**UNITED STATES****SECURITIESAND 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 March31, 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 ofregistrant 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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.       Yes o    No  ý

 

 

Indicate thenumber 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                            |       |

 

 

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**BANCTEC, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** ****(In thousands, exceptshare 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 |   |

 

 

Seenotes to condensed consolidated financial statements.

 

 

2

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**BANCTEC, INC.**

# **CONDENSEDCONSOLIDATED 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 | ) |

 

 

Seenotes to condensed consolidated financial statements.

 

 

3

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**BANCTEC, INC.**

**CONDENSEDCONSOLIDATED 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 |   |

 

 

Seenotes to condensed consolidated financial statements.

 

 

4

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**BANCTEC, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.            ****BASIS OF PRESENTATION AND OTHER ACCOUNTING INFORMATION**

 

The accompanyingunaudited condensed consolidatedbalance sheet at March 31, 2002, and the condensedconsolidated statements of operations and cash flows for the interimperiods ended March 31, 2002 and 2001, should be read in conjunction withBancTec, Inc. and subsidiaries (“BancTec” or the “Company”) consolidatedfinancial statements and notes thereto in the most recent Annual Report on Form10–K filed with the Securities and Exchange Commission.  As disclosed in the notes to that report,the condensed consolidated statementsof operations and cash flows for the interim period ended March 31, 2001 havebeen restated. In the opinion of management, the accompanying condensed consolidated financialstatements contain all material adjustments, consisting principally of normalrecurring adjustments, necessary for a fair presentation of the financialposition and results of operations of the Company. All significant intercompanybalances and transactions have been eliminated in consolidation.

 

 

**2.             INVENTORIES**

 

Inventoryconsists of the following: 

 

|             |   | **March 31,**      |       | **December 31,** |   |
|------------------|--------|--------------------|------------|------------------|--------|
|             |   | **2002**           |       | **2001**         |   |
|             |   | **(In thousands)** | ** ** |
| Raw materials    |   | $                  | 8,781      |             | $      | 9,053 |   |
| Work-in-progress |   | 20,518             |       | 24,793           |   |
| Finished goods   |   | 20,439             |       | 17,866           |   |
|             |   | $                  | 49,738     |             | $      | 51,712 |   |

 

 

**3.             PROPERTY,PLANT AND EQUIPMENT**

 

Property,plant and equipment consist of the following:

 

|                                      |   | **March 31,**      |   | **December 31,** |   |
|-------------------------------------------|--------|--------------------|--------|------------------|--------|
|                                      |   | **2002**           |   | **2001**         |   |
|                                      |   | **(In thousands)** |   |
| Land                                      |   | $                  | 2,860  |             | $      | 2,860 |   |
| Field support spare parts                 |   | 76,027             |   | 78,055           |   |
| Systems and software                      |   | 64,713             |   | 64,294           |   |
| Machinery and equipment                   |   | 53,293             |   | 53,261           |   |
| Furniture, fixtures and other             |   | 23,585             |   | 24,108           |   |
| Buildings                                 |   | 28,579             |   | 28,358           |   |
|                                      |   | 249,057            |   | 250,936          |   |
| Accumulated depreciation and amortization |   | (177,693           | )      | (174,723         | )      |
| Property, plant and equipment, net        |   | $                  | 71,364 |             | $      | 76,213 |   |

 

 

5

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**4.             OTHERACCRUED EXPENSES AND LIABILITIES**

 

Otheraccrued expenses and liabilities consist of the following:

 

|                                   |   | **March 31,**      |   | **December 31,** |   |
|----------------------------------------|--------|--------------------|--------|------------------|--------|
|                                   |   | **2002**           |   | **2001**         |   |
|                                   |   | **(In thousands)** |   |
| Salaries, wages and other compensation |   | $                  | 16,532 |             | $      | 17,602 |   |
| Accrued taxes, other than income taxes |   | 3,281              |   | 8,446            |   |
| Advances from customers                |   | 2,315              |   | 1,859            |   |
| Accrued interest payable               |   | 7,623              |   | 5,939            |   |
| Accrued invoices and costs             |   | 4,105              |   | 5,534            |   |
| Accrued contract completion costs      |   | 3,266              |   | 2,599            |   |
| Other                                  |   | 22,101             |   | 20,168           |   |
| Total                                  |   | $                  | 59,223 |             | $      | 62,147 |   |

 

 

**5.             DEBTAND OTHER OBLIGATIONS**

 

Debtand other obligations consist of the following: 

 

|                                            |   | **March 31,**      |    | **December 31,** |   |
|-------------------------------------------------|--------|--------------------|---------|------------------|--------|
|                                            |   | **2002**           |    | **2001**         |   |
|                                            |   | **(in thousands)** |    |
| 7.5% Senior Notes, due 2008                     |   | $                  | 110,950 |             | $      | 110,950 |   |
| Revolver                                        |   | 3,385              |    | 25,040           |   |
| Subordinated Sponsor Notes, unsecured, due 2009 |   | 193,848            |    | 193,848          |   |
| Other                                           |   | 2,636              |    | 3,798            |   |
|                                            |   | 310,819            |    | 333,636          |   |
| Less: Current portion                           |   | (6,021             | )       | (28,838          | )      |
|                                            |   | $                  | 304,798 |             | $      | 304,798 |   |

 

 

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

 

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

 

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

 

6

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The Revolver contains various representations, warranties andcovenants, 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 covenantsunder the Revolver.

 

Senior Notes.  Interest onthe Senior Notes is fixed at 7.5% and is due and payable in semi-annualinstallments. Payments began December 1, 1998. The Notes contain covenantsplacing limitations on the Company’s ability to permit subsidiaries to incurcertain debts, incur certain loans, and engage in certain sale and leasebacktransactions.  As of August 14, 2002, the Company was not in compliance with the SeniorNotes' reporting requirements for the quarters ended March 31, 2002 andJune 30, 2002.  The Company is in a 60-day cure period, and delivery of thefinancial statements in this Form 10-Q will remedy this non-compliancecondition for the quarter ended March 31, 2002. The Company expects to cure the non-compliance reporting for thequarter ended June 30, 2002 withinthe cure period provided and therefore continues to classify the Senior Notesas long term debt.  The estimatedfair value of the Senior Notes as of March 31, 2002 is approximately $81.0million based on a yield of 14.0%.

 

Subordinated Unsecured Sponsor Notes. The Company’s $160.0 million in SponsorNotes are issued in U.S. dollars, with interest at 10.0% due and payablequarterly. The payments began September 30, 1999. However, as provided underthe agreement, the Sponsor Notes’ holder, WCAS, elected to defer quarterlyinterest payments of $4.0 million for each of the June 2000 through September2001 quarterly periods. Such election required a deferred financing fee of30.0% of each of the interest payments being deferred.  The Company accounts for the additionalfinancing fees as a change in the effective interest rate of the debt. At March31, 2002, the Company had $33.8 million outstanding in WCAS notes representingdeferred interest. WCAS may, at its election, defer each future quarterlypayment under similar terms.  WCAS didnot elect to defer the December 2001 and March 2002 quarterly payments. Theestimated fair value of the Sponsor Notes and deferred interest and fees as ofMarch 31, 2002 is approximately $151.0 million based on a discount rate of15.0%.

 

The outstanding balance on foreign creditagreements as of March31, 2002 was $2.6 million, payable in yen.The terms on the agreements ranged from 30 to 60 days at interest rates up to1.4%.

 

**6.             GOODWILL AND INTANGIBLE ASSETS**

 

InJuly 2001, the Financial Accounting Standards Board issued SFAS No. 142,“Goodwill and Other Intangible Assets.” The Company has adopted the provisionsof SFAS No. 142 effective January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets withindefinite useful lives no longer be amortized but instead tested forimpairment at least annually.  SFAS No.142 also requires that intangible assets with definite useful lives beamortized over their respective estimated useful lives to their estimatedresidual values.

 

UnderSFAS No. 142, the Company is required to perform transitional impairment testsfor its goodwill and intangible assets with indefinite useful lives as of thedate of adoption. Step one of the transitional goodwill impairment test, whichcompares the fair values of the Company’s reporting units to their respectivecarrying 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 thecumulative effect of a change in accounting principle in the consolidatedstatement of operations.

 

Components of theCompany’s goodwill include amounts that are foreign currency denominated.  These goodwill amounts are subject totranslation at each balance sheet date. The Company records the change to accumulated other comprehensive losson the balance sheet. The following is asummary of changes in the carrying amount of goodwill by segment for the threemonths 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

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The following is a summary comparison of net loss for the three monthsended March 31, 2002 and 2001, as adjusted to remove the amortization ofgoodwill and intangible assets with indefinite useful lives for the threemonths 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 theImpairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of.”  The Company’sadoption of SFAS No. 144 on January 1, 2002 did not have a material impact onits 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.**             **BUSINESSSEGMENT DATA**

 

TheCompany segments its operations based on geographical areas  (U.S. Solutions (“USS”) and International Solutions(“INTL”)) and product lines (Computer and Network Services (“CNS”)). INTLoffers similar products as USS and consists primarily of operations throughoutthe world excluding United States. The Company recently realigned its reportingstructure and began reporting under the new alignment in the first quarter of2002. Under this new structure, USS includes the operations of AdvancedEnterprise Solutions (“AES”) and INTLreporting includes both the U.S. and international operations of Plexus® products (“Plexus”). The operations of AES and Plexus are not material to USS or toINTL operations. Under the new structure, the composition of CNS remains unchanged.  Prior period information has beenreclassified 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     |   |

 

 

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**9.             PREFERREDSTOCK**

 

**REDEEMABLE PREFERRED STOCK**

 

The Company allocated the proceeds from itsSeries A preferred stock issuance based upon the relative fair value of thepreferred stock and warrants issued. The related discount is being accretedsuch that the carrying amount of the mandatory redeemable preferred stock willequal the mandatory redemption amount at September 22, 2008. For the threemonths ended March 31, 2002, accretion of the related discount and accrued butunpaid dividends totaled $0.4 million, increasing the carrying amount to $13.5million. As of March31, 2002, the stated value of the Series Apreferred stock, including accumulated but unpaid dividends, was $166.45 pershare.

 

**SERIES BPREFERRED STOCK**

 

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

 

 

**10.          RECENTACCOUNTING PRONOUNCEMENTS**

 

In August 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.” SFAS No. 143 requires entities to record the fairvalue of a liability for an asset retirement obligation in the period in whichit is incurred. The Company will adopt SFAS No. 143 in fiscal year 2003. TheCompany has not determined the impact of the provisions of SFAS No. 143 on itsfinancial 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 ofdebt and allows extraordinary accounting treatment for early extinguishmentonly when the provisions of Accounting Principles Board Opinion No. 30,“Reporting the Results of Operations—Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transaction”, are met. The Company will adopt the provisionsSFAS 145 regarding early extinguishment of debt during the second quarterof 2002.

 

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

 

**11.          SUBSEQUENTEVENTS**

 

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

 

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

 

 

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

 

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

 

**FORWARD-LOOKING STATEMENTS**

 

*This Quarterly Report on Form 10-Q, including FactorsAffecting the Company’s Business and Prospects set forth in Management’sDiscussion and Analysis of Financial Condition and Results of Operations andQuantitative and Qualitative Disclosure About Market Risk, containsforward-looking statements as that term is defined in the Private SecuritiesLitigation 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 suchforward-looking statements. All statements other than statements of historicalfact are statements that could be deemed forward-looking statements, includingany projections of earnings, revenues, or other financial items; any statementsof the plans, strategies, and objectives of management for future operations;any statements concerning proposed new products, services, or developments; anystatements regarding future economic conditions or performance; statements ofbelief and any statement of assumptions underlying any of the foregoing. Therisks, uncertainties and assumptions referred to above include the ability ofthe Company to retain and motivate key employees; the timely development,production and acceptance of products and services and their feature sets; the challengeof managing asset levels, including inventory; the flow of products intothird-party distribution channels; the difficulty of keeping expense growth atmodest levels while increasing revenues; and other risks that are describedfrom time to time in the Company’s Securities and Exchange Commission reports,including but not limited to the items discussed in “Factors Affecting theCompany’s Business and Prospects” set forth in this report, and items describedin the Company’s other filings with the Securities and Exchange Commission. TheCompany undertakes no obligation to update or revise forward-looking statementsto reflect changes in assumptions, the occurrence of unanticipated results orchanges to future operating results over time.*

 

The Company believes several factors continued to create a challengingand competitive sales and cost containment environment during the three monthsended March 31, 2002.  These factorsinclude: general economic conditions and reduced corporate customer technology spending;ongoing competitive pressures; an ongoing planned change in revenue mix withinthe 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 segmentexperienced additional unexpected revenue declines, the duration of which theCompany cannot predict.  In response tothe continued difficult business climate, the year-end planning process and thedevelopment of the 2002 operating plan, the Company has undertaken a process ofevaluating the recovery of all its investments in inventory and long-livedassets.  This evaluation has resulted inwrite-downs and impairments of inventory and other long-lived assets inresponse to current business conditions and other decisions reached during theplanning process.

 

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

 

**RESULTS OF OPERATIONS**

 

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

 

Consolidated revenue of $116.4 million for thethree months ended March 31, 2002 decreased by $1.5 million or 1.3% from thecomparable prior year period. The decrease occurred primarily in INTL of $2.3million and CNS of $0.6 million, offset partly by an increase in USS of $1.4million. The INTL decrease resulted primarily from the impact of longeracceptance periods on highly customized products in the prior year period.  These products, scheduled for acceptance in2000, achieved acceptance in 2001 along with those products scheduled foracceptance in 2001. Thedecreased revenue from the CNS operations was primarily attributable to lowervolumes and downsizing of some contracts as a result of general economicconditions.  The USS increase was principally related to the impact of longeracceptance periods on highly customized products for which revenue was recognizedduring the current quarter, and was offset partly by declines in maintenance 

 

 

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due to Company installed products reaching theend of their useful lives and from increased competition.  The Company expects these trends to continuein the foreseeable future. Factors impacting future revenue include lowercorporate customer spending for large systems solutions as a result of thecontinuing 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 millionincreased by $8.9 million or 46.6% from the comparable prior year period. Theincrease 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 increasewas primarilyattributable to an improved labor model, with additional benefit providedthrough a reduction in support costs, including streamlining the number ofdistricts and the expanded automation of its call center operations.  TheINTL decrease occurred primarily from a decrease in the Company’s Europeantraditional businesses, partially offset by a margin improvement by theCompany’s subsidiary in Japan.  Themargin decline in the Company’s subsidiaries in Europe was due primarily tolower revenues without a corresponding percentage decline in fixed expenses, aswell as fluctuations of the euro and other European currencies. The USSincrease was principally related to the impact of longer acceptance periods onhighly customized products in the prior year period. The Company is inthe process of transitioning its product offering focus to proven deliverablesand new targeted offerings, including EDM solutions, its other archivesolutions and hardware enhancements. Incorporating more third-party products into the Company’s solutionsrather than developing the products has enabled the concentration of effortsand expenditures on the targeted items which, along with the Company’s ongoingcost containment efforts, allowed for cost reductions to help offset revenuedeclines.  The Company will continue tomonitor the effects of the business climate and its strategic plans on therecoverability of its investment in inventory and long-lived assets, all ofwhich 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 newapplications for the Company’s product lines and selective expansion ofexisting 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 aresult of the implementation of SFAS 142. Goodwill amortization for the threemonths 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 inthe comparable prior year period. The decrease was due mainly to the repurchaseof a portion of the Senior Notes, a lower outstanding balance on the revolving credit facilities and declininginterest rates, partially offset by a $13.2 million increase in debt related toSponsor Notes subsequent to March 31, 2001.

 

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

 

Pre-tax income in foreign tax jurisdictions resulted in an income taxprovision of $1.0 million for the three months ended March 31, 2002 compared toa corresponding prior year period income tax provision of $1.1 million.  The income tax provisions for both periodsrelated to income from the Company’s international subsidiaries and a valuationallowance provided to reduce the Company’s deferred tax assets to an amountmanagement believes is more likely than not to be realized.  The Company’s effective tax rate wasapproximately (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 bycash and cash equivalents, funds available under the Company’s revolving creditagreement, as discussed below, which matures May 30, 2006, and by internallygenerated funds from improved cash flows from operations. Funds availabilityunder the revolving credit agreement is determined by a borrowing base formulaequal to a specified percentage of the value of the Company’s eligible accountsreceivable, inventory and real estate. General economic conditions, the current weakness in demand for theCompany’s systems solutions products offered by USS and the requirement toobtain performance bonds or similar instruments for future advances from asignificant customer are expected to have a material impact on the Company’sfuture 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 March31, 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 revolvingcredit agreement and a related currentasset decrease in cash and cash equivalents of $15.8 million.

 

 

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During the three months ended March 31, 2002, theCompany relied primarily on cash flows generated from operating activities andshort-term borrowings under its revolving credit agreement to fund operations. At March 31, 2002 the Company had available $30.9million of borrowing capacity under the Revolver, of which the Companycan 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 theloss from continuing operations of $13.0 million and a $7.4 million decrease inother assets, partially offset by a decrease of $10.6 million in deferred revenueand $4.5 million in the prior year related to interest paid-in-kind.

 

Investing activities used net cash of $2.3million 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 andequipment.

 

Financing activities used $22.9 million of netcash 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 millionchange related primarily to the reduction of the Company’s debt. The cashprovided in the three months ended March 31, 2001 related primarily to proceedsfrom the issuance of preferred stock of $5.3 million and to additionalborrowings of $8.0 million.

 

At March 31, 2002, the Company’s principal outstanding debt instrumentsconsisted of (i) $3.4 million outstanding under the revolving credit facilitymaturing May 30, 2006 (which is more fully described below), (ii)  $111.0 million of 7.5% Senior Notes due2008, and (iii) $193.8 million of Sponsor Notes due 2009.  As of March 31, 2002, the Company’s foreignsubsidiaries had outstanding borrowings of $2.6 million.  The Company or its affiliates may from timeto time purchase, redeem or pay deferred interest on some of its outstandingdebt or equity securities.  The Companywould only make these payments in compliance with the covenants of its debtinstruments.

 

The Company continually reviews its various lines of business to assesstheir contribution to the Company’s business plan and from time to timeconsiders the sale of certain assets in order to raise cash or reducedebt.  Accordingly, the Company fromtime to time has explored and may explore possible asset sales by seekingexpressions of interest from potential bidders.  However, the Company has not entered into any binding agreementsor agreements in principle to sell any assets and there can be no assurancethat any such asset sales will occur or, if they occur, as to the timing oramount of proceeds that such assets sales may generate.

 

**RevolvingCredit Facility.**The Company has a $60 million revolving credit facility(the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which willmature on May 30, 2006. Theinterest 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 Revolverwas 4.8%.  Beginning August 1, 2002, theinterest rate margins over prime and LIBOR may be increased by 0.25% incrementsup to a total rate increase of 0.5% when available borrowing availability fallsbelow certain thresholds or decreased by 0.25% increments up to a total ratedecrease of 0.5% when available borrowing capacity exceeds certain thresholds.  At March 31, 2002, Company’s availableborrowing base was approximately $34.5 million, of which $3.4 million wasoutstanding. The Company had an outstanding balance on letters of credittotaling $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 theunused portion of the Revolver is payable quarterly.

 

Under the Revolver, substantially all of the Company’s domestic cashreceipts (including proceeds from accounts receivable and asset sales) must beapplied to repay the outstanding loans, which may be re-borrowed subject toavailability in accordance with the borrowing base formula. The Revolvercontains restrictions on the use of cash for dividend payments or non-scheduledprincipal payments on certain indebtedness. Restricted cash at March 31, 2002 of $0.9 million represents lockboxcash receipts to be applied to the outstanding borrowings under the Revolver.  The Revolver contains variousrepresentations, warranties and covenants, including financial covenants as tomaximum capital expenditures, minimum fixed charge coverage ratio and minimumaverage borrowing availability.  AtMarch 31, 2002, the Company was in compliance with all financial covenantsunder the Revolver. The Company was not in compliance with the reportingrequirements of the Revolver for the year ended December 31, 2001. Hellerwaived this non-compliance upon the Company’s delivery of the financialstatements in its Form 10-K filing.

 

**Senior Notes**. In August 1998, the Companyexchanged the public Senior Notes (the “Senior Notes”) for the notes sold in aMay 1998 Rule 144A private offering. Interest is fixed at 7.5% and is due andpayable in semi-annual installments, which began December 1, 1998. The SeniorNotes contain covenants placing limitations on the Company’s ability to permitsubsidiaries to incur certain debts, incur certain loans, and engage in certainsale and leaseback transactions.  As ofAugust 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, anddelivery of the financial statements in this Form 10-Q will remedy thisnon-compliance condition for the quarter ended March 31, 2002. The Company expects to cure the non-compliancereporting for the quarter ended June 30, 2002 within the cure period provided and therefore continues to classify theSenior Notes as long term debt.

 

 

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**SubordinatedUnsecured 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, asprovided under the agreement, the Sponsor Notes’ holder, WCAS, elected to deferquarterly interest payments of $4.0 million for each of the June 2000 throughSeptember 2001 quarterly periods. Such election required a deferred financingfee of 30.0% of each of the interest payments being deferred.  The Company accounts for the additionalfinancing fees as a change in the effective interest rate of the debt. At March31, 2002, the Company had $33.8 million outstanding in deferred interest notes.WCAS may, at its election, defer each future quarterly payment under similarterms.  WCAS did not elect to defer theDecember 2001 and March 2002 quarterly payments and currently does not intendto elect deferral of the quarterly payments in the near future.

 

**Preferred Stock — Series A**.** **The Company allocated the proceeds from its Series Apreferred stock issuance based upon the relative fair value of the preferredstock and warrants issued. The related discount is being accreted such that thecarrying amount of the mandatory redeemable preferred stock will equal themandatory redemption amount at September 22, 2008. For the three months endedMarch 31, 2002, accretion of the related discount and accrued but unpaiddividends totaled $0.4 million, increasing the carrying amount to $13.5million. As of March31, 2002, the stated value of the Series Apreferred stock, including accumulated but unpaid dividends, was $166.45 pershare.

 

**Preferred Stock — Series B**.** **For the three months ended March 31, 2002, the Companyaccrued 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 ofthe Series B preferred stock, including accumulated but unpaid dividends, was$195.22 per share.

 

**Foreign Credit Agreements**. The outstanding balance onforeign credit agreements as of March 31, 2002 was $2.6 million, payable inyen.

 

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

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

InJuly 2001, the Financial Accounting Standards Board issued SFAS No. 142,“Goodwill and Other Intangible Assets.” The Company has adopted the provisionsof SFAS No. 142 effective January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets withindefinite useful lives no longer be amortized but instead tested forimpairment at least annually.  SFAS No.142 also requires that intangible assets with definite useful lives beamortized over their respective estimated useful lives to their estimatedresidual values.

 

UnderSFAS No. 142, the Company is required to perform transitional impairment testsfor its goodwill and intangible assets with indefinite useful lives as of thedate of adoption. Step one of the transitional goodwill impairment test, whichcompares the fair values of the Company’s reporting units to their respectivecarrying 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 thecumulative effect of a change in accounting principle in the consolidatedstatement of operations.

 

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

 

InMay 2002, the FASB issued SFAS No. 145 , “Rescission of SFAS Nos. 4,44, and 64, Amendment of SFAS No. 13, and Technical Corrections” . Amongother things, SFAS 145 rescinds various pronouncements regarding earlyextinguishment of debt and allows extraordinary accounting treatment for earlyextinguishment only when the provisions of Accounting Principles Board OpinionNo. 30, “Reporting the Results of Operations—Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transaction”, are met. The Company will adoptthe provisions SFAS 145 regarding early extinguishment of debt during thesecond quarter of 2002.

 

InJuly 2002, the FASB issued SFAS No. 146, “Accounting for Exit or DisposalActivities”.  SFAS 146 will be effectivefor the Company for disposal activities initiated after December 31, 2002. TheCompany is in the process of evaluating the effect that adopting SFAS 146 willhave on its financial statements.

 

 

 

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** **

**FACTORSAFFECTING THE COMPANY’S BUSINESS AND PROSPECTS**

 

There are many factors that affect the Company’s business and theresults of its operations. The following is a description of some of theimportant factors that may cause the actual results of the Company’s operationsin future periods to differ materially from those currently expected ordesired.  See “Forward LookingStatements”.

 

***General Economic Conditions***

 

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

 

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

 

***Dependence on Suppliers***

 

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

 

The Company has several single-sourced supplier relationships, eitherbecause alternative sources are not available or the relationship isadvantageous due to performance, quality, support, delivery, capacity or priceconsiderations.  If these sources areunable to provide timely and reliable supply, the Company could experiencemanufacturing interruptions, delays or inefficiencies, adversely affecting itsresults of operations. Even where alternative sources of supply are available,qualification of the alternative suppliers and establishment of reliablesupplies could result in delays and a possible loss of sales, which couldaffect operating results adversely.

 

***Declining Financial Operating Results andIndebtedness***

 

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

 

***International Activities***

 

The Company’s international operations are a significant part of theCompany’s business.  The success andprofitability of international operations are subject to numerous risks anduncertainties, such as economic and labor conditions, political instability,tax laws (including U.S. taxes on foreign subsidiaries) and changes in thevalue of the U.S. dollar versus the local currency in which products aresold.  Any unfavorable change in one or moreof 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 andwill depend on numerous factors, including: customer demand and market acceptanceof the Company’s products and solutions, new product introductions, productobsolescence, varying product mix, foreign currency exchange rates and otherfactors. The Company’s business is sensitive to the spending patterns of itscustomers, which in turn are subject to prevailing economic conditions andother factors beyond the Company’s control. Any unfavorable change in one ormore of these factors could have a material adverse effect on the Company.

 

***Technological Changes and ProductTransitions***

 

The Company’s industry is characterized by continuing improvement intechnology, which results in the frequent introduction of new products, shortproduct life cycles and continual improvement in product price/performancecharacteristics.  The Company mustincorporate these new technologies into its products and solutions in order toremain competitive. There can be no assurance that the Company will be able tocontinue to manage technological transitions. A failure on the part of the Company to effectively manage thesetransitions of its product lines to new technologies on a timely basis couldhave a material adverse effect on the Company. In addition, the Company’s business depends on technology trends in itscustomers’ businesses.  Many of theCompany’s traditional products depend on the efficient handling of paper-

 

 

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

 

***Product Development Activities***

 

The strength of the Company’s overall business is partially dependenton the Company’s ability to develop products and solutions based on new orevolving technology and the market’s acceptance of those products.  There can be no assurance that the Company’sproduct development activities will be successful, that new technologies willbe available to the Company, that the Company will be able to delivercommercial quantities of new products in a timely manner, that those productswill adhere to generally accepted industry standards or that products willachieve market acceptance. The Company believes that it is necessary for itsproducts to adhere to generally accepted industry standards, which are subjectto change in ways that are beyond the control of the Company.

 

 

**ITEM 3.   QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK.**

 

The Company utilizes a revolving credit facilityto support working capital needs. The interest rate on loans under the Revolver is, atthe Company’s option, either (i) 1.25% over prime or (ii) 2.75% over LIBOR. From time to time the Company also hasoutstanding balances on foreign credit agreements for which the terms on theagreements 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 100basis points on that date and then remained constant at the higher rate fortwelve consecutive months, the Company’s interest costs on its outstandingvariable rate borrowings at March 31, 2002 of $6.0 million would increase byapproximately $60,000.

 

 

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**PART II**

**BANCTEC, INC.**

 

**Item5.   Other Information**

 

On July 30, 2002, the Company and Heller amendedthe Revolver, which reduced the Company’s fixed charge coverage ratio covenantduring quarters 1, 2 and 3 of 2002, and reduced the minimum undrawnavailability requirement from $10.0 million to $4.0 million.  The amendment also waived the reportingrequirement violation upon submission of the audited financial statements inthe Company’s Form 10-K filing.

 

**ITEM 6.   Exhibits andReports on Form 8-K**

 

(a)          Exhibits:

 

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

 

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

 

99.1— Certificate ofChief Executive Officer *

 

99.2— Certificate ofChief Financial Officer *

 

* Filed herewith

 

(b)         Reports on Form 8-K:

 

None.

 

 

16

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Company hasduly 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

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**Certifications**

 

 

I,Craig D. Crisman, certify that:

 

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

 

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

 

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

 

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

 

 

18

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**Certifications**

 

 

I,Brian R. Stone, certify that:

 

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

 

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

 

3.             Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of BancTec, Inc. as of, andfor, 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

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