan, net - (126) (39)
Amortization of unearned
compensation - 1,753 1,753
Repurchase of common stock - - (370,497)
Foreign currency translation
adjustments - - (68) $ (68)
Net loss - - (11,197) (11,197)
--------------- ---------- --------- -----------
Comprehensive Income (loss) $ (11,265)
===========
Balance at December 31, 1999 $ - $ - $ (21,738)
=============== ========== =========
See notes to consolidated financial statements.
21
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Description of Business
BancTec, Inc., a Delaware corporation, and subsidiaries (the "Company")
is a worldwide systems integration and services company with a 27-year history
of innovation in imaging technology, financial transaction processing and
workflow productivity improvement. Serving a variety of industries, including
banking, financial services, insurance, healthcare, governmental agencies and
others, the Company offers a comprehensive portfolio of payment and document
processing systems and services, workflow and image management software
products, and computer and network support services.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents and Short-Term Investments
Cash equivalents are comprised of highly liquid instruments with original
maturities of three months or less. Short-term investments are similar
instruments with original maturities in excess of three months and are valued
at cost, which approximates market.
Inventories
Inventories are valued at the lower of cost or market and include the cost
of raw materials, labor, factory overhead and purchased subassemblies. Cost is
determined using the first-in, first-out and weighted average methods. The
Company continually assesses the appropriateness of inventory valuations giving
consideration to obsolete and slow-moving inventories.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated
depreciation and amortization. Provision for depreciation and amortization is
based on the estimated useful lives of the assets and is computed using the
straight line method.
Deferred Revenue
Certain of the Company's contracts permit the Company to bill the customer
in advance of the time revenue is recognized. Deferred revenue represents
billings in excess of revenue recognized. Revenue is recognized ratably over
the contract period as the services are performed, which usually occurs within
one year of billing.
22
Derivative Financial Instruments
Premiums paid for purchased interest rate cap agreements are amortized to
interest expense over the period of the agreements. Unamortized premiums, if
any, are included in other current assets or other assets on the balance sheet
depending on the amortization period.
Revenue Recognition
The Company's revenue recognition policies for its principal sources of
revenue are:
Equipment and software sales--Revenue from sales of established products is
recognized upon shipment of completed product in conformity with certain
provisions of AICPA Statement of Position No. 97-2, "Software Revenue
Recognition." Revenue for new products is generally recognized at the time of
acceptance by the customer. Contracts with lengthy software development periods
are accounted for in conformity with Accounting Research Bulletin No. 45,
"Long-Term Construction-Type Contracts." Under such contracts, the costs in
excess of billings were immaterial at December 31, 1999 and 1998. All contract
costs, including equipment and software, are charged to cost of sales at the
time the related revenue is recognized.
Maintenance--Revenue from maintenance contracts is recognized ratably over
the term of the contract.
Leasing--Revenue from operating leases of equipment is recognized ratably
over the terms of the related contract. Revenue from sales type leases is
recorded as the present value of the minimum lease payments (net of executory
costs), computed at the interest rate implicit in the lease in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for
Leases."
Depreciation and Amortization
Depreciation is provided in amounts sufficient to charge the cost of
depreciable assets to operations over their estimated service lives. Such
amounts are charged to cost of sales or operating expenses in the consolidated
statements of operations, as appropriate. The straight-line method of
depreciation is used for financial reporting purposes. Accelerated methods are
used for tax purposes.
Leasehold improvements and assets recorded under capital lease obligations
are depreciated over the shorter of their estimated useful life or the
remaining lease term. Field support spare parts, which are repairable
replacement parts for products maintained under service contracts, are
amortized over a useful life of three or five years. Depreciable lives for
furniture, fixtures and machinery are generally from five to seven years.
Buildings are depreciated over a 40-year life.
Goodwill is amortized on a straight-line basis over their estimated useful
lives. The excess of cost over net assets of acquired businesses is amortized
over five to 40 years. Other intangible assets are amortized over three to five
years.
The Company evaluates the recoverability of goodwill and other long-lived
assets by measuring the carrying value of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain long-
lived assets are not sufficient to recover the carrying value of such assets,
the assets are adjusted to their fair values.
During the 1999 fourth quarter, the Company wrote down $2.1 million of
goodwill associated with its United Kingdom ("UK") subsidiary, BancTec Ltd.
The write-down was associated with the discontinuance
23
of a product line sold by the UK subsidiary. The loss is included in goodwill
amortization in the Consolidated Statements of Operations.
During the fourth quarter of 1998, management decided not to pursue the
development of certain third party maintenance business for a Canadian
subsidiary, BancTec Canada, in conjunction with the reorganization discussed in
Note E. Consequently, the related future undiscounted cash flows of such
operations were not sufficient to cover the carrying value of the subsidiary's
goodwill. During 1998, the Company recorded a charge of approximately $4.1
million to goodwill amortization expense as a result of the impairment. The
loss is included in goodwill amortization in the Consolidated Statements of
Operations.
Product Development
Company sponsored software product development costs are expensed as
incurred until technological feasibility has been established. At that time,
the software product development costs are capitalized in conformity with SFAS
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." At December 31, 1999 and 1998, the Company had no
capitalized software costs. Software costs are amortized to cost of sales on a
per unit basis or on a straight-line basis over a three year period, whichever
is less. The Company performs a periodic review to determine the realization of
capitalized software. When it is determined that there is impairment, carrying
amounts are written down to their net realizable value. The amount of software
development costs charged to expense for the twelve-month periods ended
December 31, 1998 and 1997 was $181,000, and $180,000, respectively. There was
no amortization for software development costs for the twelve-month period
ended December 31, 1999. Customer sponsored product development costs are
generally charged to cost of sales or the proceeds generated therefrom are
credited to product development costs by the Company.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at the year-end rates of exchange. Revenue and
expenses are translated monthly at the average exchange rates for the month.
Translation gains and losses including those arising from inter-company
accounts considered to be long-term investments, are reported as a separate
component of stockholders' equity, and transaction gains and losses are
included in results of operations in Sundry, net. Foreign currency transaction
gains/(losses) for the twelve months ended December 31, 1999, 1998 and 1997,
were ($445,000), $972,000 and ($741,000), respectively.
Concentration of Credit Risk
The Company sells its products to certain customers under specified credit
terms in the normal course of business. These customers can generally be
classified as banking, financial services, insurance, healthcare, government
agencies, utilities or telecommunications. Due to the diversity of the
Company's customers, management does not consider there to be a concentration
of risk within any single classification.
Reclassification
Certain amounts have been reclassified from the prior years to conform to
the current year presentation.
NOTE B--ACQUISITIONS AND EQUITY INVESTMENTS
During the first quarter of 1998, the Company acquired Groupe ParmaTec
Inc., a Montreal based object-oriented software technology company for
approximately $2.0 million. The acquisition was accounted for under the
purchase method of accounting.
24
NOTE C--MERGER
On July 22, 1999, the merger of BancTec with Colonial Acquisition Corp.,
("Colonial") was completed. Colonial, created only to engage in the merger,
was organized and owned 93.5% by Welsh, Carson, Anderson & Stowe ("WCAS"), a
private investment partnership. Convergent Equity Partners L.P. ("Convergent")
owned approximately 6.5% of Colonial's capital stock prior to the merger. The
above-named entities and related parties are now the sole shareholders of
BancTec, with WCAS owning 17,003,838 shares of New Common Stock and Convergent
owning 1,181,946 shares of Class A common stock. Holders of both New Common
Stock and Class A common stock are entitled to one vote per share. The Class A
common stockholder is entitled to one seat on the Company's Board of Directors.
The former BancTec shareholders received $18.50 per common share in cash,
or approximately $360.2 million. Funding for the distribution to the former
BancTec shareholders was provided by a $145.0 million capital contribution from
WCAS and Convergent, by the Tranche A Term Loan, the Sponsor notes, and the
Revolving Credit Facility discussed in Note G. The transaction was accounted
for as a recapitalization in which the historical basis of the Company's assets
and liabilities was not affected and no new goodwill related to the merger was
created. In addition to the funds that were paid for the shares, cash payments
were made for employee stock options of $9.3 million and an employee stock
purchase plan of $0.3 million. The options and the employee stock purchase
plan payments were recorded as a reduction to stockholders' equity.
Under the terms of the merger agreement, a Rabbi Trust in the approximate
amount of $5.5 million was established for potential senior management
separation payout pursuant to related employment agreements. The $5.5 million
was segregated as restricted cash, and the year-end restricted cash balance was
approximately $2.7 million. Under the agreements, certain BancTec executives
are eligible to receive separation pay, as defined, from one to three years
after the merger date if certain separation criteria are met. BancTec expects
to pay at least $3.4 million pursuant to the agreements, and accordingly,
recorded a corresponding accrual in the third quarter. The balance of the
accrual was approximately $2.5 million at December 31, 1999 and is expected to
be paid in fiscal 2000. Merger-related fees totaling $17.8 million were paid
to various organizations in conjunction with closing. Of this amount, $11.4
million was allocated to the capital portion of the transaction and reflected
as a reduction to stockholders' equity, $6.2 million was allocated to the
Company's new debt instruments to be amortized over their respective lives, and
approximately $0.2 million of additional merger-related fees were expensed in
the fourth quarter. Included in the above-referenced fees were payments to WCAS
in the amount of $5.8 million and to Convergent in the amount of $0.2 million.
See also Note G for additional related party information.
NOTE D--DISCONTINUED OPERATIONS
On September 9, 1999, BancTec completed the sale of substantially all of
the net assets of its community banking business to Jack Henry and Associates
("JHA") of Monett, Missouri. The transaction was effective August 31, 1999.
The Company received proceeds of $50.0 million in cash from the sale and
recorded a pre-tax gain of approximately $20.3 million. For financial
statement purposes, the Company treated the sale as a discontinued operation,
and accordingly, financial statement presentation is made in accordance with
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." Under this Opinion, the net
assets of discontinued operations have been shown as a single line item on the
Consolidated Balance Sheets. Revenues from the community banking business were
$20.7 million, $41.8 million, and $42.5 million in fiscal 1999, 1998, and 1997,
respectively.
NOTE E--REORGANIZATION
In October 1998, the Company announced plans to reorganize its operations
into two primary businesses: Worldwide Financial Systems ("WFS") and Computer
and Network Services ("CNS"). In conjunction with this reorganization, the
Company recorded charges of approximately $22.1 million, of which $13.6 million
relates to inventory obsolescence costs as discussed in Note F and $4.1 million
relates
25
to the impairment of goodwill as discussed in Note A. The remaining charges
totaled approximately $4.4 million, of which $2.0 million was recorded as cost
of sales expense and $2.4 million was recorded as selling, general and
administrative expense. Included in the reorganization charge is an accrual for
approximately $1.0 million related to the closure of the Company's operations
in Australia. The remaining $3.4 million primarily relates to severance costs
that were paid to approximately 60 employees and management's estimate of
severance paid to the Company's chief executive officer who announced his
retirement in the fourth quarter of 1998. Nearly all affected employees were
terminated. As of December 31, 1999, substantially all amounts had been paid.
NOTE F--INVENTORIES
In the fourth quarter of 1998, the Company discontinued certain product
lines in conjunction with the reorganization (see Note E) and, accordingly
expensed approximately $13.6 million of inventory.
December 31,
1999 1998
----------------- ----------------
(In thousands)
Raw materials $ 18,740 $ 27,840
Work-in-process 4,429 3,830
Finished goods 41,024 34,920
---------------- ---------------
$ 64,193 $ 66,590
================ ===============
NOTE G--DEBT
Long-term debt is presented in the following table:
December 31,
1999 1998
----------------- ------------------
(In thousands)
Term loan payable to banks due June 2004 $ 45,000 $ -
7.5% senior notes due June 1, 2008 150,000 150,000
Subordinated unsecured "Sponsor" notes due 2009 160,000 -
Obligations under capital leases 354 1,230
----------------- ----------------
355,354 151,230
Less current maturities 4,854 878
----------------- ----------------
$ 350,500 $ 150,352
================= ================
Future maturities of long-term debt, excluding capital lease obligations are as
follows:
Year (In thousands)
------------- -------------------
2000 $ 4,500
2001 9,000
2002 10,500
2003 13,500
2004 7,500
Thereafter 310,000
-------------------
$ 355,000
===================
26
On July 22, 1999, the merger of the Company with WCAS was completed (see
Note C). Subsequent to, and as a result of the merger, the following debt
instruments were put into place: 1) $75.0 million Tranche A Term Loan due June
2004 payable to a bank in sixteen consecutive quarterly installments beginning
September 30, 2000, bearing interest, at the Company's option, of either London
Interbank Offered Rate ("LIBOR") plus 2.75% or prime plus 1.75% (10.25% at
December 31, 1999), and 2) $160.0 million subordinated unsecured "Sponsor"
notes due 2009, bearing interest at 10.0%. The $160.0 million is payable to
WCAS, a related party. The Company used $30.0 million of the cash proceeds from
the sale of its community banking business to pay down the term loan to $45.0
million in the fourth quarter of 1999. Collateral for the term loan includes
all tangible and intangible assets of the Company.
On May 22, 1998, the Company sold $150.0 million of 7.5% Senior Notes due
June 1, 2008 in a Rule 144A private offering. On August 28, 1998, the Senior
Notes were registered as public debt. Interest is due and payable in semi-
annual installments beginning December 1, 1998. The notes contain covenants
placing limitations on the Company's ability to permit subsidiaries to incur
certain debts, incur certain loans and engage in certain sale and leaseback
transactions. The Company is in compliance with all covenants.
At December 31, 1999, the Company has a secured credit agreement with
financial institutions, which provides for a $50.0 million short-term revolving
credit facility (the "agreement", or the "revolver"). The agreement contains
restrictive covenants which also apply to the Tranche A Term Loan. The
covenants have variable parameters which, among other things, restrict payment
of dividends, require the Company to maintain a minimum EBITDA to interest
expense ratio, as defined, limit the maximum debt to EBITDA, restrict the
minimum fixed charge to interest expense ratio and limit capital expenditures.
The agreement also allows for an Adjusted EBITDA calculation which excludes
certain expense items in accordance with the contract's provisions. Capital
expenditures at a quarter end for the preceding twelve-month period are not to
exceed $50.0 million. At December 31, 1999, the Company is in compliance with
all covenants required under the agreement. The revolver bears interest at the
lender's prime commercial rate plus 1.75%, or at the Company's option, the
LIBOR on Eurocurrency borrowings plus 2.75%, depending on the Company's debt to
capitalization ratio (10.25% at December 31, 1999). A commitment fee of 0.5%
on the unused revolving credit facility is payable quarterly. The Company had
an outstanding balance of $9.0 million under the agreement at December 31,
1999.
Also outstanding as of December 31, 1999, were foreign credit agreements in
the amount of $1.5 million payable in Japanese yen. The terms on the
agreements range from three months to one year at interest rates up to 1.75%.
There are no restrictive covenants related to these agreements.
Except for the Senior Notes which, as of December 31, 1999, have a fair
market value of approximately $130.0 million based on an estimated yield of
10.0%, the fair market value of the Company's debt instruments approximates
their respective carrying values.
The Company paid cash totaling $21,203,000, $7,856,000, $7,943,000, for
interest during the twelve months ended December 31, 1999, 1998 and 1997,
respectively. During the twelve months ended December 31, 1999 and 1997, the
Company capitalized no interest costs. During the twelve months ended December
31, 1998, the Company capitalized $731,000, in interest on the costs incurred
to implement a new internal information system.
27
NOTE H--OTHER ACCRUED EXPENSES AND LIABILITIES
December 31,
1999 1998
---------------------- -------------------
(In thousands)
Salaries, wages and other compensation $ 15,899 $ 19,105
Advances from customers 9,543 9,479
Accrued taxes, other than income taxes 5,688 5,918
Accrued interest payable 1,157 969
Accrued invoices and costs 5,892 8,545
Accrued reorganization costs 215 3,879
Other 22,787 28,372
----------------- -----------------
$ 61,181 $ 76,267
================= =================
NOTE I--INCOME TAXES
The income tax provision (benefit) consists of the following:
Twelve Months Ended
December 31,
----------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------- -------------------
(In thousands)
Current:
Federal $ 3,205 $ 621 $ 9,358
State 231 387 3,240
Foreign 7,901 4,782 5,660
---------------------- ----------------- -----------------
Total current 11,337 5,790 18,258
---------------------- ----------------- -----------------
Deferred:
Federal (15,744) (2,684) 3,709
Foreign (2,169) (399) 1,744
---------------------- ----------------- -----------------
Total deferred (17,913) (3,083) 5,453
---------------------- ----------------- -----------------
$ (6,576) $ 2,707 $ 23,711
======================== ================= =================
28
The difference between the income tax provision computed at the statutory
federal income tax rate and the financial statement provision for taxes is
summarized as follows:
Twelve Months Ended December 31,
-----------------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(In thousands)
Provision (benefit) at U.S. statutory rate of 35% for
all periods $ (6,221) $ 2,632 $ 23,305
Increase in tax expense resulting from:
Impact of foreign and Puerto Rico income tax rates 1,310 2,724 54
State income tax, net of federal income tax benefit 150 426 2,106
Utilization of net operating losses - (4,419) (4,291)
Foreign losses not providing a current benefit - 2,086 407
Goodwill amortization 7,481 1,077 1,579
Valuation allowance (8,103) - -
Other (1,193) (1,819) 551
-------------- -------------- --------------
$ (6,576) $ 2,707 $ 23,711
============== ============== ==============
The Company paid cash totaling $14,614,000, $10,168,000 and $9,631,000, for
income taxes during the twelve months ended December 31, 1999, 1998 and 1997,
respectively.
Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax basis of assets and liabilities and their
financial reporting basis. Deferred tax assets (liabilities), as determined
under the provisions of SFAS No. 109, "Accounting for Income Taxes", were
comprised of the following:
December 31,
-----------------------------------------------
1999 1998
----------------- ----------------
(In thousands)
Gross deferred tax assets:
Net operating losses $ 26,946 $ 24,431
Inventory reserves 9,673 7,399
Depreciation 1,641 151
Receivable allowance 2,642 1,378
Intangible assets previously deducted 2,890 4,038
Deferred revenues 3,413 3,701
Deferred compensation 1,481 4,183
Foreign timing differences, net 784 706
Taxes paid on intercompany profits 1,330 1,146
Other 4,361 3,390
----------------- ----------------
Total gross deferred tax asset 55,161 50,523
----------------- ----------------
Gross deferred tax liabilities:
Tax deductible deferred computer conversion costs (7,909) (8,037)
----------------- ----------------
Total gross deferred tax liability (7,909) (8,037)
Deferred tax asset valuation reserve (8,990) (22,137)
----------------- ----------------
Net deferred tax asset $ 38,262 $ 20,349
================= ================
The Company has net operating loss carryforwards which expire as follows:
2000 through 2004, $39,649,000; 2005 through 2009, $24,065,000; 2010 through
2014, $503,000; 2015 through 2019, $2,419,000; and indefinite, $6,052,000.
29
The net change in the deferred tax asset valuation reserve for the twelve
months ended December 31, 1999 and 1998, was a decrease of $13,147,000 and
$12,284,000, respectively. During 1999, federal revenue agent reviews were
completed; consequently, management reduced the estimated valuation allowance
related to certain deferred tax assets. In 1998, the decrease was primarily
attributable to the reversal of acquisition timing differences, inventory
reserves, and utilization of net operating loss carry forwards.
Undistributed earnings of foreign subsidiaries were approximately
$30,338,000 and $25,497,000 and $21,165,000 at December 31, 1999, 1998 and
1997, respectively. No taxes have been provided on these undistributed
earnings as they are considered to be permanently reinvested.
NOTE J--STOCKHOLDERS' EQUITY
Employee Stock Award Plans
Prior to July 22, 1999, the date of the merger, the Company had various
stock award plans. In general, the plans provided for the granting of options
or restricted shares to key employees. As a result of the merger, all options
and restricted shares became fully vested and were converted into the right to
receive $18.50 in cash per common share. A summary of the key provisions of
each type of award is as follows:
Stock Options
In general, the plans provided for the granting of options at not less than
fair market value of the stock at the grant date. Options issued vested over a
five-year period, with one-fifth of the shares becoming exercisable on each
anniversary. At December 31, 1998 and 1997 options to purchase 3,030,664 shares
and 2,519,745 shares, respectively, were outstanding, of which options to
purchase 748,825 shares and 844,560 shares, respectively, were vested and could
be exercised at a weighted average exercise price of $20.36 and $17.97,
respectively.
A summary of activity in the Company's stock option plans follows:
Weighted
Range of Average
Exercise Prices Exercise
Shares Per Share Price
----------------- ---------------------------- -------------
Options outstanding--December 31, 1996 $ 2,860,586 $ 4.83 $ 28.39 $ 17.99
Granted 865,550 21.25 27.00 23.61
Exercised (1,035,468) 4.83 23.31 14.65
Forfeited (170,923) 5.42 22.50 20.72
-----------------
Options outstanding--December 31, 1997 2,519,745 5.33 27.00 21.09
Granted 1,812,319 12.56 25.81 14.40
Exercised (176,788) 5.33 23.31 15.59
Forfeited (1,124,612) 12.08 27.00 22.42
-----------------
Options outstanding--December 31, 1998 3,030,664 7.09 25.81 16.94
Granted 87,000 13.25 13.25 13.25
Exercised or surrendered (1,722,854) 12.56 18.00 13.16
Forfeited (1,394,810) $ 12.56 $ 25.81 $ 21.01
-----------------
Options outstanding--December 31, 1999 $ 0
=================
30
Of the options forfeited during 1999, options for 217,195 shares had
exercise prices between $12.56 and $18.83, with a weighted average exercise
price of $18.72. The remaining 1,177,615 options forfeited had exercise prices
between $19.88 and $25.81, with a weighted average exercise price of $21.43.
Of the options exercised during 1999, options for 1,543,795 shares had
exercise prices between $12.56 and $13.25 with a weight exercise price of
$12.73. The remaining 179,059 options had exercise prices between $13.44 and
$17.38 with a weighted average exercise price of $17.01.
The Company accounted for the stock option plans under APB Opinion No. 25,
under which no compensation has been recognized. Had compensation costs for
these plans been determined consistent with FAS Statement No. 123, "Accounting
for Stock-Based Compensation", the Company's net income (loss) would have been
reduced to the following pro forma amounts in thousands:
Twelve Months Ended December 31,
--------------------------------------------------------
1999 1998 1997
------------------- ----------------- --------------
Net Income (loss):
As reported $ (11,197) $ 4,813 $ 42,152
Pro Forma $ (13,194) $ 2,093 $ 40,173
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions and results:
Twelve Months Ended December 31,
-----------------------------------------------------------------------------
Weighted Average 1999 1998 1997
- ----------------------------- -------------------------- --------------------- -----------------
Risk free interest rate 6.3% 4.8% 5.8%
Expected life 3.5 years 3.5 years 3.5 years
Expected volatility 58% 64% 35%
Fair value of options granted (in millions) $6.15 $6.91 $6.88
Restricted Stock Awards
The Board of Directors periodically awarded restricted stock to key
employees as compensation, and vesting was pro rata and subject to future
service. In conjunction with the merger, all restricted shares became fully
vested and were purchased by WCAS and Convergent. Accordingly, there was no
restricted stock outstanding at December 31, 1999. Unearned compensation was
charged for the market value of the shares on the date of grant and was
amortized to expense over the vesting period. Such amounts were shown as a
reduction of stockholders' equity in the accompanying consolidated balance
sheets. During the twelve months ended December 31, 1999, 9,518 restricted
shares were awarded and unearned compensation of $126,114 was recorded. During
the twelve months ended December 31, 1998, 48,822 restricted shares were
awarded and unearned compensation of $1,047,240 was recorded. During the twelve
months ended December 31, 1997, 8,695 restricted shares were awarded and
unearned compensation of $184,769 was recorded. The weighted average price of
the shares awarded during the twelve months ended December 31, 1999, 1998 and
1997, was $13.25, $24.47 and $21.25, respectively. Vesting on such shares
ranged from 3 years to 21 years. In conjunction with the merger, all restricted
shares became fully vested and were purchased by WCAS and Convergent. During
the twelve months ended December 31, 1999, 1998 and 1997, $1,752,928, $529,827
and $228,413, respectively, were amortized to expense. Also during the twelve-
month period ended December 31, 1998 and 1997, the Company cancelled 6,360
shares and 6,193 shares, respectively, reserved for key employees who are no
longer with the Company. This resulted in a reduction to unearned compensation
of $117,751 and $102,006, respectively.
31
NOTE K--EMPLOYEE BENEFIT PLANS
The Company's Employees' Savings Plan allows substantially all full-time
and part-time U.S. employees to make contributions defined by Section 401(k) of
the Internal Revenue Code. During the twelve months ended December 31, 1999 and
1998 the Company elected to contribute 50% of the qualifying participants'
total pre-tax contributions. During the twelve months ended December 31, 1997,
the Company elected to contribute 69,492 shares which were allocated based on
compensation. Amounts expensed under the plan for the twelve months ended
December 31, 1999, 1998 and 1997 were $2,810,000, $2,768,000 and $1,863,000,
respectively.
The Company provides no material post retirement benefits to its employees.
NOTE L--COMMITMENTS AND CONTINGECIES
Leases
The Company leases certain sales and service office facilities and
equipment under non-cancelable operating leases expiring through year 2010.
Total Company rent expense for the twelve months ended December 31, 1999, 1998
and 1997 was $9,345,000, $11,056,000 and $8,454,000, respectively.
Future minimum payments under non-cancelable operating leases are as
follows:
Calendar Year (In thousands)
2000 $ 8,476
2001 7,060
2002 5,026
2003 3,875
2004 2,474
Thereafter 3,584
------------------
$ 30,495
==================
The Company has the option to renew operating leases on its facilities at
the end of the current lease terms.
Litigation
The Company and its subsidiaries are parties to various legal proceedings.
Although the ultimate disposition of such proceedings is not presently
determinable, in the opinion of the Company, any liability that may ensue would
not have a significant impact on the financial position or results of
operations of the Company.
Derivative Financial Instruments
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks.
Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on floating-rate long-term debt.
32
NOTE M--BUSINESS SEGMENT DATA
As of December 31, 1998, the Company adopted SFAS No. 131, which requires
disclosure of business segment data in accordance with the "management
approach". The management approach is based on the way segments are organized
within the Company for making operating decisions and assessing performance.
The Company's operations historically have been organized into three
business segments as follows: Manufacturing and Supplies, U.S. Maintenance and
Service ("USMS"), and Worldwide Systems ("WS"). In the 1998 fourth quarter,
the Company announced a reorganization of its operations into two primary
businesses, WFS and CNS. The operations of WFS include financial transaction
processing, manufacturing and supplies, and installation and maintenance of
BancTec manufactured products and Plexus. The operations of CNS include
personal computer warranty repair services and administration of third party
extended warranties. The operations of WFS include two reportable segments that
are managed separately based on geographical areas. North American Systems
("NAS") consists of WFS operations in North America and International Systems
("INTL") consists of WFS operations in Europe and Japan.
Only revenue data for the new segments is available for fiscal 1999 and is
presented below. The Company has also included tables reflecting historical
segment data on a comparative basis.
Historical Segments
The Company's Manufacturing and Supplies segment provides document-
processing systems, check sorting systems and electronic components, which are
marketed to its end-users, other manufacturers and various resellers and
systems integrators worldwide. In addition, the manufacturing and supplies
segment provides full-page document scanners that are sold worldwide through
distributors.
The Company's USMS segment installs and maintains its own equipment
products such as document reader/sorters and scanners. In addition, the
maintenance and service segment provides personal computer warranty repair
services for companies and administers third party extended warranties on
personal computers sold by some of the nation's largest retailers. The Company
provides a variety of personal computer services to Fortune 1000 companies and
government agencies.
The Company's WS segment provides integration services related to a full
range of software and equipment for high volume, complex financial transaction
processing environments. Customers include some of the largest check and
payment processors worldwide, including banks, credit card companies,
utilities, insurance companies and government agencies.
Whenever possible, the Company uses market prices to determine inter-
segment pricing. Other products are transferred at cost or cost plus an agreed
upon mark-up.
33
Table 1- New Segments
North Computer
American and Network
Systems Services International Total
--------------- ----------------- ----------------- ---------------
For the twelve months ended December 31, 1999
Revenues from
external customers $ 251,656 $ 109,738 $ 173,196 $ 534,590
For the twelve months ended December 31, 1998
Revenues from
external customers $ 274,946 $ 122,500 $ 158,651 $ 556,097
For the twelve months ended December 31, 1997
Revenues from
external customers $ 296,925 $ 100,900 $ 163,171 $ 560,996
34
Table 2- Historical Segments
Manfacturing & US Maintenance Worldwide Corporate/
Supplies & Service Systems Eliminations Total
-------------- -------------- -------- ------------ -----------
(In thousands)
For the twelve months ended December 31, 1999
Revenues from
external customers $ 47,443 $ 209,711 $ 277,436 $ - $ 534,590
Intersegment
revenues 53,663 103 16,888 (70,654) -
Segment gross profit 13,799 13,486 76,747 - 104,032
Income (loss) from
operations 1,195 847 16,195 (32,456) (14,219)
Total assets 51,843 121,238 207,184 92,840 473,105
Capital
expenditures 385 29,469 9,828 6,977 46,659
For the twelve months ended December 31, 1998
Revenues from
external customers $ 49,880 $ 238,335 $ 267,882 $ - $ 556,097
Intersegment
revenues 55,179 1,311 7,480 (63,970) -
Segment gross profit 4,864 53,229 65,310 - 123,403
Income (loss) from
operations (7,754) 42,653 (415) (17,350) 17,134
Total assets 65,058 142,921 199,285 113,048 520,312
Capital
expenditures 1,656 25,003 9,588 17,172 53,419
For the twelve months ended December 31, 1997
Revenues from
external customers $ 57,214 $ 219,902 $ 283,880 $ - $ 560,996
Intersegment
revenues 53,986 10 14,746 (68,742) -
Segment gross profit 25,122 60,891 83,644 - 169,657
Income (loss) from
operations 6,552 53,152 25,059 (7,658) 77,105
Total assets 90,746 139,871 178,087 89,639 498,343
Capital
expenditures 2,067 27,647 8,735 21,474 59,923
35
NOTE N--GEOGRAPHIC OPERATIONS
The Company operates in the following geographic areas: the United States,
Japan, the UK, and other international areas consisting primarily of Canada,
France, Germany, and other Northern European countries. Inter-area sales to
affiliates are accounted for at established transfer prices.
Sales to unaffiliated customers and affiliates for the twelve months ended
December 31, 1999, 1998 and 1997, and long-lived assets, other than deferred
taxes, at the end of each of those periods, classified by geographic area, are
as follows:
Other
United United inter- Elimina- Consoli-
States Japan Kingdom national tions dated
------ ------ ------- -------- -------- ---------
Twelve months ended December 31, 1999
Sales to unaffiliated customers $ 345,977 $ 59,585 $ 55,862 $ 73,166 $ - $ 534,590
Inter-area sales to affiliates 65,393 - 4,785 476 (70,654) -
Long-lived assets other than
deferred taxes 203,216 5,960 6,142 6,183 (27,179) 194,322
Twelve months ended December 31, 1998
Sales to unaffiliated customers $ 380,852 $ 46,713 $ 61,076 $ 67,456 $ - $ 556,097
Inter-area sales to affiliates 61,568 - 2,402 - (63,970) -
Long-lived assets other than
deferred taxes 202,335 4,687 7,913 11,226 (29,487) 196,674
Twelve months ended December 31, 1997
Sales to unaffiliated customers $ 385,405 $ 41,320 $ 61,051 $ 73,220 $ - $ 560,996
Inter-area sales to affiliates 65,757 - 2,982 3 (68,742) -
Long-lived assets other than
deferred taxes 194,917 3,365 7,629 10,571 (29,551) 186,931
NOTE O--SUMMARIZED QUARTERLY DATA (UNAUDITED)
Year Ended December 31, 1999
-----------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Total
-------------------- --------------- ----------------- --------------- --------------
(In thousands)
Revenue $ 139,489 $ 140,827 $ 126,954 $ 127,320 $ 534,590
Gross profit 35,595 35,817 30,764 1,856 104,032
Income (loss) from
continuing operations 4,972 5,889 (4,693) (28,748) (22,580)
Net income (loss) 4,818 5,521 7,464 (29,000) (11,197)
Year Ended December 31, 1998
-----------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4(A) Total
-------------------- --------------- ----------------- --------------- --------------
(In thousands)
Revenue $ 131,175 $ 135,953 $ 146,530 $ 142,439 $ 556,097
Gross profit 38,624 37,511 38,377 8,891 123,403
Income (loss) from
continuing operations 10,121 7,813 7,424 (17,966) 7,392
Net income (loss) 10,055 7,577 7,250 (20,069) 4,813
36
Year Ended December 31, 1997
-----------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Total
-------------------- --------------- ----------------- --------------- --------------
(In thousands)
Revenue $ 131,391 $ 142,320 $ 139,375 $ 147,910 $ 560,996
Gross profit 36,598 40,506 49,158 43,395 169,657
Income from
continuing operations 5,691 7,261 19,757 11,677 44,386
Net income 10,027 10,603 10,787 10,735 42,152
(A) During the fourth quarter of 1998, the Company recorded approximately
$22.1 million of charges related to the reorganization of the Company's
operations and approximately $12.1 million of various other charges, including:
the termination of a systems contract related to a discontinued product, the
termination of a third party maintenance contract, additional provisions for
doubtful accounts, inventory obsolescence costs and various other items.
NOTE P--SUBSEQUENT EVENTS
In February 2000, the Company authorized a two-for-one stock split payable
in the form of a 100% stock dividend to shareholders of record on February 25,
2000. A total of 9,092,892 shares of common stock were issued in connection
with the split, comprised of 8,501,919 shares of New Common Stock and 590,973
shares of Class A common stock. Consequently, all references to shares of New
Common Stock and Class A common stock included in the accompanying consolidated
financial statements and notes thereto reflect the 100% stock dividend and its
retroactive effect.
Also in February 2000, the Company decided to move its corporate leased-
space headquarters from its Dallas, Texas, location to an owned facility in
Irving, Texas. The move is expected to occur during the second quarter of
2000. In conjunction with the move, the Company has entered into an agreement
to sublease the office space currently being used by corporate headquarters'
staff. The Company expects to incur a pre-tax loss on the lease of
approximately $1.0 million, which will be recorded in the first quarter of
2000.
37
================================================================================
PART III
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
ITEM 10. Directors and Executive Officers of BancTec, Inc.
The following table sets forth the names, ages, and positions of each of
the directors and executive officers of the Company as of February 29, 2000.
Executive officers are elected annually at the first meeting of the Board
of Directors following the annual meeting of stockholders. No family
relationships exist among the executive officers of the Company.
Name Age Position
- ------------------------------------- ---------------------------------------------------------
John D. Staedke..................... 59 President and Chief Executive Officer
John G. Guthrie..................... 63 Senior Vice President
Tod V. Mongan....................... 49 Senior Vice President, Secretary, General Counsel and
Chief Administrative Officer
Kevin L. Roper...................... 45 Vice President
James E. Uren....................... 63 Senior Vice President
Robert A. Minicucci................. 47 Chairman of the Board and Director
Anthony J. de Nicola................ 35 Director
Murray Holland...................... 46 Director
Mr. Staedke has been President and Chief Executive Officer since December
1999. Mr. Staedke served as the Client Executive responsible for global
information technology services provided to the Xerox Corporation for EDS (an
information technology and systems integration company) from 1996 to December
1999. Mr. Staedke also served as President and Chief Executive Officer of
Hitachi Data Systems Corporation (a mainframe and computer storage company) from
1992 to 1996.
Mr. Guthrie has been Senior Vice President since September 1995. Since
February 1989, Mr. Guthrie has been employed by the Company in various
management capacities.
Mr. Mongan has been Chief Administrative Officer since January 1996, Vice
President, Secretary and General Counsel since April 1984 and Senior Vice
President since January 1993. Since November 1979, Mr. Mongan has been employed
by the Company in various management capacities.
Mr. Roper has been Vice President since May 1996. Since March 1985, Mr.
Roper has been employed by the Company in various management capacities.
Mr. Uren has been Senior Vice President since September 1995. Since October
1988, Mr. Uren has been employed by the Company in various management
capacities.
Mr. Minicucci has been a director of the Company since July 22, 1999. Mr.
Minicucci also serves as General Partner of Welsh, Carson, Anderson & Stowe
VIII, L.P. (a private investment company) and as a director of Amdocs Limited
(a telecom customer care and billing software and services company). Mr.
Minicucci has served as General Partner of Welsh, Carson, Anderson & Stowe
since 1993.
Mr. de Nicola has been a director of the Company since July 22, 1999. Mr.
de Nicola also serves as General Partner of Welsh, Carson, Anderson & Stowe
VIII, L.P. (a private investment company) and of Centennial Communications (a
wireless rural telephone systems and integrated communications services
company). Mr. de Nicola has served as General Partner of Welsh, Carson,
Anderson & Stowe since 1994.
Mr. Holland has been a director of the Company since July 22, 1999. Mr.
Holland also serves as Principal of Convergent Equity Partners L.P. (a private
investment company) and has served as Chairman and Chief Executive Officer of
Convergent Media Systems Corporation (a provider of interactive distance
38
learning solutions) since 1992. Mr. Holland also served as Chairman of
Convergent Group Corporation (an independent systems integrator for geographic
information systems) from June 1993 through August 1999, when the company was
sold, and as Chairman and Chief Executive Officer of BTI Americas, Inc. (a
travel agency) from February 1995 through June 1998, when the company was sold.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers and persons who beneficially own
more than ten percent of a registered class of the Company's equity securities
to file with the Securities and Exchange Commission ("SEC") initial reports of
ownership and reports of changes in such ownership. Officers, directors, and
greater than ten percent stockholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms that they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the Company's fiscal year ended December 31,
1999, the applicable Section 16(a) filing requirements were complied with for
all transactions.
ITEM 11. Executive Compensation
Summary Compensation Table
The following table sets forth certain information regarding compensation
earned during 1999, the year ended December 31, 1998 ("1998"), and the year
ended December 31, 1997 ("1997"), by the Company's Chief Executive Officer and
each of the Company's four other most highly compensated executive officers
(based upon salary and bonus earned during 1999). All information relating to
shares of Common Stock and options to purchase Common Stock contained herein
has been adjusted to reflect the three-for-two stock split of Common Stock
effected in February 1993.
Long Term
Annual Compensation Compensation Awards
------------------- ---------------------------
Restricted All Other
Fiscal Bonus Long Term Stock Options Compensa-
Name and Principal Position(s) Year Salary($) ($)(1) Bonus(2) Award(s)($) (#)(3) tion($)(4)
- ----------------------------- ------ ---------- ------- ----------- ---------- --------- ---------
Grahame N. Clark, Jr.(5) 1999 333,775 - - 35,695 - 2,715,898
President and Chief Executive 1998 281,390 202,300 107,100 54,820 150,000 -
Officer 1997 281,390 310,675 164,475 51,000 100,000 -
Raghavan Rajaji(6) 1999 230,479 - - 16,496 - 699,395
Senior Vice President, Chief 1998 200,278 93,500 38,500 26,249 121,000 -
Financial Officer and Treasurer 1997 200,278 148,750 43,750 25,500 40,000 -
Tod V. Mongan 1999 190,305 - - 13,607 - 553,920
Senior Vice President, Secretary 1998 140,949 77,138 31,762 21,654 94,000 -
and Chief Administrative Officer 1997 140,707 122,719 50,531 21,037 40,000 -
James E. Uren 1999 188,739 - - 15,754 - 223,770
Senior Vice President 1998 175,000 89,250 47,250 20,880 33,000 -
1997 136,307 118,405 62,685 23,630 10,000 -
Kevin L. Roper 1999 187,651 - - 15,754 - 519,240
Vice President 1998 158,169 89,250 26,250 396,999 89,000 -
1997 131,307 87,351 25,691 6,012 40,000 -
39
______________
(1) Reflects bonus earned during the fiscal year. In some instances, all or a
portion of the bonus was paid during the next fiscal year.
(2) Bonus vests ratably over a period of three years and is not available to
the individual until the later of retirement from the Company or attainment
of the age of 62.
(3) Options to acquire shares of Common Stock.
(4) Includes cash compensation received for: surrender of vested and
unexercised stock options by all executive officers; surrender of
unexercised option to purchase Employee Stock Purchase Plan shares by Mr.
Rajaji; and severance by Mr. Clark.
(5) Mr. Clark's employment with the Company terminated effective December 1,
1999.
(6) Mr. Rajaji's employment with the Company terminated effective December 31,
1999.
Option Grants in 1999
The following table sets forth information related to options granted to the
named executive officers during 1999.
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation for
Individual Grants Option Term(1)
----------------------------
Options Percent of Total Options Exercise or
Granted Granted to Employees Base Price Expiration
Name (#) In Fiscal Year (%) ($/Sh) Date 5%($) 10%($)
- ------------------------------- ------- ------------------------ ----------- ---------- ---- -----
Grahame N. Clark, Jr. - - - N/A - -
Raghavan Rajaji - - - N/A - -
Tod V. Mongan - - - N/A - -
James E. Uren - - - N/A - -
Kevin L. Roper - - - N/A - -
____________
(1) The potential realizable value portion of the foregoing table
illustrates the value that might be realized upon exercise of the options
immediately prior to the expiration of their term, assuming the specified
compound rates of appreciation of the Common Stock over the term of the
options. These amounts do not take into account provisions of certain options
providing for termination of the options following termination of employment,
nontransferability, or vesting periods of up to five years. These amounts
represent certain assumed rates of appreciation only. Actual gains on stock
option exercises are dependent on the future performance of the Common Stock
and overall stock market conditions. There can be no assurance that the
potential values reflected in this table will be achieved. All amounts have
been rounded to the nearest whole dollar amount.
40
Aggregated Option Exercises in 1999 and Fiscal Year-End Option Values
The following table sets forth information related to the number of options
exercised in 1999 and the value realized by the named executive officers.
Further, the table provides information related to the number and value of
options held by the named executive officer at the end of 1999.
Value of Unexercised
Number of Unexercised Options In-the-Money Options
Shares at Fiscal Year-End at Fiscal Year-End
Acquired Value ------------------------------- ------------------------
Name on Exercise(#) Realized($) Exercisable(#) Unexercisable (#) Exercisable($) Unexercisable($)
- ---- ------------- ---------- ------------- ---------------- ------------- ---------------
Grahame N. Clark, Jr. - - - - - -
Raghavan Rajaji - - - - - -
Tod V. Mongan - - - - - -
James E. Uren - - - - - -
Kevin L. Roper - - - - - -
Compensation of Directors
The directors of the Company are not compensated for their services.
Employment Agreements
The Company has entered into employment agreements (the "Agreements") with
Tod V. Mongan, Kevin L. Roper, and Scott J. Wilson. Each of the Agreements
provides for the payment of base salary amounts and the participation in any
employee benefit or bonus plan or arrangement made available by the Company on
a basis consistent with the terms, conditions, and overall administration of
such plan or arrangement. The Agreements expire on October 23, 2003. On July
22, 1999, a Triggering Event, as defined in the Agreements, occurred.
Upon the death of an executive during the term of that executive's
Agreement, the Company is obligated to pay the executive's base salary for a
period of months (not to exceed twelve months) determined by multiplying two
times the number of complete twelve-month periods of employment of the
executive with the Company. If the Company terminates the executive's
employment for any reason other than for cause (and at a time when the
executive is not eligible to receive benefits under the Company's long-term
disability plan) or the executive terminates his employment upon 30 days'
notice for specified types of changes in duties or compensation or due to the
Company's breach of material obligations without cure, then the Company will
pay the executive severance payments over a period of twelve months equal to
the sum of the executive's annualized base salary and the amount of the
executive's targeted bonus for the fiscal year in which the termination occurs.
Each Agreement further provides that if the executive's employment is
terminated (whether such termination is by the executive or by the Company)
within three years after a Triggering Event (which, generally speaking, is
defined in the Agreement as a change in control of the Company) for any reason
other than (i) termination by the Company for cause (as defined in the
Agreement), (ii) the executive having reached the age of 65, or (iii) the
executive's death, the Company is obligated to make a lump sum cash payment
equal to either 2.99, 2.00, or 1.00 times the average of the executive's
annualized includable compensation (as defined in the Agreement) received from
the Company during the period consisting of the five full taxable years ending
immediately preceding the Triggering Event. The Company is obligated to
transfer to an irrevocable trust upon the occurrence of a Triggering Event, or
as soon thereafter as the Company knows of the Triggering Event, the amount of
cash that the Company would be obligated to pay under the Agreement if such
executive's employment were terminated on that date.
41
The Company has also entered into an employment agreement with James E.
Uren under which Mr. Uren receives a bi-weekly salary of $6,730.76 and is
eligible for full participation in any executive bonus plan offered by the
Company. This employment agreement provides that, through December 31, 2000,
Mr. Uren will not, through ownership (other than the ownership of less than 1%
of securities of a publicly held corporation) or otherwise, compete with the
Company by engaging in any act, including specified acts described in the
employment agreement. The term of the employment agreement is through December
31, 2000.
Compensation Committee and Option Committee Interlocks and Insider
Participation
From January 1, 1999 through July 22, 1999, the Compensation Committee was
composed of Michael E. Faherty, Paul J. Ferri, Rawles Fulgham, A.A. Meitz, and
Michael A. Stone and the Option Committee was composed of Michael E. Faherty,
Paul J. Ferri, Rawles Fulgham, A.A. Meitz, and Michael A. Stone. No member of
the Compensation Committee or the Option Committee was an officer of the
Company. No member of the Compensation Committee or the Option Committee was
formerly an officer of the Company. The Company does not currently have a
Compensation Committee.
42
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of February 29, 2000
regarding the ownership of Common Stock and Class A Common Stock of: (i) each
person who is known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock or Class A Common Stock; (ii)
each director of the Company; (iii) each executive officer named in the Summary
Compensation Table; and (iv) all executive officers and directors of the
Company as a group. Percentage of ownership is based on 18,185,784 shares of
Common Stock outstanding as of February 29, 2000, which shares are comprised of
17,003,838 shares of Common Stock and 1,181,946 shares of Class A Common Stock.
Number of Percent of
Shares of Outstanding
Name of Beneficial Owner (1) Common Stock Common Stock
- ---------------------------- ------------ -------------
Welsh, Carson, Anderson & Stowe VIII, L.P. 13,754,070 75.6%
320 Park Avenue, Suite 2500
New York, NY 10022
WCAS Capital Partners III, L.P. 2,508,108 13.7%
320 Park Avenue, Suite 2500
New York, NY 10022
Convergent Equity Partners, L.P.(2) 1,181,946 6.5%
100 Crescent Court, Suite 230
Dallas, TX 75201
WCAS Information Partners, L.P. 54,056 *
320 Park Avenue, Suite 2500
New York, NY 10022
Robert A. Minicucci(3) 16,316,232 89.7%
320 Park Avenue, Suite 2500
New York, NY 10022
Anthony J. de Nicola(4) 16,275,692 89.5%
320 Park Avenue, Suite 2500
New York, NY 10022
Murray Holland(5) 1,181,946 6.5%
100 Crescent Court, Suite 230
Dallas, TX 75201
John D. Staedke -
John G. Guthrie -
Tod V. Mongan -
Kevin L. Roper -
James E. Uren -
All executive officers and directors as a group 17,511,692 96.3
(8 persons)
____________
* Less than one percent.
(1) Except as otherwise indicated, each stockholder has sole investment and
sole voting power with respect to the shares of Common Stock shown.
43
(2) Convergent Equity Partners, L.P. holds shares of Class A Common Stock. All
others hold shares of Common Stock.
(3) Includes 13,754,070 shares of Common Stock held by Welsh, Carson, Anderson
& Stowe VIII, L.P. and 2,508,108 shares of Common Stock held by WCAS
Capital Partners III, L.P. Mr. Minicucci is a general partner of each of
Welsh, Carson, Anderson & Stowe VIII, L.P. and WCAS Capital Partners III,
L.P. Mr. Minicucci disclaims beneficial ownership of such shares.
(4) Includes 13,754,070 shares of Common Stock held by Welsh, Carson, Anderson
& Stowe VIII, L.P. and 2,508,108 shares of Common Stock held by WCAS
Capital Partners III, L.P. Mr. de Nicola is a general partner of each of
Welsh, Carson, Anderson & Stowe VIII, L.P. and WCAS Capital Partners III,
L.P. Mr. de Nicola disclaims beneficial ownership of such shares.
(5) Includes 1,181,946 shares of Class A Common Stock held by Convergent Equity
Partners, L.P. Mr. Holland is a principal of Convergent Equity Partners,
L.P. Mr. Holland disclaims beneficial ownership of such shares.
ITEM 13. Certain Relationships and Related Transactions
None.
44
================================================================================
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial Statements: See Index to Financial Statements and
Schedules on page 47.
(b) Reports on Form 8-K: None
(c) Exhibits:
3.1 -- Certificate of Incorporation.(*)
3.2 -- Amendment to Certificate of Incorporation.(*)
3.3 -- By-Laws.(*)
4.2 -- Indenture dated May 22, 1998 by and between the Company and The First National Bank of
Chicago. (2)
4.3 -- Exchange and Registration Rights Agreement dated May 22, 1998 by and among the Company,
Chase Securities, Inc., Goldman, Sachs & Co. and NationsBanc Montgomery Securities LLC. (2)
10.1 -- Loan Documents dated July 22, 1999, among the Company, Chase Bank of Texas, as Agent, and
Welsh, Carson, Anderson & Stowe, as amended.(*)
10.2 -- First Amendment and Waiver dated January 21, 2000 to Loan Documents.(*)
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.8 -- Employment Agreement with Tod V. Mongan dated October 23, 1998.(3)
10.13 -- Employment Agreement with Kevin L. Roper dated October 23, 1998.(3)
10.14 -- Employment Agreement with Scott J. Wilson dated October 23, 1998.(3)
10.15 -- Employment Agreement with James E. Uren dated October 23, 1998.(3)
10.16 -- Form of Indemnification Agreement between the Company and each of its Directors and
Officers.(1)
21.1 -- Subsidiaries.(*)
27.0 -- Selected Financial Data.(*)
________
* Filed herewith.
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-4 dated August 28, 1998.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
45
================================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BancTec, Inc.
By /s/ JOHN D. STAEDKE
--------------------------------
John D. Staedke
President and Chief Executive Officer
Dated: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Company and in the capacities and on the dates indicated:
Signature Title Date
- ------------------------------------------------ --------------------------------- ---------------------
/s/ John D. Staedke President and Chief Executive March 29, 2000
- ------------------------------------------------ Officer (Principal Executive
John D. Staedke Officer)
/s/ Tod V. Mongan Senior Vice President, Treasurer March 29, 20000
- ------------------------------------------------ and Chief Administrative Officer
Tod V. Mongan
/s/ Scott J. wilson Vice President and Controller March 29, 2000
- ------------------------------------------------ (Principal Accounting Officer)
Scott J. Wilson
/s/ Robert A. Minicucci Chairman of the Board and March 29, 2000
- ------------------------------------------------ Director
Robert A. Minicucci
/s/ Anthony. de Nicola Director March 29, 2000
- ------------------------------------------------
Anthony J. de Nicola
/s/ Murray Holland Director March 29, 2000
- ------------------------------------------------
Murray Holland
46
BANCTEC, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Number
------
Financial Statements and Report of Independent Public Accountants
Reports of Independent Public Accountants................................. 16
Consolidated Balance Sheets at December 31, 1999, and December 31, 1998... 17-18
Consolidated Statements of Operations for the twelve months ended
December 31, 1999, 1998 and 1997........................................ 19
Consolidated Statements of Cash Flows for the twelve months ended
December 31, 1999, 1998 and 1997........................................ 20
Consolidated Statements of Stockholders' Equity (Deficit) for the
twelve months ended December 31, 1999, 1998 and 1997.................... 21
Notes to Consolidated Financial Statements................................ 22-37
Supplemental Schedules
Schedule II--Valuation and Qualifying Accounts for the twelve months
ended December 31, 1999, 1998 and 1997.................................. 49
All other schedules have been omitted as the required information is
inapplicable, not required, or the information is included in the financial
statements and notes thereto.
47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of BancTec, Inc:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of BancTec, Inc. (the "Company") included
in this Form 10-K, and have issued our report thereon dated February 16, 2000
(except with respect to the matters discussed in Note P to the financial
statements, as to which the date is February 25, 2000). Our audits were made
for the purpose of forming an opinion on those consolidated financial
statements taken as a whole. The schedule listed in the Index to Financial
Statements and Schedules is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
Arthur Andersen LLP
Dallas, Texas
February 16, 2000
48
Schedule II
BANCTEC, INC
VALUATION AND QUALIFYING ACCOUNTS
For the Twelve Months Ended December 31, 1999, 1998 and 1997
(In thousands)
Column A Column B Column C Column D Column E
- ------------------------------------- ---------- --------- ------------------- ---------------
Additions
Balance at charged to Balance at
beginning costs and end of
of period expenses Deductions(A)(B)(C) period
---------- --------- ------------------- ---------------
Allowance for Doubtful Accounts
- -------------------------------------
Twelve months ended December 31, 1999 $ 9,333 $ 10,914 $ (7,457) $ 12,790
Twelve months ended December 31, 1998 5,642 4,240 (549) 9,333
Twelve months ended December 31, 1997 7,669 3,091 (5,118) 5,642
Reorganization Accrual
- -------------------------------------
Twelve months ended December 31, 1999 3,879 - (3,664) 215
Twelve months ended December 31, 1998 - 4,401 (522) 3,879
Twelve months ended December 31, 1997 - - - -
Accrued Merger Charges and Costs
- -------------------------------------
Twelve months ended December 31, 1999 332 - (332) -
Twelve months ended December 31, 1998 2,902 - (2,570) 332
Twelve months ended December 31, 1997 6,431 1,542 (5,071) 2,902
- ---------------
(a) Write-off of uncollectible accounts.
(b) Severance and related payments.
(c) Payment of merger charges.
49