UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

 

FORM 10-Q

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2002

 

OR

 

o

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 incorporation or organization)		(I.R.S. Employer Identification No.)
2701 E. Grauwyler Road, Irving, Texas		75061
(Address of principal executive offices)		(Zip Code)

 

(972) 579-6000
(Registrant’s telephone number, including area code)

 

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  o     No  ý

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

		Number of Shares Outstanding at
Title of Each Class		August 15, 2002
Common Stock, $0.01 par value		17,003,838
Class A Common Stock, $0.01 par value		1,181,946

 

 

BANCTEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 (In thousands, except share data)

 

 

		March 31,			December 31,
		2002			2001
		(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $891 at March 31, 2002 and $2,050 at December 31, 2001		$	12,788		$	28,577
Accounts receivable, less allowance for doubtful accounts of $8,379 at March 31, 2002 and $7,675 at December 31, 2001		72,863			81,942
Inventories		49,738			51,712
Prepaid expenses		6,820			6,374
Other current assets		1,353			810
Total current assets		143,562			169,415
PROPERTY, PLANT AND EQUIPMENT, net		71,364			76,213
GOODWILL		48,268			48,281
OTHER ASSETS		20,936			21,140
TOTAL ASSETS		$	284,130		$	315,049
CURRENT LIABILITIES:
Revolving credit facilities		$	6,021		$	28,838
Trade accounts payable		18,908			22,016
Other accrued expenses and liabilities		59,223			62,147
Deferred revenue		57,652			61,218
Income taxes		4,385			4,166
Total current liabilities		146,189			178,385
LONG-TERM DEBT, less current maturities		304,798			304,798
OTHER LIABILITIES		35,000			31,232
COMMITMENTS AND CONTINGENCIES
MANDATORY REDEEMABLE PREFERRED STOCK-Series A		13,539			13,151
STOCKHOLDERS’ DEFICIT:
Cumulative convertible preferred stock — authorized, 1,000,000 shares of $0.01 par value at March 31, 2002 and December 31, 2001:
Series B preferred stock — issued and outstanding, 35,520 shares at March 31, 2002 and December 31, 2001		6,934			6,532
Common stock  authorized,  32,000,000 shares of $0.01 par value at March 31, 2002 and December 31, 2001:
Common stock-issued and outstanding 17,003,838 shares at March 31, 2002 and December 31, 2001		170			170
Class A common stock-issued and outstanding 1,181,946 shares at March 31, 2002 and December 31, 2001		12			12
Subscription stock warrants		3,726			3,726
Additional paid-in capital		133,642			134,432
Accumulated deficit		(348,767		)	(345,972		)
Accumulated other comprehensive loss		(11,113		)	(11,417		)
Total stockholders’ deficit		(215,396		)	(212,517		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	284,130		$	315,049

 

 

See notes to condensed consolidated financial statements.

 

 

2

 

BANCTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended March 31,
		2002			2001
		(In thousands)
REVENUE
Equipment and software		$	50,560		$	49,526
Maintenance and other services		65,841			68,354
COST OF SALES		116,401			117,880
Equipment and software		38,224			40,603
Maintenance and other services		50,318			58,277
		88,542			98,880
Gross profit		27,859			19,000
OPERATING EXPENSES
Product development		3,307			4,492
Selling, general and administrative		18,403			20,136
Goodwill amortization		—			802
		21,710			25,430
Income (loss) from operations		6,149			(6,430		)
OTHER INCOME (EXPENSE):
Interest income		41			348
Interest expense		(7,605		)	(9,326		)
Sundry, net		(353		)	620
		(7,917		)	(8,358		)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(1,768		)	(14,788		)
INCOME TAX EXPENSE		1,027			1,052
LOSS FROM CONTINUING OPERATIONS		(2,795		)	(15,840		)
NET LOSS		$	(2,795	)	$	(15,840	)
PREFERRED STOCK DIVIDENDS AND ACCRETION OF DISCOUNT		(790		)	(364		)
NET LOSS APPLICABLE TO COMMON STOCK		$	(3,585	)	$	(16,204	)

 

 

See notes to condensed consolidated financial statements.

 

 

3

 

BANCTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

		Three Months Ended March 31,
		2002			2001
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations		$	(2,795	)	$	(15,840	)
Adjustments to reconcile net loss from continuing operation to cash flows provided by operating activities:
Depreciation and amortization		6,731			9,329
Provision for doubtful accounts		820			974
Interest paid in-kind		—			4,542
Loss on disposition of property, plant and equipment		201			185
Other non-cash items		49			76
Changes in operating assets and liabilities
Decrease in accounts receivable		8,259			1,538
(Increase) decrease in inventories		1,974			(1,201		)
Increase in other assets		(715		)	(8,133		)
Decrease in trade accounts payable		(3,108		)	(2,796		)
Increase (decrease) in deferred revenue		(3,566		)	7,000
Increase in other accrued expenses and liabilities		1,063			6,095
Cash flows provided by operating activities		8,913			1,769
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(2,280		)	(2,843		)
Cash flows used in investing activities		(2,280		)	(2,843		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings		—			8,000
Payments of long-term borrowings		—			(2,500		)
Proceeds from (payments of) short-term borrowings, net		(22,787		)	141
Debt issuance costs		(70		)	—
Net proceeds from issuance of preferred stock		—			5,328
Cash flows provided by (used in) financing activities		(22,857		)	10,969
EFFECT OF EXCHANGE RATE CHANGES ON CASH		435			(1,412		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(15,789		)	8,483
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD		28,577			23,841
CASH AND CASH EQUIVALENTS-END OF PERIOD		$	12,788		$	32,324
SUPPLEMENTAL DISCLOSURE INFORMATION:
Cash paid during the period for:
Interest		$	5,115		$	1,480
Taxes		$	1,841		$	2,667
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
DEFERRAL OF SPONSOR NOTES QUARTERLY INTEREST PAYMENTS		$	—		$	5,724

 

 

See notes to condensed consolidated financial statements.

 

 

4

 

BANCTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.             BASIS OF PRESENTATION AND OTHER ACCOUNTING INFORMATION

 

The accompanying unaudited condensed consolidated balance sheet at March 31, 2002, and the condensed consolidated statements of operations and cash flows for the interim periods ended March 31, 2002 and 2001, should be read in conjunction with BancTec, Inc. and subsidiaries (“BancTec” or the “Company”) consolidated financial statements and notes thereto in the most recent Annual Report on Form 10–K filed with the Securities and Exchange Commission.  As disclosed in the notes to that report, the condensed consolidated statements of operations and cash flows for the interim period ended March 31, 2001 have been restated. In the opinion of management, the accompanying condensed consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

 

 

2.             INVENTORIES

 

Inventory consists of the following:

 

 

 

3.             PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

 

 

5

 

4.             OTHER ACCRUED EXPENSES AND LIABILITIES

 

Other accrued expenses and liabilities consist of the following:

 

 

 

5.             DEBT AND OTHER OBLIGATIONS

 

Debt and other obligations consist of the following:

 

 

 

Revolving Credit Facility.  The Company has a $60.0 million revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which will mature on May 30, 2006. The Revolver is secured by substantially all the assets of the Company, subject to the limitations on liens contained in the Company’s existing Senior Notes. Funds availability under the Revolver is determined by a borrowing base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory and real estate.  The Company had an outstanding balance on letters of credit totaling $0.2 million at March 31, 2002.  At March 31, 2002, the Company’s borrowing base was approximately $34.5 million, of which $3.4 million was outstanding.

 

The interest rate on loans under the Revolver is, at the Company’s option, either (i) 1.25% over prime or (ii) 2.75% over LIBOR.  At March 31, 2002, the Company’s weighted average rate on the Revolver was 4.8%. Beginning August 1, 2002, the interest rate margins over prime and LIBOR may be increased by 0.25% increments up to a total rate increase of 0.5% when available borrowing availability falls below certain thresholds or decreased by 0.25% increments up to a total rate decrease of 0.5% when available borrowing capacity exceeds certain thresholds. A commitment fee of 0.5% per annum on the unused portion of the Revolver is payable quarterly.

 

Under the Revolver, substantially all of the Company’s domestic cash receipts (including proceeds from accounts receivable and asset sales) must be applied to repay the outstanding loans, which may be re-borrowed subject to availability in accordance with the borrowing base formula. The Revolver contains restrictions on the use of cash for dividend payments or non-scheduled principal payments on certain indebtedness.  Restricted cash at March 31, 2002 of $0.9 million represents lockbox cash receipts to be applied to the outstanding borrowings under the Revolver.

 

6

 

The Revolver contains various representations, warranties and covenants, including financial covenants as to maximum capital expenditures, minimum fixed charge coverage ratio and minimum average borrowing availability. At March 31, 2002, the Company was in compliance with all financial covenants under the Revolver.

 

Senior Notes.  Interest on the Senior Notes is fixed at 7.5% and is due and payable in semi-annual installments. Payments began 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.  As of August 14, 2002, the Company was not in compliance with the Senior Notes' reporting requirements for the quarters ended March 31, 2002 and June 30, 2002.  The Company is in a 60-day cure period, and delivery of the financial statements in this Form 10-Q will remedy this non-compliance condition for the quarter ended March 31, 2002. The Company expects to cure the non-compliance reporting for the quarter ended June 30, 2002 within the cure period provided and therefore continues to classify the Senior Notes as long term debt.  The estimated fair value of the Senior Notes as of March 31, 2002 is approximately $81.0 million based on a yield of 14.0%.

 

Subordinated Unsecured Sponsor Notes. The Company’s $160.0 million in Sponsor Notes are issued in U.S. dollars, with interest at 10.0% due and payable quarterly. The payments began September 30, 1999. However, as provided under the agreement, the Sponsor Notes’ holder, WCAS, elected to defer quarterly interest payments of $4.0 million for each of the June 2000 through September 2001 quarterly periods. Such election required a deferred financing fee of 30.0% of each of the interest payments being deferred.  The Company accounts for the additional financing fees as a change in the effective interest rate of the debt. At March 31, 2002, the Company had $33.8 million outstanding in WCAS notes representing deferred interest. WCAS may, at its election, defer each future quarterly payment under similar terms.  WCAS did not elect to defer the December 2001 and March 2002 quarterly payments. The estimated fair value of the Sponsor Notes and deferred interest and fees as of March 31, 2002 is approximately $151.0 million based on a discount rate of 15.0%.

 

The outstanding balance on foreign credit agreements as of March 31, 2002 was $2.6 million, payable in yen. The terms on the agreements ranged from 30 to 60 days at interest rates up to 1.4%.

 

6.             GOODWILL AND INTANGIBLE ASSETS

 

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company has adopted the provisions of SFAS No. 142 effective January 1, 2002.  SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually.  SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values.

 

Under SFAS No. 142, the Company is required to perform transitional impairment tests for its goodwill and intangible assets with indefinite useful lives as of the date of adoption. Step one of the transitional goodwill impairment test, which compares the fair values of the Company’s reporting units to their respective carrying values, will be completed by June 30, 2002. Under step two of SFAS No. 142, any transitional impairment losses for goodwill will be recognized as the cumulative effect of a change in accounting principle in the consolidated statement of operations.

 

Components of the Company’s goodwill include amounts that are foreign currency denominated.  These goodwill amounts are subject to translation at each balance sheet date.  The Company records the change to accumulated other comprehensive loss on the balance sheet. The following is a summary of changes in the carrying amount of goodwill by segment for the three months ended March 31, 2002:

 

 

					Computer
		US			& Network
		Solutions			Services			International			Unallocated			Total
		(In thousands)
Balance at December 31, 2001		$	40,211		$	—		$	2,229		$	5,841		$	48,281
Changes due to foreign Currency translation		—			—			(13		)	—			(13		)
Balance at March 31, 2002		$	40,211		$	—		$	2,216		$	5,841		$	48,268

 

 

7

 

The following is a summary comparison of net loss for the three months ended March 31, 2002 and 2001, as adjusted to remove the amortization of goodwill and intangible assets with indefinite useful lives for the three months ended March 31, 2001:

 

		Three Months Ended March 31,
		2002			2001
		(In thousands)
Net loss — as reported		$	(2,795	)	$	(15,840	)
Goodwill amortization		—			802
Net loss — as adjusted		$	(2,795	)	$	(15,038	)

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”  The Company’s adoption of SFAS No. 144 on January 1, 2002 did not have a material impact on its financial condition or results of operations.

 

7.             COMPREHENSIVE LOSS

 

The components of comprehensive loss were as follows:

 

		Three Months Ended March 31,
		2002			2001
		(In thousands)
Net loss		$	(2,795	)	$	(15,840	)
Foreign currency translation adjustments		304			(2,218		)
Total comprehensive loss		$	(2,491	)	$	(18,058	)

 

8.             BUSINESS SEGMENT DATA

 

The Company segments its operations based on geographical areas  (U.S. Solutions (“USS”) and International Solutions (“INTL”)) and product lines (Computer and Network Services (“CNS”)). INTL offers similar products as USS and consists primarily of operations throughout the world excluding United States. The Company recently realigned its reporting structure and began reporting under the new alignment in the first quarter of 2002. Under this new structure, USS includes the operations of Advanced Enterprise Solutions (“AES”) and INTL reporting includes both the U.S. and international operations of Plexus® products (“Plexus”). The operations of AES and Plexus are not material to USS or to INTL operations. Under the new structure, the composition of CNS remains unchanged.  Prior period information has been reclassified to reflect the new alignment.

 

 

					Computer
		US			& Network
		Solutions			Services			International			Corp/Elims			Total
		(In thousands)
For the three months ended March 31, 2002
Revenue from external customers		$	38,805		$	36,446		$	41,150		$	—		$	116,401
Intersegment revenues		3,911			—			1,546			(5,457		)	—
Segment gross profit (loss)		9,240			7,833			11,214			(428		)	27,859
Segment operating income (loss)		2,412			4,678			2,872			(3,813		)	6,149
Segment identifiable assets		112,898			40,283			93,921			37,028			284,130
Capital expenditures		1,157			386			556			181			2,280
For the three months ended March 31, 2001
Revenue from external customers		$	37,320		$	37,086		$	43,474		$	—		$	117,880
Intersegment revenues		7,099			—			1,515			(8,614		)	—
Segment gross profit (loss)		3,772			4,002			11,558			(332		)	19,000
Segment operating income (loss)		(5,183		)	162			550			(1,959		)	(6,430		)
Segment identifiable assets		179,992			58,825			114,003			55,735			408,555
Capital expenditures		829			378			1,129			507			2,843

 

 

8

 

 

9.             PREFERRED STOCK

 

REDEEMABLE PREFERRED STOCK

 

The Company allocated the proceeds from its Series A preferred stock issuance based upon the relative fair value of the preferred stock and warrants issued. The related discount is being accreted such that the carrying amount of the mandatory redeemable preferred stock will equal the mandatory redemption amount at September 22, 2008. For the three months ended March 31, 2002, accretion of the related discount and accrued but unpaid dividends totaled $0.4 million, increasing the carrying amount to $13.5 million. As of March 31, 2002, the stated value of the Series A preferred stock, including accumulated but unpaid dividends, was $166.45 per share.

 

SERIES B PREFERRED STOCK

 

For the three months ended March 31, 2002, the Company accrued additional unpaid dividends for its Series B preferred stock totaling $0.4 million, increasing the carrying amount to $6.9 million.  As of March 31, 2002, the stated value of the Series B preferred stock, including accumulated but unpaid dividends, was $195.22 per share.

 

 

10.          RECENT ACCOUNTING PRONOUNCEMENTS

 

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The Company will adopt SFAS No. 143 in fiscal year 2003. The Company has not determined the impact of the provisions of SFAS No. 143 on its financial condition or results of operations.

 

In May 2002, the FASB issued SFAS No. 145 , “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections” . Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board 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 Transaction”, are met. The Company will adopt the provisions SFAS 145 regarding early extinguishment of debt during the second quarter of 2002.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities”.  SFAS 146 will be effective for the Company for disposal activities initiated after December 31, 2002. The Company has not determined the impact of the provisions of SFAS No. 146 on its financial condition or results of operations.

 

11.          SUBSEQUENT EVENTS

 

During the second and third quarters of 2002, the Company repurchased Senior Notes with a total face amount of $5.6 million. The Company wrote off a proportionate share of deferred financing fees, resulting in a gain of approximately $3.4 million, which will be reflected in other income upon the adoption of SFAS No. 145.

 

On July 30, 2002, the Company and Heller amended the Revolver, which reduced the Company’s fixed charge coverage ratio covenant during quarters 1, 2 and 3 of 2002, and reduced the minimum undrawn availability requirement from $10.0 million to $4.0 million.  The amendment also waived the reporting requirement violation upon submission of the audited financial statements in the Company’s Form 10-K, which was filed on August 9, 2002.

 

 

9

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN THIS DOCUMENT.

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including Factors Affecting the Company’s Business and Prospects set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure About Market Risk, contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of BancTec, Inc. and its consolidated subsidiaries (the “Company”) to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operations; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the ability of the Company to retain and motivate key employees; the timely development, production and acceptance of products and services and their feature sets; the challenge of managing asset levels, including inventory; the flow of products into third-party distribution channels; the difficulty of keeping expense growth at modest levels while increasing revenues; and other risks that are described from time to time in the Company’s Securities and Exchange Commission reports, including but not limited to the items discussed in “Factors Affecting the Company’s Business and Prospects” set forth in this report, and items described in the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated results or changes to future operating results over time.

 

The Company believes several factors continued to create a challenging and competitive sales and cost containment environment during the three months ended March 31, 2002.  These factors include: general economic conditions and reduced corporate customer technology spending; ongoing competitive pressures; an ongoing planned change in revenue mix within the Company’s U.S. Solutions (“USS”) and International Solutions (“INTL”) segments; and a highly leveraged financial position.  Additionally, in the third quarter of 2001, the USS segment experienced additional unexpected revenue declines, the duration of which the Company cannot predict.  In response to the continued difficult business climate, the year-end planning process and the development of the 2002 operating plan, the Company has undertaken a process of evaluating the recovery of all its investments in inventory and long-lived assets.  This evaluation has resulted in write-downs and impairments of inventory and other long-lived assets in response to current business conditions and other decisions reached during the planning process.

 

Expected economic and business conditions for the remainder of 2002 indicate a cautious outlook regarding the Company’s near-term revenue and earnings growth prospects.  Most of the Company’s product offerings represent a significant capital expenditure for its customers.  The general economic conditions have recently caused a significant weakening in demand for systems solutions products offered by USS. The Company has concentrated its emphasis on cost reductions and on existing offerings.  Product Development efforts are currently focused on payment, check and document processing technologies, in addition to investments in Electronic Data Management (“EDM”) vertical solutions and an investment in Archiving solutions for all markets, as well as hardware enhancements.  By incorporating more third-party products into the Company’s solutions rather than developing the products, the Company can more easily target its efforts and expenditures to these core products and solutions.

 

RESULTS OF OPERATIONS

 

Comparison of Three Months Ended March 31, 2002 and Three Months Ended March 31, 2001

 

Consolidated revenue of $116.4 million for the three months ended March 31, 2002 decreased by $1.5 million or 1.3% from the comparable prior year period. The decrease occurred primarily in INTL of $2.3 million and CNS of $0.6 million, offset partly by an increase in USS of $1.4 million. The INTL decrease resulted primarily from the impact of longer acceptance periods on highly customized products in the prior year period.  These products, scheduled for acceptance in 2000, achieved acceptance in 2001 along with those products scheduled for acceptance in 2001. The decreased revenue from the CNS operations was primarily attributable to lower volumes and downsizing of some contracts as a result of general economic conditions.  The USS increase was principally related to the impact of longer acceptance periods on highly customized products for which revenue was recognized during the current quarter, and was offset partly by declines in maintenance

 

 

10

 

due to Company installed products reaching the end of their useful lives and from increased competition.  The Company expects these trends to continue in the foreseeable future. Factors impacting future revenue include lower corporate customer spending for large systems solutions as a result of the continuing weakness in the economy, customer and prospective customer mergers, on-going competitive pressures, and fluctuations in international currencies, especially the euro and the yen.

 

Consolidated gross profit of $27.9 million increased by $8.9 million or 46.6% from the comparable prior year period. The increase occurred primarily in CNS of $3.8 million and USS of $5.4 million, offset partly by a decrease in INTL of $0.3 million. CNS’ gross profit increase was primarily attributable to an improved labor model, with additional benefit provided through a reduction in support costs, including streamlining the number of districts and the expanded automation of its call center operations.  The INTL decrease occurred primarily from a decrease in the Company’s European traditional businesses, partially offset by a margin improvement by the Company’s subsidiary in Japan.  The margin decline in the Company’s subsidiaries in Europe was due primarily to lower revenues without a corresponding percentage decline in fixed expenses, as well as fluctuations of the euro and other European currencies. The USS increase was principally related to the impact of longer acceptance periods on highly customized products in the prior year period. The Company is in the process of transitioning its product offering focus to proven deliverables and new targeted offerings, including EDM solutions, its other archive solutions and hardware enhancements.  Incorporating more third-party products into the Company’s solutions rather than developing the products has enabled the concentration of efforts and expenditures on the targeted items which, along with the Company’s ongoing cost containment efforts, allowed for cost reductions to help offset revenue declines.  The Company will continue to monitor the effects of the business climate and its strategic plans on the recoverability of its investment in inventory and long-lived assets, all of which may continue to have a negative impact on gross profit in the future.

 

Operating expenses of $21.7 million decreased $3.7 million compared to the comparable prior year period. Operating expenses, by component, changed as follows: Product development expenses decreased by $1.2 million or 26.4% primarily due to concentration on developing targeted new applications for the Company’s product lines and selective expansion of existing products. Selling, general, and administrative expenses decreased by $1.7 million or 8.6% due primarily to on-going efforts to realign the cost structure.  Goodwill amortization ceased in 2002 as a result of the implementation of SFAS 142. Goodwill amortization for the three months ended March 31, 2001 was $0.8 million.

 

Interest expense for the three months ended March 31, 2002 decreased to $7.6 million from $9.3 million in the comparable prior year period. The decrease was due mainly to the repurchase of a portion of the Senior Notes, a lower outstanding balance on the revolving credit facilities and declining interest rates, partially offset by a $13.2 million increase in debt related to Sponsor Notes subsequent to March 31, 2001.

 

Sundry items resulted in a net expense of $0.4 million during the three months ended March 31, 2002 as compared to a net income of $0.6 million during the comparable prior year period primarily due to the recognition of unrealized gains related to derivative contracts in the prior year period.  These contracts were settled in the fourth quarter of 2001.

 

Pre-tax income in foreign tax jurisdictions resulted in an income tax provision of $1.0 million for the three months ended March 31, 2002 compared to a corresponding prior year period income tax provision of $1.1 million.  The income tax provisions for both periods related to income from the Company’s international subsidiaries and a valuation allowance provided to reduce the Company’s deferred tax assets to an amount management believes is more likely than not to be realized.  The Company’s effective tax rate was approximately (58.1)% for the three months ended March 31, 2002 as compared to (7.1%) for the corresponding prior year period.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s working capital requirements are generally provided by cash and cash equivalents, funds available under the Company’s revolving credit agreement, as discussed below, which matures May 30, 2006, and by internally generated funds from improved cash flows from operations. Funds availability under the revolving credit agreement is determined by a borrowing base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory and real estate.  General economic conditions, the current weakness in demand for the Company’s systems solutions products offered by USS and the requirement to obtain performance bonds or similar instruments for future advances from a significant customer are expected to have a material impact on the Company’s future liquidity.

 

The Company’s cash and cash equivalents totaled $12.8 million at March 31, 2002, compared with $28.6 million at December 31, 2001. Working capital increased $6.3 million during the three months ended March 31, 2002 to ($2.7 million) at March 31, 2002.  The change in working capital included a current liability decrease of $22.8 million from the revolving credit agreement and a related current asset decrease in cash and cash equivalents of $15.8 million.

 

 

11

 

During the three months ended March 31, 2002, the Company relied primarily on cash flows generated from operating activities and short-term borrowings under its revolving credit agreement to fund operations. At March 31, 2002 the Company had available $30.9 million of borrowing capacity under the Revolver, of which the Company can draw $20.9 million.

 

Operating activities provided $8.9 million and $1.8 million of cash in the three months ended March 31, 2002 and 2001, respectively. The $7.1 million increase was due mainly to a decrease in the loss from continuing operations of $13.0 million and a $7.4 million decrease in other assets, partially offset by a decrease of $10.6 million in deferred revenue and $4.5 million in the prior year related to interest paid-in-kind.

 

Investing activities used net cash of $2.3 million and $2.8 million in the three months ended March 31, 2002 and 2001, respectively. Both uses of cash related to purchases of property, plant and equipment.

 

Financing activities used $22.9 million of net cash in the three months ended March 31, 2002 compared to net cash provided of $11.0 million in the three months ended March 31, 2001. The $33.9 million change related primarily to the reduction of the Company’s debt. The cash provided in the three months ended March 31, 2001 related primarily to proceeds from the issuance of preferred stock of $5.3 million and to additional borrowings of $8.0 million.

 

At March 31, 2002, the Company’s principal outstanding debt instruments consisted of (i) $3.4 million outstanding under the revolving credit facility maturing May 30, 2006 (which is more fully described below), (ii)  $111.0 million of 7.5% Senior Notes due 2008, and (iii) $193.8 million of Sponsor Notes due 2009.  As of March 31, 2002, the Company’s foreign subsidiaries had outstanding borrowings of $2.6 million.  The Company or its affiliates may from time to time purchase, redeem or pay deferred interest on some of its outstanding debt or equity securities.  The Company would only make these payments in compliance with the covenants of its debt instruments.

 

The Company continually reviews its various lines of business to assess their contribution to the Company’s business plan and from time to time considers the sale of certain assets in order to raise cash or reduce debt.  Accordingly, the Company from time to time has explored and may explore possible asset sales by seeking expressions of interest from potential bidders.  However, the Company has not entered into any binding agreements or agreements in principle to sell any assets and there can be no assurance that any such asset sales will occur or, if they occur, as to the timing or amount of proceeds that such assets sales may generate.

 

Revolving Credit Facility. The Company has a $60 million revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which will mature on May 30, 2006. The interest rate on loans under the Revolver is, at the Company’s option, either (i) 1.25% over prime or (ii) 2.75% over LIBOR.  At March 31, 2002, the Company’s weighted average rate on the Revolver was 4.8%.  Beginning August 1, 2002, the interest rate margins over prime and LIBOR may be increased by 0.25% increments up to a total rate increase of 0.5% when available borrowing availability falls below certain thresholds or decreased by 0.25% increments up to a total rate decrease of 0.5% when available borrowing capacity exceeds certain thresholds.  At March 31, 2002, Company’s available borrowing base was approximately $34.5 million, of which $3.4 million was outstanding. The Company had an outstanding balance on letters of credit totaling $0.2 million at March 31, 2002, resulting in remaining availability of $30.9 million, of which the Company can draw $20.9 million.  A commitment fee of 0.5% per annum on the unused portion of the Revolver is payable quarterly.

 

Under the Revolver, substantially all of the Company’s domestic cash receipts (including proceeds from accounts receivable and asset sales) must be applied to repay the outstanding loans, which may be re-borrowed subject to availability in accordance with the borrowing base formula. The Revolver contains restrictions on the use of cash for dividend payments or non-scheduled principal payments on certain indebtedness.  Restricted cash at March 31, 2002 of $0.9 million represents lockbox cash receipts to be applied to the outstanding borrowings under the Revolver.  The Revolver contains various representations, warranties and covenants, including financial covenants as to maximum capital expenditures, minimum fixed charge coverage ratio and minimum average borrowing availability.  At March 31, 2002, the Company was in compliance with all financial covenants under the Revolver. The Company was not in compliance with the reporting requirements of the Revolver for the year ended December 31, 2001. Heller waived this non-compliance upon the Company’s delivery of the financial statements in its Form 10-K filing.

 

Senior Notes. In August 1998, the Company exchanged the public Senior Notes (the “Senior Notes”) for the notes sold in a May 1998 Rule 144A private offering. Interest is fixed at 7.5% and is due and payable in semi-annual installments, which began December 1, 1998. The Senior 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.  As of August 14, 2002, the Company was not in compliance with the Senior Notes’ reporting requirements for the quarters ended March 31, 2002 and June 30, 2002. The Company is in a 60-day cure period, and delivery of the financial statements in this Form 10-Q will remedy this non-compliance condition for the quarter ended March 31, 2002. The Company expects to cure the non-compliance reporting for the quarter ended June 30, 2002 within the cure period provided and therefore continues to classify the Senior Notes as long term debt.

 

 

12

 

 

Subordinated Unsecured Sponsor Notes. The Company’s $160.0 million in Sponsor Notes bear interest at 10.0%, due and payable quarterly. The payments began September 30, 1999. However, as provided under the agreement, the Sponsor Notes’ holder, WCAS, elected to defer quarterly interest payments of $4.0 million for each of the June 2000 through September 2001 quarterly periods. Such election required a deferred financing fee of 30.0% of each of the interest payments being deferred.  The Company accounts for the additional financing fees as a change in the effective interest rate of the debt. At March 31, 2002, the Company had $33.8 million outstanding in deferred interest notes. WCAS may, at its election, defer each future quarterly payment under similar terms.  WCAS did not elect to defer the December 2001 and March 2002 quarterly payments and currently does not intend to elect deferral of the quarterly payments in the near future.

 

Preferred Stock — Series A.  The Company allocated the proceeds from its Series A preferred stock issuance based upon the relative fair value of the preferred stock and warrants issued. The related discount is being accreted such that the carrying amount of the mandatory redeemable preferred stock will equal the mandatory redemption amount at September 22, 2008. For the three months ended March 31, 2002, accretion of the related discount and accrued but unpaid dividends totaled $0.4 million, increasing the carrying amount to $13.5 million. As of March 31, 2002, the stated value of the Series A preferred stock, including accumulated but unpaid dividends, was $166.45 per share.

 

Preferred Stock — Series B.  For the three months ended March 31, 2002, the Company accrued additional unpaid dividends for its Series B preferred stock totaling $0.4 million, increasing the carrying amount to $6.9 million.  As of March 31, 2002, the stated value of the Series B preferred stock, including accumulated but unpaid dividends, was $195.22 per share.

 

Foreign Credit Agreements. The outstanding balance on foreign credit agreements as of March 31, 2002 was $2.6 million, payable in yen.

 

Inflation has not had a material effect on the operating results of the Company.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company has adopted the provisions of SFAS No. 142 effective January 1, 2002.  SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually.  SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values.

 

Under SFAS No. 142, the Company is required to perform transitional impairment tests for its goodwill and intangible assets with indefinite useful lives as of the date of adoption. Step one of the transitional goodwill impairment test, which compares the fair values of the Company’s reporting units to their respective carrying values, will be completed by June 30, 2002. Under step two of SFAS No. 142, any transitional impairment losses for goodwill will be recognized as the cumulative effect of a change in accounting principle in the consolidated statement of operations.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”  The Company’s adoption of SFAS No. 144 on January 1, 2002 did not have a material impact on its financial condition or results of operations.

 

In May 2002, the FASB issued SFAS No. 145 , “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections” . Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board 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 Transaction”, are met. The Company will adopt the provisions SFAS 145 regarding early extinguishment of debt during the second quarter of 2002.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities”.  SFAS 146 will be effective for the Company for disposal activities initiated after December 31, 2002. The Company is in the process of evaluating the effect that adopting SFAS 146 will have on its financial statements.

 

 

 

13

 

 

FACTORS AFFECTING THE COMPANY’S BUSINESS AND PROSPECTS

 

There are many factors that affect the Company’s business and the results of its operations. The following is a description of some of the important factors that may cause the actual results of the Company’s operations in future periods to differ materially from those currently expected or desired.  See “Forward Looking Statements”.

 

General Economic Conditions

 

The Company’s business partly depends on general economic and business conditions. The Company’s sales are to businesses in a wide variety of industries, including banking, financial services, insurance, health care and governmental agencies.  General economic conditions that cause customers in such industries to reduce or delay their investments in products and solutions such as those offered by the Company could have a material adverse effect on the Company.

 

Delays or reductions in technology spending could have a material adverse effect on demand for BancTec’s products and services, and consequently on BancTec’s business, operating results, financial condition, and prospects.

 

Dependence on Suppliers

 

The Company’s solutions products are dependent on quality components that are procured from third-party suppliers.  Reliance on suppliers, as well as industry supply conditions, generally involves several risks, including the possibility of defective parts (which can adversely affect the reliability and reputation of the Company’s products), a shortage of components and reduced control over delivery schedules (which can adversely affect the Company’s manufacturing efficiencies) and increases in component costs (which can adversely affect the Company’s profitability).

 

The Company has several single-sourced supplier relationships, either because alternative sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity or price considerations.  If these sources are unable to provide timely and reliable supply, the Company could experience manufacturing interruptions, delays or inefficiencies, adversely affecting its results of operations. Even where alternative sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could affect operating results adversely.

 

Declining Financial Operating Results and Indebtedness

 

As a result of increased leverage and reduced performance over the last few years, certain negative consequences of the Company’s indebtedness could occur, such as restrictions on expenditures or other activities.  The Company’s future operating flexibility may be impacted.  In addition, the Company may be more vulnerable to an increase in interest rates, a downturn in its operating performance or a decline in general economic conditions.

 

International Activities

 

The Company’s international operations are a significant part of the Company’s business.  The success and profitability of international operations are subject to numerous risks and uncertainties, such as economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries) and changes in the value of the U.S. dollar versus the local currency in which products are sold.  Any unfavorable change in one or more of these factors could have a material adverse effect on the Company.

 

Fluctuations in Operating Results

 

The Company’s operating results may fluctuate from period to period and will depend on numerous factors, including: customer demand and market acceptance of the Company’s products and solutions, new product introductions, product obsolescence, varying product mix, foreign currency exchange rates and other factors. The Company’s business is sensitive to the spending patterns of its customers, which in turn are subject to prevailing economic conditions and other factors beyond the Company’s control. Any unfavorable change in one or more of these factors could have a material adverse effect on the Company.

 

Technological Changes and Product Transitions

 

The Company’s industry is characterized by continuing improvement in technology, which results in the frequent introduction of new products, short product life cycles and continual improvement in product price/performance characteristics.  The Company must incorporate these new technologies into its products and solutions in order to remain competitive. There can be no assurance that the Company will be able to continue to manage technological transitions.  A failure on the part of the Company to effectively manage these transitions of its product lines to new technologies on a timely basis could have a material adverse effect on the Company.  In addition, the Company’s business depends on technology trends in its customers’ businesses.  Many of the Company’s traditional products depend on the efficient handling of paper-

 

 

14

 

based transactions.  To the extent that technological changes impact the future volume of paper transactions, the Company’s traditional business may be adversely impacted.

 

Product Development Activities

 

The strength of the Company’s overall business is partially dependent on the Company’s ability to develop products and solutions based on new or evolving technology and the market’s acceptance of those products.  There can be no assurance that the Company’s product development activities will be successful, that new technologies will be available to the Company, that the Company will be able to deliver commercial quantities of new products in a timely manner, that those products will adhere to generally accepted industry standards or that products will achieve market acceptance. The Company believes that it is necessary for its products to adhere to generally accepted industry standards, which are subject to change in ways that are beyond the control of the Company.

 

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

The Company utilizes a revolving credit facility to support working capital needs. The interest rate on loans under the Revolver is, at the Company’s option, either (i) 1.25% over prime or (ii) 2.75% over LIBOR. From time to time the Company also has outstanding balances on foreign credit agreements for which the terms on the agreements ranged from 30 to 60 days at interest rates up to 1.4% at March 31, 2002. If the bank’s prime rate or LIBOR on March 31, 2002 increased by 100 basis points on that date and then remained constant at the higher rate for twelve consecutive months, the Company’s interest costs on its outstanding variable rate borrowings at March 31, 2002 of $6.0 million would increase by approximately $60,000.

 

 

15

 

PART II

BANCTEC, INC.

 

Item 5.   Other Information

 

On July 30, 2002, the Company and Heller amended the Revolver, which reduced the Company’s fixed charge coverage ratio covenant during quarters 1, 2 and 3 of 2002, and reduced the minimum undrawn availability requirement from $10.0 million to $4.0 million.  The amendment also waived the reporting requirement violation upon submission of the audited financial statements in the Company’s Form 10-K filing.

 

ITEM 6.   Exhibits and Reports on Form 8-K

 

(a)          Exhibits:

 

10.1 — Second Amendment to Loan and Security Agreement, dated as of February 5, 2002, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

 

10.2 — Third Amendment to Loan and Security Agreement, dated as of July 30, 2002, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

 

10.3 — Employment Agreement with Craig D. Crisman effective as of July 1, 2002, incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

 

10.4 — Employment Agreement with Brian R. Stone effective as of August 1, 2002, incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

 

99.1 — Certificate of Chief Executive Officer *

 

99.2 — Certificate of Chief Financial Officer *

 

* Filed herewith

 

(b)         Reports on Form 8-K:

 

None.

 

 

16

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

BancTec, Inc.

 

 

 

		By	/s/ Brian R. Stone
			Brian R. Stone
			Senior Vice President and Chief
			Financial Officer
Dated: September 20, 2002

 

 

17

 

Certifications

 

 

I, Craig D. Crisman, certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q of BancTec, Inc;

 

2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of BancTec, Inc. as of, and for, the periods presented in this quarterly report.

 

 

Date:  September 20, 2002	/s/ Craig D. Crisman
	Craig D. Crisman
	President and Chief Executive Officer

 

 

18

 

Certifications

 

 

I, Brian R. Stone, certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q of BancTec, Inc;

 

2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of BancTec, Inc. as of, and for, the periods presented in this quarterly report.

 

 

Date:  September 20, 2002	/s/ Brian R. Stone
	Brian R. Stone
	Senior Vice President and Chief Financial Officer

 

 

19