UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
OR
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 0-9859

 

 

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  ý     No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     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.

 

Title of Each Class		Number of Shares Outstanding at May 12, 2004
Common Stock, $0.01 par value		17,003,838
Class A Common Stock, $0.01 par value		1,181,946

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

BANCTEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		March 31, 2004			December 31, 2003
		(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $14,762 and $19,578 at March 31, 2004 and December 31, 2003		$	59,911		$	61,566
Accounts receivable, less allowance for doubtful accounts of $1,000 and $1,126 at March 31, 2004 and December 31, 2003		47,318			39,193
Inventories, net		24,354			23,908
Prepaid expenses		7,362			4,823
Other current assets		55			21
Total current assets		139,000			129,511
PROPERTY, PLANT AND EQUIPMENT, net		42,827			44,832
OTHER ASSETS:
Goodwill		41,476			41,476
Deferred income tax benefit		15,202			13,796
Other assets		9,734			9,900
Total other assets		66,412			65,172
TOTAL ASSETS		$	248,239		$	239,515
CURRENT LIABILITIES:
Current obligations under capital leases		$	1,033		$	1,105
Trade accounts payable		12,180			13,122
Other accrued expenses and liabilities		44,805			36,901
Deferred revenue		20,299			22,179
Maintenance contract deposits		46,909			44,540
Income taxes		1,777			1,717
Total current liabilities		127,003			119,564
OTHER LIABILITIES:
Long-term debt, less current maturities		197,823			197,823
Non-current maintenance contract deposits		32,574			30,837
Other noncurrent liabilities		16,627			16,750
Total other liabilities		247,024			245,410
Total liabilities		374,027			364,974
COMMITMENTS AND CONTINGENCIES
SERIES A PREFERRED STOCK (Note 3)		—			16,568
SERIES B PREFERRED STOCK (Note 3)		—			10,609
STOCKHOLDERS’ DEFICIT:
Cumulative preferred stock – authorized, 1,000,000 shares of $0.01 par value at March 31, 2004 and December 31, 2003
Series A preferred stock – issued and outstanding, 100,667 shares at March 31, 2004 and December 31, 2003		17,008			—
Series B preferred stock – issued and outstanding, 35,520 shares at March 31, 2004 and December 31, 2003		11,263			—
Common stock authorized, 22,000,000 shares of $0.01 par value at March 31, 2004 and December 31, 2003:
Common stock-issued and outstanding 17,003,838 shares at March 31, 2004 and December 31, 2003		170			170
Class A common stock-issued and outstanding 1,181,946 shares at March 31, 2004 and December 31, 2003		12			12
Subscription stock warrants		3,726			3,726
Additional paid-in capital		125,944			127,038
Accumulated deficit		(269,812		)	(269,020		)
Accumulated other comprehensive loss		(14,099		)	(14,562		)
Total stockholders’ deficit		(125,788		)	(152,636		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	248,239		$	239,515

 

See notes to unaudited condensed consolidated financial statements.

 

2

 

BANCTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended March 31,
		2004			2003
		(In thousands)			(In thousands)
REVENUE
Equipment and software		$	32,526		$	34,759
Maintenance and other services		56,558			55,993
		89,084			90,752
COST OF SALES
Equipment and software		19,235			23,314
Maintenance and other services		50,505			44,950
		69,740			68,264
Gross profit		19,344			22,488
OPERATING EXPENSES
Product development		2,485			3,717
Selling, general and administrative		12,892			14,724
		15,377			18,441
Income from operations		3,967			4,047
OTHER INCOME (EXPENSE):
Interest income		138			57
Interest expense		(4,773		)	(4,822		)
Sundry, net		(494		)	1,203
		(5,129		)	(3,562		)
INCOME (LOSS) BEFORE INCOME TAXES		(1,162		)	485
INCOME TAX (BENEFIT) EXPENSE		(370		)	631
NET LOSS		(792		)	(146		)
PREFERRED STOCK DIVIDENDS AND ACCRETION OF DISCOUNT		(1,094		)	(927		)
NET LOSS APPLICABLE TO COMMON STOCK		$	(1,886	)	$	(1,073	)

 

See notes to unaudited condensed consolidated financial statements.

 

3

 

BANCTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended March 31
		2004			2003
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(792	)	$	(146	)
Adjustments to reconcile to cash flows provided by operations:
Depreciation and amortization		3,974			5,286
Provision for doubtful accounts		(163		)	94
Deferred income tax benefit		(1,406		)	—
Loss on disposition of property, plant and equipment		131			233
Gain on extinguishment of long-term debt		—			(996		)
Other non-cash items		104			73
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable		(7,962		)	6,250
Increase in inventories		(529		)	(5,085		)
Increase in other assets		(2,407		)	(52		)
Increase (decrease) in trade accounts payable		(942		)	2,014
Increase in deferred revenue & maintenance contracts deposits		489			12,235
Increase (decrease) in other accrued expenses and liabilities		9,772			(2,728		)
Cash flows provided by operating activities		247			17,178
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(2,039		)	(1,819		)
Cash flows used in investing activities		(2,039		)	(1,819		)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of current maturities of long-term debt and capital lease obligations		(266		)	(346		)
Payments on long-term borrowing		—			(2,387		)
Debt issuance costs		—			(81		)
Cash flows used in financing activities		(266		)	(2,814		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		403			(169		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,655		)	12,376
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD		61,566			31,595
CASH AND CASH EQUIVALENTS—END OF PERIOD		$	59,911		$	43,971
SUPPLEMENTAL DISCLOSURES INFORMATION:
Cash paid (refunded) during the period for:
Interest		$	2,682		$	4,519
Taxes		$	1,006		$	(494	)

 

See notes to unaudited condensed consolidated financial statements.

 

4

 

BANCTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

BancTec, Inc. is a worldwide systems integration and services company with a 30-year history 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 portfolio of payment and document processing systems and services, workflow and image management software products, and computer and network support services.

 

The accompanying unaudited condensed consolidated balance sheet at March 31, 2004, and the unaudited condensed consolidated statements of operations and cash flows for the interim periods ended March 31, 2004 and 2003, 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.  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.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The significant accounting principles and practices used in the preparation of the accompanying financial statements are summarized below:

 

Cash and Cash Equivalents and Short-Term Investments

 

Cash and cash equivalents include cash on hand and on deposit, including highly liquid investments with original maturities of three months or less. Short-term investments or similar instruments with original maturities in excess of three months are valued at cost, which approximates market. Restricted cash at March 31, 2004, of $14.8 million represents the cash pledged under the terms of the Revolver.

 

Allowance for Doubtful Accounts

 

The allowance for doubtful accounts is an estimate prepared by management based on evaluation of the collectibility of specific accounts and the overall condition of the receivable portfolios. The Company analyzes trade receivables, and analyzes historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts. The allowance for doubtful accounts is reviewed periodically and adjustments are recorded as deemed necessary.

 

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. At least quarterly, the Company evaluates the carrying amount of inventory based on the identification of excess and obsolete inventory. The Company’s evaluation involves a multi-element approach incorporating the stratification of inventory by time held and the stratification of inventory by risk category, among other elements.  The approach incorporates both recent historical information and management estimates of trends. The Company’s approach is intended to take into consideration potential excess and obsolescence caused by a decreasing installed base, engineering changes and end of manufacture.  If any of the elements of the Company’s estimate were to deteriorate, write-downs may be required. The inventory write-down calculations are reviewed periodically and additional write-downs are recorded as deemed necessary.  Inventory reserves as of March 31, 2004, and December 31, 2003, were $14.8 million and $15.0 million respectively.  Inventory reserves establish a new cost basis for inventory and are not reversed in future periods.

 

Property, Plant, and Equipment

 

Property, plant, and equipment are recorded at cost and are depreciated or amortized principally on a straight-line basis over the estimated useful lives of the related assets. Estimated useful lives range from three to five years for field support spare parts, three to eight years for systems and software, five to seven years for machinery and equipment, leasehold improvements, and furniture and fixtures. Buildings are depreciated over 40 years.  Depreciation expense for the three months ended March 31, 2004 and 2003, were $4.0 million and $5.3 million respectively.

 

5

 

Revenue Recognition

 

The Company derives revenue from primarily two sources- 1) product sales- hardware and software which address complex data and paper-intensive work processes, including advanced web-enabled imaging and workflow technologies with both BancTec-manufacturedequipment and third-party equipment,and 2) services- which consist primarily of application design, development and maintenance, all aspects of desktop outsourcing, including field engineering, as well as help desk and LAN/WAN network outsourcing.

 

The Company applies the provisions of Statement of Position 97-2, “Software Revenue Recognition,” as amended by Statement of Position 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” to all transactions involving the sale of software products and sales of hardware where the software is not incidental. For those transactions that involve acceptance certificates, the Company recognizes revenue upon receipt of the acceptance certificate, or when it can be objectively demonstrated that acceptance criteria have been met.  For hardware transactions where software is considered incidental, or no software is included, revenue is recognized when the product has been delivered and all obligations have been fulfilled.

 

The Company recognizes revenue from sales of equipment and supplies upon delivery and transfer of title or upon customer acceptance.

 

The Company recognizes hardware and software revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. At the time of the transaction, the Company determines whether the fee associated with revenue transactions is fixed or determinable and whether or not collection is reasonably assured. The Company determines whether the fee is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after the normal payment terms, which are generally 30 days from invoice date, the Company recognizes revenue as the fees are collected. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from customers. If the Company determines that collection of the fee is not reasonably assured, the Company defers the revenue and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. For all sales, the Company generally uses either a binding purchase order or signed sales agreement as evidence of an arrangement.

 

Maintenance contracts are primarily at least one year in duration and the revenue generated is generally recognized ratably over the term of the contract.

 

The Company’s services revenue is primarily billed based on contractual rates and terms, and the Company generally recognizes revenue as these services are performed which, in some cases is ratably over the contract term. Certain customers advance funds prior to the performance of the services. The Company recognizes revenue related to these advances over time or as services are performed on a “per call” basis.  These current and non-current portions of these advances are shown as Deferred Revenue or Maintenance Contract Deposits on the Consolidated Balance Sheets.

 

Research and Development

 

Research and development costs are expensed as incurred.  Research and development costs for the three months ended March 31, 2004, and 2003, were $2.5 million and $3.7 million respectively.

 

Income Taxes

 

The Company and its domestic subsidiaries file a consolidated Federal income tax return with BancTec Intermediate Holding as the parent company. The Company’s foreign subsidiaries file separate income tax returns in the countries in which their operations are based.

 

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The Company records valuation allowances related to its deferred income tax assets when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Foreign Currency Translation

 

Foreign assets and liabilities are translated using the exchange rate in effect at the balance sheet date, and results of operations are translated using an average rate for the period. Translation adjustments are accumulated and reported as a component of stockholders’

 

6

 

deficit and comprehensive income (loss). Transaction gains and losses are included in results of operations in “Sundry, net”.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB No. 25”), Accounting for Stock Issued to Employees. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (“SFAS No. 123”), Accounting for Stock-Based Compensation.

 

2000 Stock Plan:

 

Effective July 1, 2000, the Company adopted the 2000 Stock Plan (the Plan), which provides for the grant to employees of incentive options, non-qualified stock options, and restricted stock awards.

 

Incentive Options. During the year ended December 31, 2003, the Company granted 45,000 incentive options.  During the three months ended March 31, 2004, 369,500 incentive options were granted.  Under the Plan, incentive options are granted at a fixed exercise price not less than 100% of the fair market value of the shares of stock on the date of grant (or 110% of the fair market value in certain circumstances). A portion of the incentive options vest over a four-year period at 25% per year beginning January 2, 2001; the remainder vest based on the performance of the Company. As a part of an employee retention program, vesting of 20.0% of the performance-based incentive options was accelerated in October 2000.

 

Non-qualified stock options. During the year ended December 31, 2003 and the three months ended March 31, 2004, no non-qualified options were granted.  Under the Plan, non-qualified options are granted at a fixed exercise price equal to, more than, or less than 100% of the fair market value of the shares of stock on the date of grant. A portion of the non-qualified options vest over a four-year period at 25% per year beginning January 2, 2001; the remainder vest based on the performance of the Company. As a part of an employee retention program, vesting of 20.0% of the performance-based incentive options was accelerated in October 2000.

 

Restricted stock option awards. The amount, if any, to be paid by the award recipient to acquire the shares of stock pursuant to a restricted stock option award is a fixed exercise price equal to, more than, or less than 100% of the fair market value of the shares of stock subject to the award on the date of grant. The restricted stock option awards are subject to vesting provisions determined by the Company’s Board of Directors. As of March 31, 2004, 50,000 stock options vesting over a three-year period were granted.

 

		Incentive Shares		Non-qualified Shares		Restricted Stock		Weighted Average Exercise Price
Options outstanding–December 31, 2002		497,240		31,760		—		9.25
Granted		45,000		—		—		9.25
Forfeited		(60,000	)	—		—		9.25
Options outstanding–December 31, 2003		482,240		31,760		—		9.25
Granted		369,500		—		50,000		9.25
Forfeited		(24,500	)	—		—		9.25
Options outstanding–March 31, 2004		827,240		31,760		50,000		9.25

 

Options and awards expire and terminate the earlier of ten years from the date of grant or one month after the date the employee ceases to be employed by the Company.

 

At March 31, 2004, options to purchase 909,000 shares were outstanding, of which 266,700 were vested.  All options outstanding have an exercise price of $9.25.  No options have been exercised.

 

Under the intrinsic-value method, compensation expense is recorded only to the extent that the strike price is less than market price on the measurement date.  All options granted in 2003 and 2004 were issued at or above market price, and therefore no stock-based compensation was recorded.

 

7

 

The following table illustrates the effect on net income as if compensation for the Company’s stock option plans had been determined consistent with SFAS No. 123:

 

		Three Months Ended March 31,
		2004			2003
Net loss as reported		$	(792	)	$	(146	)
Total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax		(20		)	—
Pro Forma net loss		$	(812	)	$	(146	)

 

3.                                      RECLASSIFICATION

 

Certain amounts have been reclassified from the prior years to conform to the current year presentation.

 

The Company has two issues of Preferred Stock as described in Note 13 – Preferred Stock, contained in Notes to the Condensed Consolidated Financial Statements.  Series A Preferred Stock has been historically classified in the mezzanine section of the Consolidated Balance Sheets due to the provision providing for mandatory redemption.  On March 31, 2004, the Board of Directors and the holder of the Series A Preferred Stock approved an amendment to the Series A Preferred Stock agreement to remove the mandatory redemption provision.

 

Both the Series A Preferred and the Series B Preferred include provisions for redemption at the option of holders in certain circumstances including a sale or merger of the Company and redemption at the option of the Company.  At December 31, 2003, the Series B Preferred was classified in the mezzanine section as provided by guidance contained in EITF Topic D-98, “Classification and Measurement of Redeemable Securities.”  Under this guidance, classification in the permanent equity section is not considered appropriate if the preferred stock is redeemable upon majority vote of the Board of Directors and such board is controlled by the preferred security holders.  At December 31, 2003, preferred security holders comprised 50% of the Board of Directors.  On March 31, 2004, the Board of Directors elected a seventh member who is not a preferred security holder.  As a result of the removal of the mandatory redemption provisions for Series A Preferred Stock and the addition of the seventh board member whereby the preferred security holders no longer control the Board of Directors, the Series A and Series B Preferred Stock are being reclassified into the permanent equity section of the Consolidated Balance Sheets at March 31, 2004.

 

4.                                      SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING TRANSACTIONS

 

The Consolidated Statement of Cash Flows included the following noncash investing and financing transactions:

 

		Three Months Ended March 31,
		2004			2003
		(In thousands)
Capital lease obligation incurred for lease of computer hardware		$	—		$	2,048
Inventory put in service as fixed asset		83			—

 

5.                                      INVENTORIES

 

Inventory consists of the following:

 

		March 31, 2004			December 31, 2003
		(In thousands)
Raw materials		$	5,916		$	6,035
Work-in-progress		8,746			7,168
Finished goods		9,692			10,705
		$	24,354		$	23,908

 

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6.                                      PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

		March 31, 2004			December 31, 2003
		(In thousands)
Land		$	2,860		$	2,860
Field support spare parts		60,253			59,789
Systems and software		59,837			58,927
Machinery and equipment		21,505			21,075
Furniture, fixtures and other		19,338			19,514
Buildings		27,676			27,653
		191,469			189,818
Accumulated depreciation and amortization		148,642			144,986
Property, plant and equipment, net		$	42,827		$	44,832

 

7.                                      OTHER ACCRUED EXPENSES AND LIABILITIES

 

Other accrued expenses and liabilities consist of the following:

 

		March 31, 2004			December 31, 2003
		(In thousands)
Salaries, wages and other compensation		$	12,638		$	12,843
Accrued taxes, other than income taxes		4,882			5,312
Advances from customers		9,697			907
Accrued interest payable		4,969			3,211
Accrued invoices and costs		1,326			2,114
Other		11,293			12,514
		$	44,805		$	36,901

 

8.                                      DEBT AND OTHER OBLIGATIONS

 

Debt and other obligations consist of the following:

 

		March 31, 2004			December 31, 2003
		(In thousands)
7.5% Senior Notes, due 2008		$	93,975		$	93,975
Subordinated Sponsor Note, unsecured, due 2009		103,848			103,848
		197,823			197,823
Less:  Current portion		—			—
		$	197,823		$	197,823

 

9

 

Revolving Credit Facility.  The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which will mature on May 30, 2006.  Effective May 7, 2003, the Company and Heller entered into an amendment to the Revolver which reduced the committed amount from $60 million to $40 million, while increasing the letter-of-credit sub-limit from $30 million to $40 million.  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 pledged cash.  At March 31, 2004, the Company had no balance outstanding under the Revolver and an outstanding balance on letters-of-credit totaling $14.8 million.  The balance remaining under the Revolver that the Company can draw was $15.5 million at March 31, 2004 ($19.5 million in availability less a $4.0 million reserve).  A commitment fee of 0.5% per annum on the unused portion of the Revolver is payable quarterly.

 

The interest rate on loans under the Revolver is, at the Company’s option, either (1) 0.75% over prime or (2) 2.25% over LIBOR.  Under an amendment effective September 1, 2003, the interest rate margins over prime and LIBOR may be increased by 0.25% increments when the fixed charge coverage ratio falls below (1) 2.0 to 1.0, (2) 1.75 to 1.0, (3) 1.5 to 1.0 and (4) 1.25 to 1.0 and (total rate increase of 1.00%) or decreased by 0.25% increments when the fixed charge coverage ratio is greater than 2.25 to 1.0 (total rate decrease of 0.25%).  The interest rate was remeasured as of the effective date of September 1, 2003 under this amendment.  At March 31, 2004, the Company’s weighted average rate on the Revolver was 4.75%.

 

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, 2004 of $14.8 million represents cash pledged under the terms of 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, 2004, the Company was in compliance with all 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. During the first quarter of 2003, the Company repurchased Senior Notes with a face amount of $3.4 million. The Company wrote off a proportionate share of deferred financing-fees, resulting in a gain of approximately $1.0 million, which was reported as sundry (other) income in the condensed consolidated statements of operations for the interim period ended March 31, 2003.  The estimated fair value of the Senior Notes as of March 31, 2004, is approximately $66.9 million based on an average value of the most recently completed market trades, resulting in a yield-to-maturity of approximately 20%.  The number of actual trades is limited; therefore the result may vary if a widely traded market environment existed.

 

Subordinated Unsecured Sponsor Note. The Company’s Sponsor Note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid.  The payments began September 30, 1999. As provided under the agreement, however, the Sponsor Note holder, Welsh, Carson, Anderson & Stowe (“WCAS’), elected to defer quarterly interest payments of $4.0 million for each of the September 2000 through September 2001 quarterly periods resulting in an increase in the principal amount of the Sponsor Note totaling $33.8 million.  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. WCAS may, at its election, defer each future quarterly payment under similar terms.  WCAS has not elected to defer the quarterly payments since September 2001.  In accordance with the terms of the Sponsor Note, on December 6, 2002, the Company made a $90.0 million principal payment on the Sponsor Note.  A holder of the Senior Note had sought to contest this payment.  See discussion under Legal Proceedings.  The estimated fair-value of the Sponsor Note and deferred interest and fees as of March 31, 2004, is approximately $64.4 million assuming a yield-to-maturity of 25%.

 

The Company had no outstanding balances on foreign credit agreements at March 31, 2004.

 

Capital Leases.  During the first quarter of 2003, the Company entered into a capital lease for $2.0 million that pertained to computer hardware.  Amounts due under capital leases are recorded as liabilities. The Company’s interest in assets acquired under capital leases is recorded as property and equipment on the Condensed Consolidated Balance Sheets. Amortization of assets recorded under capital leases is included in depreciation expense.  The current obligations under capital leases are classified in the current liabilities section of the Condensed Consolidated Balance Sheets and the non-current portion of capital leases are included in Other Liabilities.

 

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9.                                      GOODWILL AND INTANGIBLE ASSETS

 

Beginning January 1, 2002, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (See “New Accounting Pronouncements”).  SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be 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.

 

SFAS No. 142 requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If impairment is indicated, then under the second step the fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill is measured as the excess of its carrying value over its fair value.

 

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 its Accumulated Other Comprehensive Loss on the balance sheet.  Goodwill previously classified as unallocated has been allocated to the reporting units as required by SFAS No. 142.  There were no changes in the carrying amount of goodwill by segment for the three months ended March 31, 2004 or March 31, 2003.

 

10.                               WARRANTY LIABILITY

 

The Company offers various product warranties for hardware sold to its customers.  The specific terms and conditions of the warranties vary depending upon the customer and the product sold.  Factors that affect the Company’s warranty liability include number of products sold, historical and anticipated rates of warranty claims and cost per claim.  The Company accrues for estimated warranty costs as sales are made and periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary.

 

Changes to the Company’s warranty liability, which is reported as a component of other accrued expenses and liabilities in the accompanying condensed consolidated balance sheet during the three months ended March 31, 2004 are summarized as follows:

 

		(In thousands)
Balance at December 31, 2003		$	140
Warranties issued		45
Claims paid/settlements		(29		)
Changes in liability for pre-existing warranties		—
Balance at March 31, 2004		$	156

 

11.                               COMPREHENSIVE LOSS

 

The components of comprehensive loss were as follows:

 

		Three Months Ended March 31,
		2004			2003
		(In thousands)
Net loss		$	(792	)	$	(146	)
Foreign currency translation adjustments		463			(103		)
Total comprehensive loss		$	(329	)	$	(249	)

 

12.                               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 the United States.

 

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		US Solutions			Computer & Network Services			International			Corp/Elims			Total
		(In thousands)
For the three months ended March 31, 2004
Revenue from external customers		$	28,932		$	31,616		$	28,536		$	—		$	89,084
Intersegment revenue		746			—			2,108			(2,854		)	—
Segment gross profits		7,314			1,449			11,001			(420		)	19,344
Segment operating income (loss)		2,121			(531		)	4,053			(1,676		)	3,967
Segment identifiable assets		79,861			26,575			57,799			84,004			248,239
Capital appropriations		850			696			562			36			2,144
For the three months ended March 31, 2003
Revenue from external customers		$	32,023		$	30,820		$	27,909		$	—		$	90,752
Intersegment revenue		544			—			1,202			(1,746		)	—
Segment gross profits		7,084			5,967			9,427			10			22,488
Segment operating income (loss)		247			3,833			2,351			(2,384		)	4,047
Segment identifiable assets		102,339			29,092			54,771			55,159			241,361
Capital appropriations		915			210			326			2,416			3,867

 

13.                               PREFERRED STOCK

 

SERIES A 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 over a period of 8 years.  For the three months ended March 31, 2004, accretion of the related discount and accrued but unpaid dividends totaled $0.4 million, increasing the carrying amount to $17.0 million. As of March 31, 2004, the stated value of the Series A preferred stock, including accumulated but unpaid dividends, was $190.07 per share.

 

SERIES B PREFERRED STOCK

 

For the three months ended March 31, 2004, the Company accrued additional unpaid dividends for its Series B preferred stock totaling $0.7 million, increasing the carrying amount to $11.3 million.  As of March 31, 2004, the stated value of the Series B preferred stock, including accumulated but unpaid dividends, was $317.08 per share.

 

14.                               RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity.  For mandatorily redeemable financial instruments of a nonpublic entity, this statement shall be effective for fiscal periods beginning after December 15, 2003.  The Company has adopted SFAS No. 150 with no effect on the Company’s results of operations or financial position.

 

15.                               SUBSEQUENT EVENTS

 

None

 

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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 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.

 

Overview

 

The Company believes several factors continued to create a challenging and competitive sales and cost-containment environment during the three months ended March 31, 2004.  These factors include: the impact of check truncation, 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.  The change in revenue mix is partially a result of trends in payment processing, including truncation, which impacts domestic and international markets.  Additionally, during the three months ended March 31, 2004, the USS and INTL segments experienced revenue declines in the maintenance business, the duration of which the Company cannot predict.

 

Expected economic and business conditions into the remainder of 2004 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.  As a result, demand for systems solutions products offered by USS and INTL continues to be weak. The Company has concentrated on cost reductions and on existing offerings.  Product-development efforts are focused on payment, check and document processing technologies, in addition to investments in Electronic Document Management (“EDM”) vertical solutions, 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, 2004 and Three Months Ended March 31, 2003

 

Consolidated revenue of $89.1 million for the three months ended March 31, 2004 deceased by $1.7 million or 1.9% from the comparable prior-year period. The US Solutions (“USS”) revenue decrease of $3.1 million was partially related to a 12.9% decline in maintenance revenue due to the Company’s installed products reaching the end of their useful lives and from increased competition.  The Company expects these trends to continue in the foreseeable future.  In addition, an 8.4% decline in revenues related to the sale and installation of hardware and software products was primarily related to a weak market for payments solutions due to the recent passage of laws in the United States related to check truncation.  Increases in International (“INTL”) of $0.6 million are the result of the introduction in the United Kingdom of document processing services and the impact of the weakening dollar on the conversion of revenue stated in foreign currencies.  An increase in Computer & Network Services (“CNS”) of $0.8 million resulted from the expansion by CNS of operations into Europe; somewhat offset by pricing decreases, domestic competitive pressure, and decreased volume under certain maintenance programs.  Factors expected to impact future revenue include corporate-customer spending for large systems-solutions, the continued impacts of check truncation, customer and prospective customer mergers, on-going competitive pressures, and fluctuations in international currencies.

 

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Consolidated gross profit of $19.3 million decreased by $3.2 million or 14.2% from the comparable prior-year period. Decreases in CNS of $4.6 million were partially offset by increases in USS of $0.2 million and in INTL of $1.6 million.  Although overall USS revenue decreased, the higher USS gross profit resulted from ongoing cost-containment efforts and manufacturing efficiencies.  As a result, the USS gross margin percentage increased from 22.1% to 25.3%.  Increases in INTL gross profit resulted partially from increased revenue, including the impact of currency conversion, and partially from a higher gross profit percentage, increasing from 24.9% to 35.0%. Continued efforts to provide proven deliverables as well as targeted new offerings, including EDM solutions, archive solutions and hardware enhancements, which, along with ongoing cost-containment efforts, allowed for cost reductions to strengthen the INTL gross profit.  CNS’ gross profit percentage decreased from 19.4% to 4.6%, resulting primarily from decreased revenue as well as margin pressure caused by increased competition and changes in the revenue mix.  CNS is the major component in the maintenance and other services category on the Consolidated Statements of Operations, and therefore is the primary contributing factor in the decreased gross profit in the maintenance and other services category.

 

Operating expenses of $15.4 million decreased $3.0 million compared to the prior-year period. Operating expenses, by component, changed as follows: Product-development expenses decreased by $1.2 million or 32.4% primarily due to the focused realignment of research and development expenditures against future product strategies and marketing plans.  The use of outsourced product-development services also contributed to the reduction. Selling, general and administrative expenses (“SG&A”) decreased by $1.8 million or 12.2% due to decreased SG&A depreciation expense and on-going efforts to realign the cost structure.

 

Interest expense for the three months ended March 31, 2004 of  $4.8 million was unchanged from the comparable prior-year period.

 

Sundry items resulted in a net loss of $0.5 million during the three months ended March 31, 2004 as compared to a net income of $1.2 million during the comparable prior-year period.  This decrease is primarily due to foreign-exchange losses of $0.5 million during the current-year period, compared to a gain from the repurchase of Senior Notes of approximately $1.0 million and foreign-exchange gains of $0.2 million in the prior-year period.

 

An income tax benefit of $0.4 million for the three months ended March 31, 2004 compared to a corresponding prior-year period income tax provision of $0.6 million.  The income tax provisions for the prior-year period related primarily to income from the Company’s international subsidiaries.  During the fiscal year ended December 31, 2003, a $13.8 million release of valuation allowance was recorded to adjust the deferred tax assets to an amount management believes is more likely than not to be realized.  As a result, the net loss recorded for the three months ended March 31, 2004 resulted in realization of a net tax benefit.  The Company’s effective tax rate was approximately 31.8% for the three months ended March 31, 2004 as compared to 130.1% 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 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 pledged cash.  General economic conditions, the current weakness in demand for the Company’s systems solutions products and the requirement to obtain performance bonds or similar instruments could have an impact on the Company’s future liquidity.

 

The Company’s cash and cash equivalents totaled $59.9 million at March 31, 2004, compared with $61.6 million at December 31, 2003. Working capital increased $2.1 million during the three months ended March 31, 2004 to working capital of $12.0 million compared to working capital of $9.9 million at December 31, 2003.  The change in working capital included a current liability increase of $7.4 million from increased deferred revenue and maintenance contract deposits and accrued expenses, an accounts payable decrease of $1.0 million, an accounts receivable increase of $8.1 million and a prepaid expense increase of $2.5 million.

 

During the three months ended March 31, 2004, the Company relied primarily on cash flows generated from operating activities to fund operations. At March 31, 2004, the Company had available $34.3 million of borrowing capacity under the Revolver, of which the Company can draw $15.5 million.

 

Operating activities provided $0.2 million and $17.2 million of cash in the three months ended March 31, 2004 and 2003, respectively, a decrease of  $17.0 million.  Net loss increased $0.6 million from the prior -year period.  In addition, cash generated by changes in working capital assets and liabilities was $14.2 million less than in the prior-year period.

 

Investing activities used net cash of $2.0 million and $1.8 million in the three months ended March 31, 2004 and 2003, respectively. Both uses of cash related to purchases of property, plant and equipment.

 

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Financing activities used $0.3 million and $2.8 million of net cash in the three months ended March 31, 2004 and 2003, respectively.  Both uses of cash related primarily to the reduction of the Company’s debt.

 

At March 31, 2004, the Company’s principal outstanding debt instruments consisted of (i) no balance outstanding under the revolving credit facility maturing May 30, 2006 (which is more fully described below), (ii)  $94.0 million of 7.5% Senior Notes due 2008, and (iii) $103.8 million of Sponsor Notes due 2009. 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 asset sales may generate.

 

Revolving Credit Facility. The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which will mature on May 30, 2006.  Effective May 7, 2003, the Company and Heller entered into an amendment to the Revolver which reduced the committed amount from $60 million to $40 million, while increasing the letter-of-credit sub-limit from $30 million to $40 million.  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 pledged cash.  At March 31, 2004, the Company had no balance outstanding under the Revolver and an outstanding balance on letters-of-credit totaling $14.8 million.  The balance remaining under the Revolver that the Company can draw was $15.5 million at March 31, 2004 ($19.5 million in availability less a $4.0 million reserve).  A commitment fee of 0.5% per annum on the unused portion of the Revolver is payable quarterly.

 

The interest rate on loans under the Revolver is, at the Company’s option, either (1) 0.75% over prime or (2) 2.25% over LIBOR.  Under an amendment effective September 1, 2003, the interest rate margins over prime and LIBOR may be increased by 0.25% increments when the fixed charge coverage ratio falls below (1) 2.0 to 1.0, (2) 1.75 to 1.0, (3) 1.5 to 1.0 and (4) 1.25 to 1.0 and (total rate increase of 1.00%) or decreased by 0.25% increments when the fixed charge coverage ratio is greater than 2.25 to 1.0 (total rate decrease of 0.25%).  The interest rate was remeasured as of the effective date of September 1, 2003 under this amendment.  At March 31, 2004, the Company’s weighted average rate on the Revolver was 4.75%.

 

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, 2004 of $14.8 million represents cash pledged under the terms of 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, 2004, the Company was in compliance with all covenants under the Revolver.

 

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 mature on June 1, 2008.  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. During the three months ended March 31, 2003, the Company repurchased Senior Notes with a face amount of $3.4 million. The Company wrote off a proportionate share of deferred financing-fees, resulting in a gain of approximately $1.0 million, which was reported as sundry (other) income in the condensed consolidated statements of operations for the three months ended March 31, 2003.

 

Subordinated Unsecured Sponsor Note. The Company’s Sponsor Note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid.  The payments began September 30, 1999. The Sponsor Note matures on July 22, 2009.  As provided under the agreement, however, the Sponsor Note holder, WCAS, elected to defer quarterly interest payments of $4.0 million for each of the September 2000 through September 2001 quarterly periods resulting in an increase in the principal amount of the Sponsor Note totaling $33.8 million.  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. WCAS may, at its election, defer each future quarterly payment under similar terms.  WCAS has not elected to defer the quarterly payments since September 2001.  In accordance with the terms of the Sponsor Note, on December 6, 2002, the Company made a $90.0 million principal payment on the Sponsor Note.  A holder of Senior Notes had sought to contest this payment.  See discussion under Legal Proceedings.

 

15

 

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 over a period of 8 years. For the three months ended March 31, 2004, accretion of the related discount and accrued but unpaid dividends totaled $0.4 million, increasing the carrying amount to $17.0 million. As of March 31, 2004, the stated value of the Series A preferred stock, including accumulated but unpaid dividends, was $190.07 per share.

 

Preferred Stock – Series B. For the three months ended March 31, 2004, the Company accrued additional unpaid dividends for its Series B preferred stock totaling $0.7 million, increasing the carrying amount to $11.3 million.  As of March 31, 2004, the stated value of the Series B preferred stock, including accumulated but unpaid dividends, was $317.08 per share.

 

See Note 3 – Reclassification, contained in Notes to the Condensed Consolidated Financial Statements, for a discussion of the reclassification of the Series A and B Preferred Stock to the permanent equity section of the Condensed Consolidated Balance Sheets under the guidance of EITF Topic D-98, “Classification and Measurement of Redeemable Securities.”

 

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

 

Contractual Obligations and Commercial Commitments.

 

In the normal course of business, the Company enters into various contractual and other commercial commitments that impact, or could impact, the liquidity of operations. The following table outlines the commitments at March 31, 2004:

 

		Total Amounts			Less than 1 Year			1-3 Years			4-5 Years			Over 5 Years
		(In Millions)
Long-term debt		$	197.8		$	—		$	—		$	94.0		$	103.8
Capital leases		1.0			1.0			—			—			—
Operating leases (non-cancelable)		18.4			5.6			8.6			2.7			1.5
Total Contractual		217.2			6.6			8.6			96.7			105.3
Unused lines of credit		$	19.5		$	19.5		$	—		$	—		$	—
Standby letters of credit		14.8			14.8			—			—			—
Total Commercial		$	34.3		$	34.3		$	—		$	—		$	—

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity.  For mandatorily redeemable financial instruments of a nonpublic entity, this statement shall be effective for fiscal periods beginning after December 15, 2003.  The Company has adopted SFAS No. 150 with no effect on the Company’s results of operations or financial position.

 

FACTORS AFFECTING THE COMPANY’S BUSINESS AND PROSPECTS

 

Information provided by the Company in this Quarterly Report on Form 10-Q and other documents filed with the Securities and Exchange Commission include “forward-looking” information, as that term is defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). All statements other than statements of historical fact are statements that could be deemed forward-looking statements.  The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of numerous factors beyond the Company’s control. 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 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.

 

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General Economic Conditions

 

The Company’s business partially 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 high technology, and to governmental agencies.  General economic conditions that cause customers 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, including its business, operating results, financial condition and prospects.

 

Delays or reductions in technology spending could have a material adverse effect on demand for the Company’s products and services, and consequently 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-based transactions.  To the extent that technological changes impact the future volume of paper transactions, the Company’s traditional business may be adversely impacted.

 

Dependence on Suppliers

 

The Company’s solutions products depend on the quality of 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.

 

Indebtedness and Impact on Operating Results

 

As a result of the Company’s high debt to equity ratio, the Company is required to devote significant cash to debt service.  This limits the Company’s future operating flexibility and could make the Company more vulnerable to 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, competition 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.

 

Product Development Activities

 

The strength of the Company’s overall business depends in part 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

 

17

 

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.  Many of the Company’s customers use its products in highly regulated or technologically demanding industries.  As a result of products introduced by the Company’s competitors, generally accepted industry standards can change rapidly 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 (1) 0.75% over prime or (2) 2.25% over LIBOR.  Although no actual balances were outstanding under the Revolver at March 31, 2004, assuming $1.0 million in borrowings under the Revolver, a one hundred basis point change in the bank’s prime or LIBOR rate would impact net interest expense by $10,000 over a twelve-month period.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

During the audit of the Company’s 2000 financial statements, the Company’s certifying accountant, Deloitte & Touche LLP (D&T) noted what D&T considered to be material weaknesses in internal-control design and in the operation of internal controls.  See Current Report on Form 8-K filed with the Securities and Exchange Commission on November 13, 2001 for additional information regarding this item and the subsequent change in the Company’s independent accountant.  The Company’s current independent accountant, KPMG, LLP (KPMG), also informally noted certain internal-control weaknesses as a result of the 2001 audit, some of which are the same weaknesses as noted by D&T in their report.

 

The Company has addressed certain of the individual internal-control weaknesses noted by D&T and KPMG, but analysis of internal control factors continues on an ongoing basis.  Steps that have been implemented to address internal-control weaknesses include policies covering loss contracts, inventory reserves, allowance for doubtful accounts, revenue recognition, and project costing.  In addition, as a result of Exchange Act Rule 13a-14, the Company has begun to put in place procedures addressing the adequacy of disclosure controls, including obtaining certifications from each member of management involved in the preparation and review of this Form 10-Q.  The Company is continuing its efforts to correct the internal-control weaknesses noted by D&T and KPMG.  Although the Company believes that it has implemented adequate controls and procedures for the preparation of this report, the actions taken by the Company to correct certain of the previously identified weaknesses will not be fully tested by the Company’s independent accountants until the annual audit for the year ended December 31, 2005.

 

Within the 90 days prior to the filing date of this report, the Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Company’s management, began an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon the evaluation completed to date, and the new procedures put in place, the Chief Executive Officer and the Chief Financial Officer believe that the Company’s disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.  The Company will continue to evaluate disclosure controls on an ongoing basis.

 

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.

 

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or the Chief Financial Officer, subsequent to the date of the evaluation.

 

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BANCTEC, INC.

PART II

OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

A lawsuit captioned Cerberus International, Ltd., et al. vs. BancTec, Inc., et al. (Case No. 03600287) was filed on January 28, 2003 in the Supreme Court of the State of New York for the County of New York naming as defendants the Company and certain of its affiliates.  The complaint alleged that the Company improperly made a payment to the holder of the Sponsor Note and sought damages of not less than $89 million as a result of the alleged improper payment and the imposition of a constructive trust on monies paid by the Company to the holder of the Sponsor Note.  The Company’s $90 million payment to the holder of the Sponsor Note was disclosed in the Company’s Current Report on Form 8-K dated November 27, 2002.

 

On May 5, 2004, the Supreme Court granted the Company’s motion for summary judgment dismissing the plaintiff’s complaint in its entirety.  The plaintiff will have 30 days from the date of entry of the judgment to file a notice of appeal.

 

The Company is a party to various other legal proceedings.  None of those current proceedings is expected to have an outcome that is material to the financial condition or operations of the Company.

 

ITEM 2.  Changes in Securities and Use of Proceeds

 

None

 

ITEM 3.  Defaults Upon Senior Securities

 

None

 

ITEM 4.  Submission of Matters to a Vote of Security Holders

 

None

 

ITEM 5. Other Information

 

None

 

ITEM 6. Exhibits and Reports on Form 8-K

 

(a)          Exhibits:

 

31.1 – Certificate of Chief Executive Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act

 

31.2 – Certificate of Chief Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act

 

32.1 – Certificate of Chief Executive Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under the Sarbanes-Oxley Act

 

32.2 – Certificate of Chief Financial Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under the Sarbanes-Oxley Act

 

(b)         Reports on Form 8-K:

 

None

 

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SIGNATURES

 

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

 

BancTec, Inc.

 

 

	By	/s/	Brian R. Stone
			Brian R. Stone
			Senior Vice President on behalf of
			the registrant and as Chief
			Financial Officer

 

 

Dated: May 20, 2004

 

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