**FORM 10-Q**

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

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

 

**For the quarterlyperiod ended June 30, 2002**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**Commission FileNumber 0-9859**

 

| **BANCTEC,  INC.**                                             |
|----------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)         |
|                                                           |   |   |
| **DELAWARE**                                                   |   | **75-1559633** |
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                           |   |   |
| **2701 E. Grauwyler Road, Irving, Texas**                      |   | **75061** |
| (Address of principal executive offices)                       |   | (Zip Code) |
|                                                           |   |   |
| **(972) 579-6000**                                             |
| (Registrant’s telephone number, including area code)      |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes  o    No ý

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 
| **Title of Each Class**                |   | **Number of  Shares Outstanding at  October 24, 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.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands, exceptshare data)**

 
|                                                                                                                               |   | **June 30,  2002** |    | **December 31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                                                               |   | **(Unaudited)**    |    |                   |   |
|                                                                                                                               |   |               |    |                   |   |
| CURRENT  ASSETS:                                                                                                                   |   |               |    |                   |   |
| Cash and cash  equivalents, including restricted cash of $1,613 at June 30, 2002 and $2,050  at December 31, 2001                  |   | $                  | 27,137  |                   | $      | 28,577 |   |
| Accounts  receivable, less allowance for doubtful accounts of $6,313 at June 30, 2002  and $7,675 at December 31, 2001             |   | 62,961             |    | 81,942                 |   |
| Inventories                                                                                                                        |   | 44,188             |    | 51,712                 |   |
| Prepaid  expenses                                                                                                                  |   | 7,129              |    | 6,374                  |   |
| Other current  assets                                                                                                              |   | 1,442              |    | 810                    |   |
| Total current  assets                                                                                                              |   | 142,857            |    | 169,415                |   |
|                                                                                                                               |   |               |    |                   |   |
| PROPERTY,  PLANT AND EQUIPMENT, net                                                                                                |   | 67,588             |    | 76,213                 |   |
|                                                                                                                               |   |               |    |                   |   |
| GOODWILL                                                                                                                           |   | 48,408             |    | 48,281                 |   |
| OTHER ASSETS                                                                                                                       |   | 21,145             |    | 21,140                 |   |
| TOTAL ASSETS                                                                                                                       |   | $                  | 279,998 |                   | $      | 315,049 |   |
|                                                                                                                               |   |               |    |                   |   |
| CURRENT  LIABILITIES:                                                                                                              |   |               |    |                   |   |
| Revolving  credit facilities                                                                                                       |   | $                  | 8,000   |                   | $      | 28,838 |   |
| Trade accounts  payable                                                                                                            |   | 17,435             |    | 22,016                 |   |
| Other accrued  expenses and liabilities                                                                                            |   | 53,643             |    | 62,147                 |   |
| Deferred  revenue                                                                                                                  |   | 56,415             |    | 61,218                 |   |
| Income taxes                                                                                                                       |   | 4,438              |    | 4,166                  |   |
| Total current  liabilities                                                                                                         |   | 139,931            |    | 178,385                |   |
| LONG-TERM  DEBT, less current maturities                                                                                           |   | 300,173            |    | 304,798                |   |
|                                                                                                                               |   |               |    |                   |   |
| OTHER  LIABILITIES                                                                                                                 |   | 38,094             |    | 31,232                 |   |
|                                                                                                                               |   |               |    |                   |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                     |   |               |    |                   |   |
|                                                                                                                               |   |               |    |                   |   |
| MANDATORY  REDEEMABLE PREFERRED STOCK-Series A                                                                                     |   | 13,936             |    | 13,151                 |   |
|                                                                                                                               |   |               |    |                   |   |
| STOCKHOLDERS’  DEFICIT:                                                                                                       |   |               |    |                   |   |
| Cumulative  convertible preferred stock - authorized, 1,000,000 shares of $0.01 par value  at June 30, 2002 and December 31, 2001: |   |               |    |                   |   |
| Series B  preferred stock - issued and outstanding, 35,520 shares at June 30, 2002 and  December 31, 2001                          |   | 7,366              |    | 6,532                  |   |
| Common stock  authorized, 32,000,000 shares of $0.01 par value at June 30, 2002 and  December 31, 2001:                            |   |               |    |                   |   |
| Common  stock-issued and outstanding 17,003,838 shares at June 30, 2002 and December  31, 2001                                     |   | 170                |    | 170                    |   |
| Class A common  stock-issued and outstanding 1,181,946 shares at June 30, 2002 and December  31, 2001                              |   | 12                 |    | 12                     |   |
| Subscription  stock warrants                                                                                                       |   | 3,726              |    | 3,726                  |   |
| Additional  paid-in capital                                                                                                        |   | 132,813            |    | 134,432                |   |
| Accumulated  deficit                                                                                                               |   | (347,259           | )       | (345,972               | )      |
| Accumulated  other comprehensive loss                                                                                              |   | (8,964             | )       | (11,417                | )      |
| Total  stockholders’ deficit                                                                                                  |   | (212,136           | )       | (212,517               | )      |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                  |   | $                  | 279,998 |                   | $      | 315,049 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

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**BANCTEC, INC.**

# **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                          |   | **Three Months Ended June 30,** |         | **Six Months Ended June 30,** |   |
|---------------------------------------------------------------|--------|---------------------------------|--------------|-------------------------------|--------|
|                                                          |   | **2002**                        |         | **2001**                      |   | **2002** |   | **2001** |   |
|                                                          |   | **(In thousands)**              |         |
| REVENUE                                                       |   |                            |         |                          |   |   |   |   |   |
| Equipment and  software                                       |   | $                               | 47,754  |                          | $      | 61,499 |   | $ | 98,314  |   | $ | 111,025 |   |
| Maintenance  and other services                               |   | 65,957                          |         | 67,032                        |   | 131,798 |   | 135,386 |   |
|                                                          |   | 113,711                         |         | 128,531                       |   | 230,112 |   | 246,411 |   |
| COST OF SALES                                                 |   |                            |         |                          |   |   |   |   |   |
| Equipment and  software                                       |   | 37,938                          |         | 48,041                        |   | 76,162 |   | 88,644 |   |
| Maintenance  and other services                               |   | 48,923                          |         | 55,633                        |   | 99,241 |   | 113,910 |   |
|                                                          |   | 86,861                          |         | 103,674                       |   | 175,403 |   | 202,554 |   |
| Gross profit                                                  |   | 26,850                          |         | 24,857                        |   | 54,709 |   | 43,857 |   |
|                                                          |   |                            |         |                          |   |   |   |   |   |
| OPERATING  EXPENSES                                           |   |                            |         |                          |   |   |   |   |   |
| Product  development                                          |   | 4,147                           |         | 3,698                         |   | 7,454 |   | 8,190 |   |
| Selling,  general and administrative                          |   | 16,934                          |         | 20,743                        |   | 35,337 |   | 40,879 |   |
| Goodwill  amortization                                        |   | —                          |         | 806                           |   | — |   | 1,608 |   |
|                                                          |   | 21,081                          |         | 25,247                        |   | 42,791 |   | 50,677 |   |
| Income (loss)  from operations                                |   | 5,769                           |         | (390                          | )      | 11,918 |   | (6,820 | ) |
|                                                          |   |                            |         |                          |   |   |   |   |   |
| OTHER INCOME  (EXPENSE):                                      |   |                            |         |                          |   |   |   |   |   |
| Interest  income                                              |   | 59                              |         | 363                           |   | 100 |   | 711 |   |
| Interest  expense                                             |   | (7,635                          | )            | (9,566                        | )      | (15,240 | ) | (18,892 | ) |
| Sundry, net                                                   |   | 4,408                           |         | (1,666                        | )      | 4,055 |   | (1,046 | ) |
|                                                          |   | (3,168                          | )            | (10,869                       | )      | (11,085 | ) | (19,227 | ) |
| INCOME (LOSS)  FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |   | 2,601                           |         | (11,259                       | )      | 833 |   | (26,047 | ) |
| INCOME TAX  EXPENSE                                           |   | 1,093                           |         | 839                           |   | 2,120 |   | 1,891 |   |
| INCOME (LOSS)  FROM CONTINUING OPERATIONS                     |   | 1,508                           |         | (12,098                       | )      | (1,287 | ) | (27,938 | ) |
| NET INCOME  (LOSS)                                            |   | $                               | 1,508   |                          | $      | (12,098 | ) | $ | (1,287 | ) | $ | (27,938 | ) |
|                                                          |   |                            |         |                          |   |   |   |   |   |
| PREFERRED  STOCK DIVIDENDS AND ACCRETION OF DISCOUNT          |   | (829                            | )            | (701                          | )      | (1,619 | ) | (1,065 | ) |
|                                                          |   |                            |         |                          |   |   |   |   |   |   |   |   |   |
| NET INCOME  (LOSS) APPLICABLE TO COMMON STOCK                 |   | $                               | 679     |                          | $      | (12,799 | ) | $ | (2,906 | ) | $ | (29,003 | ) |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

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**BANCTEC, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
|                                                                                                          |   | **Six Months Ended June 30,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                                          |   | **2002**                      |   | **2001** |   |
|                                                                                                          |   | **(In thousands)**            |   |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                                                         |   |                          |   |   |   |
| Net loss from  continuing operations                                                                          |   | $                             | (1,287 | ) | $ | (27,938 | ) |
| Adjustments to  reconcile net loss from continuing operation to cash flows provided by  operating activities: |   |                          |   |   |   |
| Depreciation  and amortization                                                                                |   | 13,251                        |   | 18,729 |   |
| Provision for  doubtful accounts, net of recoveries                                                           |   | (1,416                        | )      | 1,491 |   |
| Interest paid  in-kind                                                                                        |   | —                        |   | 9,339 |   |
| Loss on  disposition of property, plant and equipment                                                         |   | 498                           |   | 537 |   |
| (Gain) loss on  extinguishment of long-term debt                                                              |   | (2,842                        | )      | 1,840 |   |
| Other non-cash  items                                                                                         |   | 239                           |   | 189 |   |
| Changes in  operating assets and liabilities                                                                  |   |                          |   |   |   |
| Decrease in  accounts receivable                                                                              |   | 20,397                        |   | 16,561 |   |
| Decrease in  inventories                                                                                      |   | 7,425                         |   | 1,330 |   |
| Increase in  other assets                                                                                     |   | (1,272                        | )      | (6,675 | ) |
| Decrease in  trade accounts payable                                                                           |   | (4,581                        | )      | (5,116 | ) |
| Increase  (decrease) in deferred revenue                                                                      |   | (4,803                        | )      | 19,920 |   |
| Decrease in  other accrued expenses and liabilities                                                           |   | (1,370                        | )      | (5,294 | ) |
| Cash flows  provided by operating activities                                                                  |   | 24,239                        |   | 24,913 |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                                                         |   |                          |   |   |   |
| Purchases of  property, plant and equipment                                                                   |   | (4,421                        | )      | (6,945 | ) |
| Cash flows  used in investing activities                                                                      |   | (4,421                        | )      | (6,945 | ) |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                                                         |   |                          |   |   |   |
| Proceeds from  long-term borrowings                                                                           |   | —                        |   | 8,000 |   |
| Payments of  long-term borrowings                                                                             |   | (1,783                        | )      | (70,000 | ) |
| Proceeds from  (payments of) short-term borrowings, net                                                       |   | (20,855                       | )      | 35,036 |   |
| Debt issuance  costs                                                                                          |   | (120                          | )      | (2,458 | ) |
|                                                                                                          |   |                          |   |   |   |
| Net proceeds  issuance of preferred stock                                                                     |   | —                        |   | 5,328 |   |
| Cash flows  used in financing activities                                                                      |   | (22,758                       | )      | (24,094 | ) |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                                                      |   | 1,500                         |   | (1,237 | ) |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                         |   | (1,440                        | )      | (7,363 | ) |
| CASH AND CASH  EQUIVALENTS—BEGINNING OF PERIOD                                                           |   | 28,577                        |   | 23,841 |   |
| CASH AND CASH  EQUIVALENTS—END OF PERIOD                                                                 |   | $                             | 27,137 |   | $ | 16,478 |   |
| SUPPLEMENTAL  DISCLOSURE INFORMATION:                                                                         |   |                          |   |   |   |
| Cash paid  during the period for:                                                                             |   |                          |   |   |   |
| Interest                                                                                                      |   | $                             | 14,050 |   | $ | 8,565 |   |
| Taxes                                                                                                         |   | $                             | 2,459  |   | $ | 2,931 |   |
| SUPPLEMENTAL  DISCLOSURES OF NONCASH ACTIVITIES:                                                              |   |                          |   |   |   |
| DEFERRAL OF  SPONSOR NOTES QUARTERLY INTEREST PAYMENTS                                                        |   | $                             | — |   | $ | 11,634 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

4

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**BANCTEC, INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The accompanying unaudited condensed consolidated balance sheet at June30, 2002, and the condensed consolidated statements of operations and cashflows for the interim periods ended June 30, 2002 and 2001, should be read inconjunction with BancTec, Inc. and subsidiaries (“BancTec” or the “Company”)consolidated financial statements and notes thereto in the most recent AnnualReport on Form 10-K filed with the Securities and Exchange Commission.  As disclosed in the notes to that report,the condensed consolidated statements of operations and cash flows for theinterim periods ended June 30, 2001 have been restated. In the opinion ofmanagement, the accompanying condensed consolidated financial statementscontain all material adjustments, consisting principally of normal recurringadjustments, necessary for a fair presentation of the financial position and resultsof operations of the Company. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

 

**2.   INVENTORIES**

 

Inventory consists of the following: 

 
|             |   | **June 30,  2002** |   | **December 31,  2001** |   |
|------------------|--------|--------------------|--------|------------------------|--------|
|             |   | **(In thousands)** |   |
|             |   |               |   |                   |   |
| Raw materials    |   | $                  | 5,403  |                   | $      | 9,053 |   |
| Work-in-progress |   | 20,829             |   | 24,793                 |   |
| Finished goods   |   | 17,956             |   | 17,866                 |   |
|             |   | $                  | 44,188 |                   | $      | 51,712 |   |

 

 

**3.   PROPERTY, PLANT AND EQUIPMENT**

 

Property, plant and equipment consist of thefollowing:

 
|                                       |   | **June 30,  2002** |   | **December 31,  2001** |   |
|--------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                       |   | **(In thousands)** |   |
| Land                                       |   | $                  | 2,860  |                   | $      | 2,860 |   |
| Field support  spare parts                 |   | 70,256             |   | 78,055                 |   |
| Systems and  software                      |   | 64,191             |   | 64,294                 |   |
| Machinery and  equipment                   |   | 52,841             |   | 53,261                 |   |
| Furniture,  fixtures and other             |   | 24,574             |   | 24,108                 |   |
| Buildings                                  |   | 28,665             |   | 28,358                 |   |
|                                       |   | 243,387            |   | 250,936                |   |
| Accumulated  depreciation and amortization |   | (175,799           | )      | (174,723               | )      |
| Property,  plant and equipment, net        |   | $                  | 67,588 |                   | $      | 76,213 |   |

 

5

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**4.   OTHER ACCRUED EXPENSES AND LIABILITIES**

 

Other accrued expenses and liabilitiesconsist of the following:

 
|                                    |   | **June 30,  2002** |   | **December 31,  2001** |   |
|-----------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                    |   | **(In thousands)** |   |
| Salaries,  wages and other compensation |   | $                  | 15,311 |                   | $      | 17,602 |   |
| Accrued taxes,  other than income taxes |   | 5,171              |   | 8,446                  |   |
| Advances from  customers                |   | 1,989              |   | 1,859                  |   |
| Accrued  interest payable               |   | 733                |   | 5,939                  |   |
| Accrued  invoices and costs             |   | 1,948              |   | 5,534                  |   |
| Accrued  contract completion costs      |   | 4,049              |   | 2,599                  |   |
| Other                                   |   | 24,442             |   | 20,168                 |   |
| Total                                   |   | $                  | 53,643 |                   | $      | 62,147 |   |

 

 

**5.   DEBT AND OTHER OBLIGATIONS**

 

Debt and other obligations consist of thefollowing: 

 
|                                             |   | **June 30,  2002** |    | **December 31,  2001** |   |
|--------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                             |   | **(in thousands)** |    |
|                                             |   |               |    |                   |   |
| 7.5% Senior  Notes, due 2008                     |   | $                  | 106,325 |                   | $      | 110,950 |   |
| Revolver                                         |   | 8,000              |    | 25,040                 |   |
| Subordinated  Sponsor Notes, unsecured, due 2009 |   | 193,848            |    | 193,848                |   |
| Other                                            |   | —             |    | 3,798                  |   |
|                                             |   | 308,173            |    | 333,636                |   |
| Less: Current  portion                           |   | (8,000             | )       | (28,838                | )      |
|                                             |   | $                  | 300,173 |                   | $      | 304,798 |   |

 

 

RevolvingCredit 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.  At June 30, 2002, the Company had $8.0million outstanding under the Revolver and an outstanding balance on letters ofcredit totaling $8.5 million.  Thebalance remaining under the Revolver that the Company can draw was $6.9 millionat June 30, 2002.  A commitment feeof 0.5% per annum on the unused portion of the Revolver is payable quarterly.

 

The interest rate on loansunder the Revolver is, at the Company’s option, either (i) 1.25% over prime or(ii) 2.75% over LIBOR.  At June 30,2002, the Company’s weighted average rate on the Revolver was 6.0%. 

 

Under the Revolver,substantially all of the Company’s domestic cash receipts (including proceedsfrom accounts receivable and asset sales) must be applied to repay theoutstanding loans, which may be re-borrowed subject to availability inaccordance with the borrowing base formula. The Revolver contains restrictionson the use of cash for dividend payments or non-scheduled principal payments oncertain indebtedness.  Restricted cashat June 30, 2002 of $1.6 million represents lockbox cash receipts to be appliedto the outstanding borrowings under the Revolver.

 

6

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The Revolver contains variousrepresentations, warranties and covenants, including financial covenants as tomaximum capital expenditures, minimum fixed charge coverage ratio and minimumaverage borrowing availability. At June 30, 2002, the Company was in compliancewith all financial covenants under the Revolver.

 

Senior Notes.  Interest on the Senior Notes is fixed at7.5% and is due and payable in semi-annual installments. Payments beganDecember 1, 1998. The Notes contain covenants placing limitations on theCompany’s ability to permit subsidiaries to incur certain debts, incur certainloans, and engage in certain sale and leaseback transactions. During the secondquarter of 2002, the Company repurchased Senior Notes with a face amount of$4.6 million. The Company wrote off a proportionate share of deferred financingfees, resulting in a gain of approximately $2.8 million, which was reported assundry (other) income in the condensed consolidated statements of operationsfor the interim periods ended June 30, 2002. As of August 14, 2002, the Companywas not in compliance with the Senior Notes’ reporting requirements for thequarters ended March 31, 2002 and June 30, 2002. The Company is in a 60-day cureperiod, and delivery of the financial statements in the Company’s Form 10-Qfiling remedied this non- compliance condition for the quarter ended March 31,2002. Delivery of the financial statements in this Form 10-Q will remedy thisnon- compliance condition for the quarter ended June 30, 2002 within the cureperiod provided and therefore the Company continues to classify the SeniorNotes as long term debt.  The estimatedfair value of the Senior Notes as of June 30, 2002, is approximately $41million based on an average value of recently completed market trades,resulting in a yield to maturity of approximately 30%.

 

SubordinatedUnsecured Sponsor Notes. The Company’s $160.0 millionin Sponsor Notes are issued in U.S. dollars, with interest at 10.0% due andpayable quarterly. The payments began September 30, 1999. However, as providedunder 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 June30, 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, March 2002 or June 2002 quarterlypayments.  The estimated fair value ofthe Sponsor Notes and deferred interest and fees as of June 30, 2002, isapproximately $70 million assuming a yield to maturity of 35%.

 

TheCompany had no outstanding balances on foreign credit agreements at June30, 2002.

 

 

**6.  GOODWILL AND INTANGIBLE ASSETS**

 

In July 2001, the Financial AccountingStandards Board issued SFAS No. 142, “Goodwill and Other Intangible Assets.”The Company has adopted the provisions of SFAS No. 142 effective January 1,2002.  SFAS No. 142 requires thatgoodwill and intangible assets with indefinite useful lives no longer beamortized but instead be tested for impairment at least annually.  SFAS No. 142 also requires that intangibleassets with definite useful lives be amortized over their respective estimateduseful 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 todetermine whether an indication of impairment exists. If impairment isindicated, then under the second step the fair value of the reporting unit’sgoodwill is determined by allocating the unit’s fair value to its assets andliabilities (including any unrecognized intangible assets) as if the reportingunit had been acquired in a business combination. The amount of impairment forgoodwill is measured as the excess of its carrying value over its fair value.During the six months ended June 30, 2002, the Company completed its analysisof the first step of the impairment test of goodwill measured as of January 1,2002.

 

Upon completion of the second step of the analysis, the Companyanticipates recording as a cumulative effect of a change in accountingprinciple, a non-cash charge of between $9 and $21 million, after applicable income taxes, to write off aportion of the carrying value of goodwill.  This non-cash charge will berecorded before December 31, 2002, and will not affect the Company’soperations.

 

Components of the Company’sgoodwill include amounts that are foreign currency denominated.  These goodwill amounts are subject totranslation at each balance sheet date. The Company records the change to its Accumulated Other ComprehensiveLoss on the balance sheet.  Goodwillpreviously classified as unallocated has been allocated to the reporting unitsas required by SFAS No. 142. The following is a summary of changes in thecarrying amount of goodwill by segment for the six months ended June 30, 2002:

 

7

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|                                           |   | **US  Solutions**  |   | **Computer  & Network  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   |   | —             |   | —                                |   | 127               |   | —          |   | 127       |   |
| Allocation of  previously unallocated Goodwill |   | 1,025              |   | —                                |   | 4,816             |   | (5,841          | )      | —    |   |
| Balance at  June 30, 2002                      |   | $                  | 41,236 |                                  | $      | —            |   | $               | 7,172  |      | $      | — |   | $ | 48,408 |   |

 

 

The following is a summarycomparison of net loss for the three and six months ended June 30, 2002 and2001, as adjusted to remove the amortization of goodwill and intangible assetswith indefinite useful lives for the three and six months ended June 30, 2001:

 
|                                 |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|--------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                 |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                 |   | **(In  thousands)**              |   | **(In  thousands****)**        |   |
| Net income (loss) – as reported |   | $                                | 1,508  |                           | $      | (12,098 | ) | $ | (1,287 | ) | $ | (27,938 | ) |
| Goodwill amortization                |   | —                           |   | 806                            |   | — |   | 1,608 |   |
| Net income (loss) – as adjusted |   | $                                | 1,508  |                           | $      | (11,292 | ) | $ | (1,287 | ) | $ | (26,330 | ) |

 

 

In October 2001, the FASB issuedSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”which replaces SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of.”  The Company’s adoption of SFAS No. 144 on January 1, 2002 did nothave a material impact on its financial condition or results of operations.

 

 

**7.  COMPREHENSIVE INCOME (LOSS)**

 

The components of comprehensiveincome (loss) were as follows:

 
|                                     |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                     |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                     |   | **(In  thousands)**              |   | **(In  thousands)**            |   |
| Net income (loss)                        |   | $                                | 1,508  |                           | $      | (12,098 | ) | $ | (1,287 | ) | $ | (27,938 | ) |
| Foreign currency translation adjustments |   | 2,149                            |   | 148                            |   | 2,453 |   | (2,070 | ) |
| Total comprehensive income (loss)        |   | $                                | 3,657  |                           | $      | (11,950 | ) | $ | 1,166 |   | $ | (30,008 | ) |

 

**8.  ****BUSINESS SEGMENT DATA**

 

The Company segments itsoperations based on geographical areas (U.S. Solutions (“USS”) and International Solutions (“INTL”)) andproduct lines (Computer and Network Services (“CNS”)). INTL offers similarproducts as USS and consists primarily of operations throughout the worldexcluding United States. The Company recently realigned its reporting structureand began reporting under the new alignment in the first quarter of 2002. Underthis new structure, USS includes the operations of Advanced EnterpriseSolutions (“AES”) and INTL reporting includes both the U.S. and internationaloperations of Plexus® products (“Plexus”). The operations of AES and Plexus arenot material to USS or to INTL operations. Under the new structure, thecomposition of CNS remains unchanged. Prior period information has been reclassified to reflect the newalignment.

 

8

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|                                      |   | **US  Solutions**  |   | **Computer  & Network  Services** |   | **International** |   | **Corp/Elims** |   | **Total** |   |
|-------------------------------------------|--------|--------------------|--------|---------------------------------------|--------|-------------------|--------|----------------|--------|-----------|--------|
|                                      |   | **(In thousands)** |   |
| For the three  months ended June 30, 2002 |   |               |   |                                  |   |              |   |           |   |      |   |
|                                      |   |               |   |                                  |   |              |   |           |   |      |   |
| Revenue from  external customers          |   | $                  | 36,673 |                                  | $      | 36,481            |   | $              | 40,557 |      | $      | — |   | $ | 113,711 |   |
| Intersegment  revenues                    |   | 2,183              |   | —                                |   | 1,332             |   | (3,515         | )      | —    |   |
| Segment gross  profit (loss)              |   | 5,272              |   | 9,381                                 |   | 11,438            |   | 759            |   | 26,850    |   |
| Segment  operating income (loss)          |   | (2,208             | )      | 8,378                                 |   | 1,988             |   | (2,389         | )      | 5,769     |   |
| Segment  identifiable assets              |   | 107,858            |   | 33,317                                |   | 92,027            |   | 46,796         |   | 279,998   |   |
| Capital  expenditures                     |   | 832                |   | 202                                   |   | 1,069             |   | 38             |   | 2,141     |   |
|                                      |   |               |   |                                  |   |              |   |           |   |      |   |
| For the three  months ended June 30, 2001 |   |               |   |                                  |   |              |   |           |   |      |   |
|                                      |   |               |   |                                  |   |              |   |           |   |      |   |
| Revenue from  external customers          |   | $                  | 44,606 |                                  | $      | 35,894            |   | $              | 48,031 |      | $      | — |   | $ | 128,531 |   |
| Intersegment  revenues                    |   | 9,348              |   | —                                |   | 1,212             |   | (10,560        | )      | —    |   |
| Segment gross  profit (loss)              |   | 7,894              |   | 3,761                                 |   | 12,880            |   | 322            |   | 24,857    |   |
| Segment  operating income (loss)          |   | (206               | )      | (1,084                                | )      | 2,849             |   | (1,949         | )      | (390      | )      |
| Segment  identifiable assets              |   | 164,060            |   | 47,224                                |   | 113,859           |   | 43,917         |   | 369,060   |   |
| Capital  expenditures                     |   | 1,358              |   | 592                                   |   | 1,498             |   | 654            |   | 4,102     |   |

 

 
|                                    |   | **US  Solutions**  |   | **Computer  & Network  Services** |   | **International** |   | **Corp/Elims** |   | **Total** |   |
|-----------------------------------------|--------|--------------------|--------|---------------------------------------|--------|-------------------|--------|----------------|--------|-----------|--------|
|                                    |   | **(In thousands)** |   |
| For the six  months ended June 30, 2002 |   |               |   |                                  |   |              |   |           |   |      |   |
|                                    |   |               |   |                                  |   |              |   |           |   |      |   |
| Revenue from  external customers        |   | $                  | 75,478 |                                  | $      | 72,927            |   | $              | 81,707 |      | $      | — |   | $ | 230,112 |   |
| Intersegment  revenues                  |   | 6,094              |   | —                                |   | 2,878             |   | (8,972         | )      | —    |   |
| Segment gross  profit (loss)            |   | 14,512             |   | 17,214                                |   | 22,652            |   | 331            |   | 54,709    |   |
| Segment  operating income (loss)        |   | 204                |   | 13,056                                |   | 4,860             |   | (6,202         | )      | 11,918    |   |
| Segment  identifiable assets            |   | 107,858            |   | 33,317                                |   | 92,027            |   | 46,796         |   | 279,998   |   |
| Capital  expenditures                   |   | 1,989              |   | 588                                   |   | 1,625             |   | 219            |   | 4,421     |   |
|                                    |   |               |   |                                  |   |              |   |           |   |      |   |
| For the six  months ended June 30, 2001 |   |               |   |                                  |   |              |   |           |   |      |   |
|                                    |   |               |   |                                  |   |              |   |           |   |      |   |
| Revenue from  external customers        |   | $                  | 81,926 |                                  | $      | 72,980            |   | $              | 91,505 |      | $      | — |   | $ | 246,411 |   |
| Intersegment  revenues                  |   | 16,447             |   | —                                |   | 2,727             |   | (19,174        | )      | —    |   |
| Segment gross  profit (loss)            |   | 11,666             |   | 7,763                                 |   | 24,438            |   | (10            | )      | 43,857    |   |
| Segment  operating income (loss)        |   | (5,389             | )      | (922                                  | )      | 3,399             |   | (3,908         | )      | (6,820    | )      |
| Segment identifiable  assets            |   | 164,060            |   | 47,224                                |   | 113,859           |   | 43,917         |   | 369,060   |   |
| Capital  expenditures                   |   | 2,187              |   | 970                                   |   | 2,627             |   | 1,161          |   | 6,945     |   |

 

 

**9.   PREFERRED STOCK**

 

**REDEEMABLEPREFERRED STOCK**

 

The Company allocated theproceeds from its Series A preferred stock issuance based upon the relativefair value of the preferred stock and warrants issued. The related discount isbeing accreted such that the carrying amount of the mandatory redeemablepreferred stock will equal the mandatory redemption amount at September 22, 2008.For the six months ended June 30, 2002, accretion of the related discount andaccrued but unpaid dividends totaled $0.8 million, increasing the carryingamount to $13.9 million. As of June 30, 2002, the stated value of the Series Apreferred stock, including accumulated but unpaid dividends, was $169.36 pershare.

 

**SERIES B PREFERRED STOCK**

 

For six months ended June 30,2002, the Company accrued additional unpaid dividends for its Series Bpreferred stock totaling $0.8 million, increasing the carrying amount to $7.3million.  As of June 30, 2002, thestated value of the Series B preferred stock, including accumulated but unpaiddividends, was $207.39 per share.

 

9

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**10.   RECENT ACCOUNTING PRONOUNCEMENTS**

 

In August 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143requires entities to record the fair value of a liability for an assetretirement obligation in the period in which it is incurred. The Company willadopt SFAS No. 143 in fiscal year 2003. The Company has not determined theimpact of the provisions of SFAS No. 143 on its financial condition or resultsof 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 adoptedthe provisions SFAS 145 regarding early extinguishment of debt during thesecond quarter of 2002. During the second quarter of 2002, the Companyrepurchased Senior Notes with a face amount of $4.6 million. The Company wroteoff a proportionate share of deferred financing fees, resulting in a gain ofapproximately $2.8 million, which was reported as sundry (other) income in thecondensed consolidated statements of operations for the interimperiods ended June 30, 2002.

 

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

 

 

**11.   SUBSEQUENT EVENTS**

 

SinceJune 30, 2002, the Company repurchased Senior Notes with a total faceamount of $1.9 million. The Company wrote off a proportionate share of deferredfinancing fees, resulting in a gain of approximately $1.2 million, which willbe reflected in other income as a result of the early adoption of SFAS No. 145.

 

On July30, 2002, the Company and Heller amended the Revolver, which reduced theCompany’s fixed charge coverage ratio covenant during quarters 1, 2 and 3 of2002, and reduced the minimum undrawn availability requirement from $10.0million to $4.0 million.  The amendmentalso waived the reporting requirement violation upon submission of the auditedfinancial statements in the Company’s Form 10-K, which was filed on August 9,2002.

 

**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

THEFOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHEREIN THIS DOCUMENT.

 

**FORWARD-LOOKINGSTATEMENTS**

 

*This QuarterlyReport on Form 10-Q, including Factors Affecting the Company’s Business andProspects set forth in Management’s Discussion and Analysis of FinancialCondition and Results of Operations and Quantitative and Qualitative DisclosureAbout Market Risk, contains forward-looking statements as that term is definedin the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) thatinvolve risks and uncertainties, as well as assumptions that, if they nevermaterialize or prove incorrect, could cause the results of BancTec, Inc. andits consolidated subsidiaries (the “Company”) to differ materially from thoseexpressed or implied by such forward-looking statements. All statements otherthan statements of historical fact are statements that could be deemedforward-looking statements, including any projections of earnings, revenues, orother financial items; any statements of the plans, strategies, and objectivesof management for future operations; any statements concerning proposed newproducts, services, or developments; any statements regarding future economicconditions or performance; statements of belief and any statement ofassumptions underlying any of the foregoing. The risks, uncertainties andassumptions referred to above include the ability of the Company to retain andmotivate key employees; the timely development, production and acceptance ofproducts and services and their feature sets; the challenge of managing assetlevels, including inventory; the flow of products into third-party distributionchannels; the difficulty of keeping expense growth at modest levels whileincreasing revenues; and other risks that are described from time to time inthe Company’s Securities and Exchange Commission reports, including but notlimited to the items discussed in “Factors Affecting the Company’s Business andProspects” set forth in this report, and items described in the Company’s otherfilings with the Securities and Exchange Commission. The Company undertakes noobligation to update or revise forward-looking statements to reflect changes inassumptions, the occurrence of unanticipated results or changes to futureoperating results over time.*

* *

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The Company believes severalfactors continued to create a challenging and competitive sales and costcontainment environment during the six months ended June 30, 2002.  These factors include: general economicconditions and reduced corporate customer technology spending; ongoingcompetitive pressures; an ongoing planned change in revenue mix within theCompany’s U.S. Solutions (“USS”) and International Solutions (“INTL”) segments;and a highly leveraged financial position. The Company has undertaken a process of evaluating the recovery of allits investments in inventory and long-lived assets.  This evaluation has resulted in write-downs and impairments ofinventory and other long-lived assets in response to current businessconditions and other decisions reached during the planning process.

 

Expected economic and businessconditions for the remainder of 2002 indicate a cautious outlook regarding theCompany’s near-term revenue and earnings growth prospects.  Most of the Company’s product offeringsrepresent a significant capital expenditure for its customers.  The general economic conditions haverecently caused a significant weakening in demand for systems solutionsproducts offered by USS and INTL. The Company has concentrated its emphasis oncost reductions and on existing offerings. Product Development efforts arecurrently focused on payment, check and document processing technologies, inaddition to investments in Electronic Document Management (“EDM”) verticalsolutions and an investment in archiving solutions for all markets, as well ashardware enhancements. By incorporating more third-party products into theCompany’s solutions rather than developing the products, the Company can moreeasily target its efforts and expenditures to these core products andsolutions.

 

 

**RESULTS OF OPERATIONS**

 

**Comparison of ThreeMonths Ended June 30, 2002 and Three Months Ended June 30, 2001**

 

Consolidatedrevenue of $113.7 million for the three months ended June 30, 2002 decreased by$14.8 million or 11.5% from the comparable prior year period. The decreaseoccurred primarily in INTL of $7.4 million and USS of $7.9 million, offsetpartially by an increase in CNS of $0.6 million. The INTL and USS decreasesresulted primarily from the impact of longer acceptance periods on highlycustomized products in the prior-year period. These products, scheduled for acceptance in 2000, achieved acceptance in2001 along with those products scheduled for acceptance in 2001.  In addition, USS experienced declines inmaintenance revenue due to Company installed products reaching the end of theiruseful lives and from increased competition. The Company expects these trends to continue in the foreseeable future.Factors impacting future revenue include lower corporate customer spending forlarge systems solutions as a result of the continuing weakness in the economy,customer and prospective customer mergers, on-going competitive pressures, andfluctuations in international currencies, especially the euro and the yen.

 

Consolidated gross profit of$26.9 million increased by $2.0 million or 8.0% from the comparable prior-yearperiod. The increase occurred primarily in CNS of $5.6 million, offsetpartially by decreases in INTL of $1.4 million and USS of $2.6 million. CNS’gross profit increase was primarily attributable to an improved labor model,with additional benefit provided through a reduction in support costs,including streamlining the number of districts and the expanded automation ofits call center operations. The INTL decrease resulted primarily from adecrease in the Company’s European traditional businesses, partially offset bya margin improvement by the Company’s subsidiary in Japan. The margin declinein the Company’s subsidiaries in Europe was due primarily to lower revenueswithout a corresponding percentage decline in fixed expenses, as well asfluctuations of the euro, yen and other international currencies. The USSdecrease was principally related to the impact of decreased revenues, partiallyoffset by lower costs resulting from the Company’s cost containment efforts.The Company is in the process of transitioning its product offering focus toproven deliverables and new targeted offerings, including EDM solutions, itsother archive solutions and hardware enhancements.  Incorporating more third-party products into the Company’ssolutions rather than developing the products has enabled the concentration ofefforts and expenditures on the targeted items which, along with the Company’songoing cost containment efforts, allowed for cost reductions to help offsetrevenue declines.  The Company willcontinue to monitor the effects of the business climate and its strategic planson the recoverability of its investment in inventory and long-lived assets, allof which may continue to have a negative impact on gross profit in the future.

 

Operatingexpenses of $21.1 million decreased $4.2 million compared to the comparableprior year-period. Operating expenses, by component, changed as follows:Product development expenses increased by $0.4 million or 12.1% primarily dueto concentration on developing targeted new applications for the Company’sproduct lines, selective expansion of existing products, and the use ofoutsourced product development services. Selling, general, and administrativeexpenses decreased by $3.8 million or 18.4% due primarily toon-going efforts to realign the cost structure.  Goodwill amortization ceased in 2002 as a result of theimplementation of SFAS 142. Goodwill amortization for the three months ended June 30, 2001 was $0.8 million.

 

Interest expense for the threemonths ended June 30, 2002 decreased to $7.6 million from $9.6 million in thecomparable prior-year period. The decrease was due mainly to the repurchase ofa portion of the Senior Notes, a lower outstanding balance on the revolvingcredit facilities and declining interest rates, partially offset by a $6.1million increase in debt related to Sponsor Notes subsequent to June 30, 2001.

 

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Sundry items resulted in a netincome of $4.4 million during the three months ended June 30, 2002 as comparedto a net expense of $1.7 million during the comparable prior-year period.  This increase is primarily due to foreignexchange gains of $2.1 million and a gain of approximately $2.8 million fromthe Company’s repurchase of Senior Notes during the current year period,compared to foreign exchange gains of $0.1 million and a loss of $1.8 millionas a result of the extinguishment of a previous credit facility in theprior-year period.

 

Pre-tax income in foreign taxjurisdictions resulted in an income tax provision of $1.1 million for the threemonths ended June 30, 2002 comparedto a corresponding prior-year period income tax provision of $0.8 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 42.0% for the three months ended June 30, 2002 as compared to (7.5%) for the correspondingprior-year period.

 

**Comparison of SixMonths Ended June 30, 2002 and Six Months Ended June 30, 2001**

 

Consolidatedrevenue of $230.1 million for the six months ended June 30, 2002 decreased by$16.3 million or 6.6% from the comparable prior-year period. The decreaseoccurred primarily in INTL of $9.8 million and USS of $6.5 million, whilerevenue for CNS remained flat. The INTL decrease resulted primarily from theimpact of longer acceptance periods on highly customized products in theprior-year period.  These products,scheduled for acceptance in 2000, achieved acceptance in 2001 along with thoseproducts scheduled for acceptance in 2001. The USS decrease was principally related to the impact of continuedeconomic weakness, and declines in maintenance revenue due to Company installedproducts reaching the end of their useful lives and from increasedcompetition.  The Company expects thesetrends to continue in the foreseeable future. Factors impacting future revenueinclude lower corporate customer spending for large systems solutions as aresult of the continuing weakness in the economy, customer and prospectivecustomer mergers, on-going competitive pressures, and fluctuations ininternational currencies, especially the euro and the yen.

 

Consolidated gross profit of$54.7 million increased by $10.9 million or 24.7% from the comparableprior-year period. The increase occurred primarily in CNS of $9.5 million andUSS of $2.8 million, offset partially by a decrease in INTL of $1.8 million.CNS’ gross profit increase was primarily attributable to an improved labormodel, with additional benefit provided through a reduction in support costs,including streamlining the number of districts and the expanded automation ofits call center operations. The INTL decrease occurred primarily from adecrease in the Company’s European traditional businesses. The margin declinein the Company’s subsidiaries in Europe was due primarily to lower revenueswithout a corresponding percentage decline in fixed expenses, as well asfluctuations of the euro, yen and other international currencies.  USS gross profit increased despite   decreased revenues due to significantlylower cost of sales resulting from the Company’s cost containment efforts. TheCompany is in the process of transitioning its product offering focus to provendeliverables and new targeted offerings, including EDM solutions, its otherarchive solutions 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 the recoverabilityof its investment in inventory and long-lived assets, all of which may continueto have a negative impact on gross profit in the future.

 

Operatingexpenses of $42.8 million decreased $7.9 million compared to the comparableprior-year period. Operating expenses, by component, changed as follows:Product development expenses decreased by $0.7 million or 9.0% primarily due toconcentration on developing targeted new applications for the Company’s productlines, selective expansion of existing products, and the use of outsourcedproduct development services. Selling, general, and administrative expensesdecreased by $5.5 million or 13.6% due primarily to on-goingefforts to realign the cost structure. Goodwill amortization ceased in 2002 as a result of the implementationof SFAS 142. Goodwill amortization for the six months ended June 30, 2001 was $1.6 million.

 

Interest expense for the sixmonths ended June 30, 2002 decreased to $15.2 million from $18.9 million in thecomparable prior-year period. The decrease was due mainly to the repurchase ofa portion of the Senior Notes, a lower outstanding balance on the revolvingcredit facilities and declining interest rates, partially offset by a $6.1million increase in debt related to Sponsor Notes subsequent to June 30, 2001.

 

Sundry items resulted in a netincome of $4.1 million during the six months ended June 30, 2002 as compared toa net expense of $1.0 million during the comparable prior-year period.  This increase is primarily due to foreignexchange gains of $2.5 million and a gain of approximately $2.8 million fromthe Company’s repurchase of Senior Notes during the current year period,compared to foreign exchange losses of $2.1 million and a loss of $1.8 millionas a result of the extinguishment of a previous credit facility in the prior-yearperiod.

 

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Pre-tax income in foreign taxjurisdictions resulted in an income tax provision of $2.1 million for the sixmonths ended June 30, 2002 compared to a corresponding prior-year period incometax provision of $1.9 million.  Theincome tax provisions for both periods related to income from the Company’sinternational subsidiaries and a valuation allowance provided to reduce theCompany’s deferred tax assets to an amount management believes is more likelythan not to be realized.  The Company’seffective tax rate was approximately 254.5% for the six months ended June 30,2002 as compared to (7.3%) for the corresponding prior-year period.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

The Company’s working capitalrequirements are generally provided by cash and cash equivalents, fundsavailable under the Company’s revolving credit agreement, as discussed below,which matures May 30, 2006, and by internally generated funds from improvedcash flows from operations. Funds availability under the revolving creditagreement is determined by a borrowing base formula equal to a specifiedpercentage of the value of the Company’s eligible accounts receivable,inventory and real estate.  Generaleconomic conditions, the current weakness in demand for the Company’s systemssolutions products offered by USS and the requirement to obtain performancebonds or similar instruments for future advances from a significant customercould have a material impact on the Company’s future liquidity.

 

The Company’s cash and cashequivalents totaled $27.1 million at June 30, 2002, compared with $28.6 millionat December 31, 2001. Working capital increased $11.9 million during the sixmonths ended June 30, 2002 to $2.9 million compared to a working capitaldeficit of $9.0 million at December 31,2001. The change in working capital included a current liability decrease of$20.8 million from the revolving credit agreement and a current asset decreasein accounts receivable of $19.0 million.

 

During the six months endedJune 30, 2002, the Company relied primarily on cash flows generated fromoperating activities and short-term borrowings under its revolving creditagreement to fund operations. At June 30, 2002 the Company had available $16.9million of borrowing capacity under the Revolver, of which the Company can draw$6.9 million.

 

Operating activities provided$24.2 million and $24.9 million of cash in the six months ended June 30, 2002and 2001, respectively, a decrease of $0.7 million.  Although the netloss from continuing operations decreased $26.7 million, $22.5 million of thisimprovement resulted from lower depreciation and amortization, interest paidin-kind, and other non-cash transactions. In addition, cash generated by the conversion of operating assets andliabilities was $4.9 million less than in the prior-year period.

 

Investing activities used netcash of $4.4 million and $6.9 million in the six months ended June 30, 2002 and2001, respectively. Both uses of cash related to purchases of property, plantand equipment.

 

Financing activities used $22.8million and $24.1 million of net cash in the six months ended June 30, 2002 and2001, respectively. The $1.3 million change related primarily to the reductionof the Company’s debt, offset by the issuance of preferred stock of $5.3million in the six months ended June 30, 2001.

 

At June 30, 2002, the Company’sprincipal outstanding debt instruments consisted of (i) $8.0 millionoutstanding under the revolving credit facility maturing May 30, 2006 (which ismore fully described below), (ii) $106.3 million of 7.5% Senior Notes due 2008, and (iii) $193.8 millionof Sponsor Notes due 2009. The Company or its affiliates may from time to timepurchase, redeem or pay deferred interest on some of its outstanding debt orequity securities.  The Company wouldonly make these payments in compliance with the covenants of its debtinstruments.

 

The Company continually reviewsits various lines of business to assess their contribution to the Company’s businessplan and from time to time considers the sale of certain assets in order toraise cash or reduce debt.  Accordingly,the Company from time to time has explored and may explore possible asset salesby seeking expressions of interest from potential bidders.  However, the Company has not entered intoany binding agreements or agreements in principle to sell any assets and therecan be no assurance that any such asset sales will occur or, if they occur, asto the timing or amount of proceeds that such assets sales may generate.

 

**RevolvingCredit Facility**. The Company has a $60 millionrevolving credit facility (the “Revolver”) provided by Heller Financial, Inc.(“Heller”), which will mature on May 30, 2006. The Revolver is secured by substantially all the assets of the Company,subject to the limitations on liens contained in the Company’s existing SeniorNotes.  Funds availability under theRevolver is determined by a borrowing base formula equal to a specified percentageof the value of the Company’s eligible accounts receivable, inventory and realestate.  At June 30, 2002, theCompany had $8.0 million outstanding under the Revolver and an outstandingbalance on letters of credit totaling $8.5 million.  The balance remaining under the Revolver that the Company candraw was $6.9 million at June 30, 2002. A commitment fee of 0.5% per annum on the unused portion of the Revolveris payable quarterly.

 

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The interest rate on loansunder the Revolver is, at the Company’s option, either (i) 1.25% over prime or(ii) 2.75% over LIBOR.  At June 30,2002, the Company’s weighted average rate on the Revolver was 6.0%. 

 

Under the Revolver,substantially all of the Company’s domestic cash receipts (including proceedsfrom accounts receivable and asset sales) must be applied to repay theoutstanding loans, which may be re-borrowed subject to availability inaccordance with the borrowing base formula. The Revolver contains restrictionson the use of cash for dividend payments or non-scheduled principal payments oncertain indebtedness.  Restricted cashat June 30, 2002 of $1.6 million represents lockbox cash receipts to be appliedto the outstanding borrowings under the Revolver.  The Revolver contains various representations, warranties andcovenants, including financial covenants as to maximum capital expenditures,minimum fixed charge coverage ratio and minimum average borrowingavailability.  At June 30, 2002, theCompany was in compliance with all financial covenants under the Revolver. TheCompany was not in compliance with the reporting requirements of the Revolverfor the year ended December 31, 2001. On July 30, 2002, the Company and Heller amended the Revolver, which reducedthe Company’s fixed charge coverage ratio covenant during quarters 1, 2 and 3of 2002, and reduced the minimum undrawn availability requirement from $10.0million to $4.0 million.  The amendmentalso waived the reporting requirement violation upon submission of the auditedfinancial statements in the Company’s Form 10-K, which was filed on August 9,2002

 

**SeniorNotes**. In August 1998, the Company exchanged thepublic Senior Notes (the “Senior Notes”) for the notes sold in a May 1998 Rule144A private offering. Interest is fixed at 7.5% and is due and payable insemi-annual installments, which began December 1, 1998. The Senior Notescontain covenants placing limitations on the Company’s ability to permitsubsidiaries to incur certain debts, incur certain loans, and engage in certainsale and leaseback transactions. During the second quarter of 2002, the Companyrepurchased Senior Notes with a face amount of $4.6 million. The Company wroteoff a proportionate share of deferred financing fees, resulting in a gain ofapproximately $2.8 million, which was reported as sundry (other) income in thecondensed consolidated statements of operations for the interim periods endedJune 30, 2002. As of October 15, 2002, the Company was not in compliance withthe Senior Notes’ reporting requirements for the quarter ended June 30, 2002.The Company is in a 60-day cure period, and delivery of the financialstatements in this Form 10-Q will remedy this non- compliance condition for thequarter ended June 30, 2002, within the cure period provided, and therefore theCompany continues to classify the Senior Notes as long term debt.

 

**Subordinated Unsecured Sponsor Notes**.The Company’s $160.0 million in Sponsor Notes bear interest at 10.0%, due andpayable quarterly. The payments began September 30, 1999. However, as providedunder 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 June30, 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 the December 2001, March 2002 or June 2002quarterly payments and currently does not intend to elect deferral of thequarterly payments in the near future.

 

**PreferredStock – Series A**. The Company allocated the proceedsfrom its Series A preferred stock issuance based upon the relative fair valueof the preferred stock and warrants issued. The related discount is beingaccreted such that the carrying amount of the mandatory redeemable preferredstock will equal the mandatory redemption amount at September 22, 2008. For thesix months ended June 30, 2002, accretion of the related discount and accruedbut unpaid dividends totaled $0.8 million, increasing the carrying amount to$13.9 million. As of June 30, 2002, the stated value of the Series A preferredstock, including accumulated but unpaid dividends, was $169.36 per share.

 

**PreferredStock – Series B**. For six months ended June 30, 2002,the Company accrued additional unpaid dividends for its Series B preferredstock totaling $0.8 million, increasing the carrying amount to $7.3million.  As of June 30, 2002, thestated value of the Series B preferred stock, including accumulated but unpaiddividends, was $207.39 per share.

 

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

 

**RECENT ACCOUNTINGPRONOUNCEMENTS**

 

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

 

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Under SFAS No. 142, the Company is required to perform transitionalimpairment tests for its goodwill and intangible assets with indefinite usefullives as of the date of adoption.  SFASNo. 142 requires a two-step process for testing impairment. First, the fair valueof each reporting unit is compared to its carrying value to determine whetheran indication of impairment exists. If impairment is indicated, then under thesecond step the fair value of the reporting unit’s goodwill is determined byallocating the unit’s fair value to its assets and liabilities (including anyunrecognized intangible assets) as if the reporting unit had been acquired in abusiness combination. The amount of impairment for goodwill is measured as theexcess of its carrying value over its fair value. During the six months ended June30, 2002, the Company completed its analysis of the first step of theimpairment test of goodwill measured as of January 1, 2002.

 

Upon completion of the second step of the analysis, the Companyanticipates recording as a cumulative effect of a change in accountingprinciple, a non-cash charge of between $9 and $21 million, after applicable income taxes, to write off aportion of the carrying value of goodwill.  This non-cash charge will berecorded before December 31, 2002, and will not affect the Company’soperations.

 

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

 

In May 2002, the FASB issued SFASNo. 145 , “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFASNo. 13, and Technical Corrections” . Among other things, SFAS 145rescinds various pronouncements regarding early extinguishment of debt andallows extraordinary accounting treatment for early extinguishment only whenthe provisions of Accounting Principles Board Opinion No. 30, “Reportingthe Results of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransaction”, are met. The Company adopted the provisions SFAS 145 regardingearly extinguishment of debt during the second quarter of 2002. During thesecond quarter of 2002, the Company repurchased Senior Notes with a face amountof $4.6 million. The Company wrote off a proportionate share of deferredfinancing fees, resulting in a gain of approximately $2.8 million, which wasreported as sundry (other) income in the condensed consolidatedstatements of operations for the interim periods ended June 30, 2002.

 

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

 

**FACTORS AFFECTING THE COMPANY’S BUSINESS ANDPROSPECTS**

 

There are many factors thataffect the Company’s business and the results of its operations. The followingis a description of some of the important factors that may cause the actualresults of the Company’s operations in future periods to differ materially fromthose currently expected or desired. See “Forward Looking Statements”.

 

***GeneralEconomic Conditions***

 

The Company’s businesspartially depends on general economic and business conditions. The Company’ssales are to businesses in a wide variety of industries, including banking,financial services, insurance, health care, high technology and governmentalagencies.  General economic conditionsthat cause customers in such industries to reduce or delay their investments inproducts and solutions such as those offered by the Company could have amaterial adverse effect on the Company.

 

Delays or reductions intechnology spending could have a material adverse effect on demand for theCompany’s products and services, and consequently on the Company’s business,operating results, financial condition, and prospects.

 

***Dependenceon Suppliers***

 

The Company’s solutionsproducts are dependent on quality components that are procured from third-partysuppliers.  Reliance on suppliers, aswell as industry supply conditions, generally involves several risks, includingthe possibility of defective parts (which can adversely affect the reliabilityand reputation of the Company’s products), a shortage of components and reducedcontrol over delivery schedules (which can adversely affect the Company’smanufacturing efficiencies) and increases in component costs (which canadversely affect the Company’s profitability).

 

The Company has severalsingle-sourced supplier relationships, either because alternative sources arenot 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 reliablesupply, the Company could experience manufacturing interruptions, delays orinefficiencies, adversely affecting its results of operations. Even wherealternative sources of supply are available,

 

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qualification of thealternative suppliers and establishment of reliable supplies could result indelays and a possible loss of sales, which could affect operating resultsadversely.

 

***DecliningFinancial Operating Results and Indebtedness***

 

As a result of increasedleverage and reduced performance over the last few years, certain negativeconsequences of the Company’s indebtedness could occur, such as restrictions onexpenditures or other activities.  TheCompany’s future operating flexibility may be impacted.  In addition, the Company may be morevulnerable to an increase in interest rates, a downturn in its operatingperformance or a decline in general economic conditions.

 

***InternationalActivities***

 

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

 

***Fluctuationsin Operating Results***

 

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

 

***TechnologicalChanges and Product Transitions***

 

The Company’s industry ischaracterized by continuing improvement in technology, which results in thefrequent introduction of new products, short product life cycles and continualimprovement in product price/performance characteristics.  The Company must incorporate these newtechnologies into its products and solutions in order to remain competitive.There can be no assurance that the Company will be able to continue to managetechnological transitions.  A failure onthe part of the Company to effectively manage these transitions of its productlines to new technologies on a timely basis could have a material adverseeffect on the Company.  In addition, theCompany’s business depends on technology trends in its customers’businesses.  Many of the Company’straditional products depend on the efficient handling of paper-basedtransactions.  To the extent thattechnological changes impact the future volume of paper transactions, theCompany’s traditional business may be adversely impacted.

 

***ProductDevelopment Activities***

 

The strength of the Company’soverall business is partially dependent on the Company’s ability to developproducts and solutions based on new or evolving technology and the market’sacceptance of those products.  There canbe no assurance that the Company’s product development activities will besuccessful, that new technologies will be available to the Company, that theCompany will be able to deliver commercial quantities of new products in atimely manner, that those products will adhere to generally accepted industrystandards or that products will achieve market acceptance. The Company believesthat it is necessary for its products to adhere to generally accepted industrystandards, which are subject to change in ways that are beyond the control ofthe Company.

 

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK.**

 

The Company utilizes arevolving credit facility to support working capital needs. The interest rateon loans under the Revolver is, at the Company’s option, either (i) 1.25% overprime or (ii) 2.75% over LIBOR. Assuming the level of outstanding variable rateborrowings at June 30, 2002 of $8.0 million, a one hundred basis point changein the bank’s prime or LIBOR rate would impact net interest expense by $80,000over a twelve-month period.

 

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**PART II**

**BANCTEC, INC.**

 

**Item5.   Other Information**

 

On July30, 2002, the Company and Heller amended the Revolver, which reduced theCompany’s fixed charge coverage ratio covenant during quarters 1, 2 and 3 of2002, and reduced the minimum undrawn availability requirement from $10.0million to $4.0 million.  The amendmentalso waived the reporting requirement violation upon submission of the auditedfinancial statements in the Company’s Form 10-K filing.

 

 

**ITEM6.  Exhibits and Reports on Form 8-K**

 

 

(a)   Exhibits:

 

99.1 - Certificate of ChiefExecutive Officer *

 

99.2 - Certificate of ChiefFinancial Officer *

 

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* Filed herewith

 

 

(b)   Reports on Form 8-K:

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Company has duly caused this report to besigned 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: October 28, 2002 |                               |

 

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**Certifications**

 

 

I, Craig D. Crisman, certify that:

 

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

 

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

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of BancTec, Inc. asof, and for, the periods presented in this quarterly report.

 

 
| Date:  October 28, 2002 |     |                                    |   |
|------------------------------|----------|-----------------------------------------|--------|
|                         |     | *Craig D. Crisman*                      |   |   |
| * *                     | * * | *President and Chief Executive Officer* |   |   |
|                              |          |                                         |        |  |  |

 

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**Certifications**

 

 

I, Brian R. Stone, certify that:

 

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

 

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

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of BancTec, Inc. asof, and for, the periods presented in this quarterly report.

 

 
| Date:  October 28, 2002 | /s/ Brian R. Stone                                  |   |   |
|------------------------------|-----------------------------------------------------|--------|--------|
|                         | *Brian R. Stone*                                    |   |
|                         | *Senior Vice President and Chief Financial Officer* |   |

 

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