** **

**FORM 10-Q**

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES**

**EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended September 30, 2001**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES**

**EXCHANGE ACT OF 1934**

 

**CommissionFile Number 0–9859**

 

**BANCTEC,INC.**

(Exact name ofregistrant as specified in its charter)

 
| **DELAWARE**                                                    |   | **75–1559633**                   |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **2701 E. Grauwyler Road, Irving,  Texas**                      |   | **75061**                             |
| (Address of principal  executive offices)                       |   | (Zip Code)                            |
|                                                            |   |                                  |
| **(972) 579-6000**                                              |
| (Registrant's telephone  number, including area code)           |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.       Yes ý     No    o

 

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

 
|                                  |   | **Number  of Shares Outstanding at** |       |
|---------------------------------------|--------|--------------------------------------|------------|
| **Title of Each Class**               |   | **November 10, 2001**                | ** ** |
|                                  |   |                                 |       |
| Common Stock, $0.01 par value         |   | 17,003,838                           |       |
| Class A Common Stock, $0.01 par value |   | 1,181,946                            |       |

 

 

**BANCTEC,INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share data)**

 
| **ASSETS**                                                                                                                                                                                                                                                                            |   |              |                        |             |                        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------------------------|------------------|-----------------------------|
|                                                                                                                                                                                                                                                                                  |   | **September 30,** |                        | **December 31,** |                        |
|                                                                                                                                                                                                                                                                                  |   | **2001**          |                        | **2000**         |                        |
|                                                                                                                                                                                                                                                                                  |   | **(Unaudited)**   |                        |             |                        |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                       |   |              |                        |             |                        |
| Cash and cash equivalents, including restricted cash  of $494 at September 30, 2001 and $464 at December 31, 2000                                                                                                                                                                     |   | $                 | 13,523                      |             | $                           | 23,841 |   |
| Accounts receivable, less allowance for doubtful  accounts of $8,031 at September 30, 2001 and $8,274 at December 31, 2000                                                                                                                                                            |   | 81,740            |                        | 106,201          |                        |
| Inventories, net                                                                                                                                                                                                                                                                      |   | 68,932            |                        | 83,824           |                        |
| Other                                                                                                                                                                                                                                                                                 |   | 14,081            |                        | 12,446           |                        |
| Total Current Assets                                                                                                                                                                                                                                                                  |   | 178,276           |                        | 226,312          |                        |
|                                                                                                                                                                                                                                                                                  |   |              |                        |             |                        |
| PROPERTY, PLANT AND EQUIPMENT, net                                                                                                                                                                                                                                                    |   | 85,459            |                        | 101,485          |                        |
| GOODWILL, less accumulated amortization of $33,250 at  September 30, 2001 and $30,953 at December 31, 2000                                                                                                                                                                            |   | 49,101            |                        | 51,596           |                        |
| OTHER ASSETS                                                                                                                                                                                                                                                                          |   | 27,635            |                        | 20,359           |                        |
| TOTAL ASSETS                                                                                                                                                                                                                                                                          |   | $                 | 340,471                     |             | $                           | 399,752 |   |
|                                                                                                                                                                                                                                                                                  |   |              |                        |             |                        |   |   |
| **LIABILITIES AND STOCKHOLDERS' DEFICIT**                                                                                                                                                                                                                                             |   |              |                        |             |                        |
|                                                                                                                                                                                                                                                                                  |   |              |                        |             |                        |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                  |   |              |                        |             |                        |
| Revolving credit facility                                                                                                                                                                                                                                                             |   | $                 | 25,618                      |             | $                           | - |   |
| Trade accounts payable                                                                                                                                                                                                                                                                |   | 26,315            |                        | 29,347           |                        |
| Other accrued expenses and liabilities                                                                                                                                                                                                                                                |   | 59,487            |                        | 66,635           |                        |
| Deferred revenue                                                                                                                                                                                                                                                                      |   | 41,337            |                        | 40,687           |                        |
| Income taxes                                                                                                                                                                                                                                                                          |   | 1,206             |                        | 4,925            |                        |
| Total Current Liabilities                                                                                                                                                                                                                                                             |   | 153,963           |                        | 141,594          |                        |
|                                                                                                                                                                                                                                                                                  |   |              |                        |             |                        |
| LONG-TERM DEBT                                                                                                                                                                                                                                                                        |   | 343,848           |                        | 388,112          |                        |
| OTHER LIABILITIES                                                                                                                                                                                                                                                                     |   | 36,211            |                        | 25,750           |                        |
|                                                                                                                                                                                                                                                                                  |   |              |                        |             |                        |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                         |   |              |                        |             |                        |
|                                                                                                                                                                                                                                                                                  |   |              |                        |             |                        |
| MANDATORY REDEEMABLE PREFERRED STOCK                                                                                                                                                                                                                                                  |   | 12,734            |                        | 11,638           |                        |
|                                                                                                                                                                                                                                                                                  |   |              |                        |             |                        |
| STOCKHOLDERS' DEFICIT:                                                                                                                                                                                                                                                                |   |              |                        |             |                        |
| Cumulative  convertible preferred stock - authorized, 1,000,000 shares and zero shares of  $0.01 par value at September 30, 2001 and December 31, 2000 Series B  preferred stock - issued and outstanding, 35,520 shares and zero shares at  September 30, 2001 and December 31, 2000 |   | -                 |         | -                |         |
| Common stock - authorized, 32,000,000 shares of  $0.01 par value at September 30, 2001 and December 31, 2000 Common stock -  issued and outstanding 17,003,838 shares at September 30, 2001 and December  31, 2000                                                                    |   | 170               |                        | 170              |                        |
| Class A common stock - issued and outstanding  1,181,946 shares at September 30, 2001 and December 31, 2000                                                                                                                                                                           |   | 12                |                        | 12               |                        |
| Subscription stock warrants                                                                                                                                                                                                                                                           |   | 3,726             |                        | 3,726            |                        |
| Additional paid-in capital                                                                                                                                                                                                                                                            |   | 141,381           |                        | 137,149          |                        |
| Accumulated deficit                                                                                                                                                                                                                                                                   |   | (342,147          | )                           | (300,146         | )                           |
| Foreign currency translation adjustments                                                                                                                                                                                                                                              |   | (9,427            | )                           | (8,253           | )                           |
| Total Stockholders' Deficit                                                                                                                                                                                                                                                           |   | (206,285          | )                           | (167,342         | )                           |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                                                                                                                           |   | $                 | 340,471                     |             | $                           | 399,752 |   |
|                                                                                                                                                                                                                                                                                       |        |                   |                             |                  |                             |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Inthousands)**

**(Unaudited)**

 
|                                                 |   | **Three Months Ended September 30,** |    | **Nine Months Ended September 30,** |   |
|------------------------------------------------------|--------|--------------------------------------|---------|-------------------------------------|--------|
|                                                 |   | **2001**                             |    | **2000**                            |   | **2001** |   | **2000** |   |
| REVENUES                                             |   | $                                    | 119,874 |                                | $      | 128,412 |   | $ | 375,751 |   | $ | 397,262 |   |
| COST OF SALES                                        |   | 100,874                              |    | 111,943                             |   | 308,909 |   | 347,051 |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| GROSS PROFIT                                         |   | 19,000                               |    | 16,469                              |   | 66,842 |   | 50,211 |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| OPERATING EXPENSES:                                  |   |                                 |    |                                |   |   |   |   |   |
| Product development                                  |   | 3,955                                |    | 4,367                               |   | 12,145 |   | 12,223 |   |
| Selling, general & administrative                |   | 21,589                               |    | 22,193                              |   | 62,468 |   | 68,358 |   |
| Goodwill amortization                                |   | 803                                  |    | 804                                 |   | 2,411 |   | 2,414 |   |
|                                                 |   | 26,347                               |    | 27,364                              |   | 77,024 |   | 82,995 |   |
| INCOME (LOSS) FROM OPERATIONS                        |   | (7,347                               | )       | (10,895                             | )      | (10,182 | ) | (32,784 | ) |
| OTHER INCOME (EXPENSE):                              |   |                                 |    |                                |   |   |   |   |   |
| Interest income                                      |   | 64                                   |    | 278                                 |   | 775 |   | 473 |   |
| Interest expense                                     |   | (8,881                               | )       | (9,716                              | )      | (27,973 | ) | (27,578 | ) |
| Sundry, net                                          |   | 715                                  |    | (1,148                              | )      | 1,509 |   | (1,672 | ) |
|                                                 |   | (8,102                               | )       | (10,586                             | )      | (25,689 | ) | (28,777 | ) |
| LOSS FROM CONTINUING OPERATIONS

BEFORE INCOME TAXES |   | (15,449                              | )       | (21,481                             | )      | (35,871 | ) | (61,561 | ) |
| INCOME TAX PROVISION (BENEFIT)                       |   | 1,021                                |    | (6,015                              | )      | 2,912 |   | (17,238 | ) |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS                      |   | (16,470                              | )       | (15,466                             | )      | (38,783 | ) | (44,323 | ) |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| DISCONTINUED OPERATIONS:                             |   |                                 |    |                                |   |   |   |   |   |
| LOSS FROM DISCONTINUED OPERATIONS                    |   | (685                                 | )       | -                                   |   | (685 | ) | - |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| LOSS BEFORE EXTRAORDINARY ITEM                       |   | (17,155                              | )       | (15,466                             | )      | (39,468 | ) | (44,323 | ) |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| EXTRAORDINARY ITEM:                                  |   |                                 |    |                                |   |   |   |   |   |
| LOSS FROM EARLY EXTINGUISHMENT OF DEBT               |   | -                                    |    | -                                   |   | (1,840 | ) | - |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |   |   |   |   |
| NET LOSS                                             |   | $                                    | (17,155 | )                                   | $      | (15,466 | ) | $ | (41,308 | ) | $ | (44,323 | ) |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| PREFERRED STOCK DIVIDENDS AND ACCRETION OF DISCOUNT  |   | (723                                 | )       | -                                   |   | (1,788 | ) | - |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |   |   |   |   |
| NET LOSS APPLICABLE TO COMMON STOCK                  |   | $                                    | (17,878 | )                                   | $      | (15,466 | ) | $ | (43,096 | ) | $ | (44,323 | ) |

 

See notes to consolidated financial statements.

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
|                                                                                                                                           |   | **Nine Months Ended September 30,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                                                                                           |   | **2001**                            |    | **2000** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                          |   |                                |    |   |   |
| Loss from continuing operations                                                                                                                |   | $                                   | (38,783 | ) | $ | (44,323 | ) |
| Adjustments to reconcile loss from continuing  operations before extraordinary item to cash flows provided by (used in)  operating activities: |   |                                |    |   |   |
| Depreciation and amortization                                                                                                                  |   | 27,629                              |    | 30,853 |   |
| Interest paid in-kind                                                                                                                          |   | 14,278                              |    | 8,164 |   |
| Loss on disposition of property, plant and equipment                                                                                           |   | 836                                 |    | 3,229 |   |
| Other non-cash items                                                                                                                           |   | 422                                 |    | 1,747 |   |
| Changes in operating assets and liabilities:                                                                                                   |   |                                |    |   |   |
| Decrease in accounts receivable                                                                                                                |   | 24,461                              |    | 6,635 |   |
| Decrease in inventories                                                                                                                        |   | 14,174                              |    | 3,569 |   |
| Increase in other assets                                                                                                                       |   | (4,746                              | )       | (22,142 | ) |
| Decrease in trade accounts payable                                                                                                             |   | (3,032                              | )       | (3,378 | ) |
| Increase in deferred revenue                                                                                                                   |   | 650                                 |    | 1,015 |   |
| Increase (decrease) in other accrued expenses and  liabilities                                                                                 |   | (1,784                              | )       | 3,244 |   |
| CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES                                                                                          |   | 34,105                              |    | (11,387 | ) |
|                                                                                                                                           |   |                                |    |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                          |   |                                |    |   |   |
| Purchases of property, plant and equipment                                                                                                     |   | (10,121                             | )       | (17,345 | ) |
| Investment in unconsolidated subsidiary                                                                                                        |   | -                                   |    | 1,189 |   |
| Proceeds from disposal of short-term investments                                                                                               |   | -                                   |    | 371 |   |
| CASH FLOWS USED IN INVESTING ACTIVITIES                                                                                                        |   | (10,121                             | )       | (15,785 | ) |
|                                                                                                                                           |   |                                |    |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                          |   |                                |    |   |   |
| Payment of current maturities of long-term debt and  capital lease obligations                                                                 |   | (2,500                              | )       | (354 | ) |
| Proceeds from long-term borrowings                                                                                                             |   | 8,000                               |    | - |   |
| Payments on long-term borrowings                                                                                                               |   | (67,500                             | )       | - |   |
| Debt issuance costs                                                                                                                            |   | (2,547                              | )       | - |   |
| Proceeds from short-term borrowings, net                                                                                                       |   | 25,722                              |    | 10,971 |   |
| Issuance of preferred stock                                                                                                                    |   | 5,328                               |    | 15,000 |   |
| CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES                                                                                          |   | (33,497                             | )       | 25,617 |   |
|                                                                                                                                           |   |                                |    |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                                                        |   | (805                                | )       | (2,779 | ) |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                                                                      |   | (10,318                             | )       | (4,334 | ) |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                                                                 |   | 23,841                              |    | 20,292 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                                                       |   | $                                   | 13,523  |   | $ | 15,958 |   |
| SUPPLEMENTAL DISCLOSURE INFORMATION:                                                                                                           |   |                                |    |   |   |
| Cash paid during the period for:                                                                                                               |   |                                |    |   |   |
| Interest                                                                                                                                       |   | $                                   | 9,371   |   | $ | 15,282 |   |
| Income taxes                                                                                                                                   |   | $                                   | 6,030   |   | $ | 9,761 |   |
|                                                                                                                                           |   |                                |    |   |   |
| SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:                                                                                                |   |                                |    |   |   |
| DEFERRAL OF QUARTERLY INTEREST PAYMENTS ON SPONSOR  NOTES                                                                                      |   | $                                   | 17,735  |   | $ | 10,569 |   |
|                                                                                                                                                |        |                                     |         |  |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

**BANCTEC, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1****.             BASIS OF PRESENTATION AND OTHERACCOUNTING INFORMATION**

 

The accompanying unaudited consolidated balance sheet at September 30,2001, and the consolidated statements of operations and cash flows for theinterim periods ended September 30, 2001 and 2000, 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 ExchangeCommission.  In the opinion ofmanagement, the accompanying consolidated financial statements contain allmaterial adjustments, consisting principally of normal recurring adjustments,necessary for a fair presentation of the financial position and results ofoperations of the Company. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

Certain prior year amounts have been reclassified to conform with thecurrent year presentation.

 

**2.             INVENTORIES**

 

Inventories consisted of the following:

 
|             |   | **September 30,**  |       | **December 31,** |   |
|------------------|--------|--------------------|------------|------------------|--------|
|             |   | **2001**           |       | **2000**         |   |
|             |   | **(In thousands)** | ** ** |
| Raw materials    |   | $                  | 13,101     |             | $      | 10,264 |   |
| Work-in-progress |   | 28,481             |       | 34,507           |   |
| Finished goods   |   | 27,350             |       | 39,053           |   |
| Inventories, net |   | $                  | 68,932     |             | $      | 83,824 |   |

 

**3.             PROPERTY,PLANT AND EQUIPMENT**

 

Property, plant and equipment consisted of the following:

 
|                               |   | **September 30,**  |       | **December 31,** |   |
|------------------------------------|--------|--------------------|------------|------------------|--------|
|                               |   | **2001**           |       | **2000**         |   |
|                               |   | **(In thousands)** | ** ** |
| Land                               |   | $                  | 2,860      |             | $      | 2,860 |   |
| Field support spare parts          |   | 84,909             |       | 96,473           |   |
| Systems and software               |   | 66,429             |       | 64,686           |   |
| Machinery and equipment            |   | 55,199             |       | 55,574           |   |
| Furniture, fixtures and other      |   | 27,567             |       | 26,978           |   |
| Building                           |   | 29,743             |       | 29,591           |   |
|                               |   | 266,707            |       | 276,162          |   |
| Accumulated depreciation           |   | (181,248           | )          | (174,677         | )      |
| Property, Plant and Equipment, net |   | $                  | 85,459     |             | $      | 101,485 |   |

 

**4.             OTHERACCRUED EXPENSES AND LIABILITIES**

 

Other accrued expenses and liabilities consisted of the following:

 
|                                    |   | **September 30,**  |   | **December 31,** |   |
|-----------------------------------------|--------|--------------------|--------|------------------|--------|
|                                    |   | **2001**           |   | **2000**         |   |
|                                    |   | **(In thousands)** |   |
| Salaries, wages and other compensation  |   | $                  | 16,215 |             | $      | 18,976 |   |
| Accrued taxes, other than income taxes  |   | 5,558              |   | 7,795            |   |
| Advances from customers                 |   | 6,285              |   | 12,043           |   |
| Accrued interest payable                |   | 3,906              |   | 1,128            |   |
| Accrued invoices and costs              |   | 4,809              |   | 5,812            |   |
| Other                                   |   | 22,714             |   | 20,881           |   |
| Other accrued  expenses and liabilities |   | $                  | 59,487 |             | $      | 66,635 |   |
|                                         |        |                    |        |                  |        |  |  |  |

 

 

**5.             REVOLVINGCREDIT FACILITY AND LONG-TERM DEBT**

 

Long-term debt consisted of the following:

 
|                                                                           |   | **September 30,**  |       | **December 31,** |   |
|--------------------------------------------------------------------------------|--------|--------------------|------------|------------------|--------|
|                                                                           |   | **2001**           |       | **2000**         |   |
|                                                                           |   | **(In thousands)** | ** ** |
| 7.5% Senior Notes, due 2008                                                    |   | $                  | 150,000    |             | $      | 150,000 |   |
| Sponsor Notes, subordinated, unsecured, due 2009                               |   | 193,848            |       | 176,112          |   |
| Tranche A Term Loan, due 2004, LIBOR plus 3.25% or prime plus  2.25%           |   | -                  |       | 45,000           |   |
| $50.0 million Revolving  Credit Facility, LIBOR plus 3.25% or prime plus 2.25% |   | -                  |       | 17,000           |   |
|                                                                           |   | $                  | 343,848    |             | $      | 388,112 |   |

 

New Credit Facility.  On May 31, 2001, the Company replaced itsexisting bank debt facilities (which included the Tranche A Term Loan and $50.0million Revolving Credit Facility) provided by a syndicate of lenders led byThe Chase Manhattan Bank with a $100.0 million revolving credit facility (the“New Facility”) provided by Heller Financial, Inc. (“Heller”), which willmature on May 30, 2006. Efforts by Heller to syndicate the New Facility havebeen unsuccessful. As a result of the failed syndication efforts of Heller anda desire of the Company to reduce commitment fee expenses on the unused portionof the facility, on November 8, 2001, the Company and Heller entered into anamendment to the New Facility which reduced the committed amount to $60.0million while the sub-limit related to Letter of Credit availability wasincreased from $5.0 million to $20.0 million. The sub-limit increase will allow the Company greater flexibility goingforward to obtain performance bonds or similar instruments for future advancesfrom a significant customer. 

 

The New Facility 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 New Facility will bedetermined by a borrowing base formula equal to a specified percentage of thevalue of the Company’s eligible accounts receivable, inventory and real estate.  The Company had an outstanding balance onletters of credit totaling $0.7 million at September 30, 2001.  At September 30, 2001, the Company’savailable borrowing base was approximately $50.6 million, of which $25.6million was outstanding.

 

The interest rate on loans under the New Facility is, at the Company’soption, either (i) 1.25% over prime or (ii) 2.75% over LIBOR.  At September 30, 2001, the Company’sweighted average rate on the New Facility was 6.5%. Beginning August 1, 2002,the interest rate margins over prime and LIBOR may be increased or decreased byup to 0.5% based upon the Company’s available borrowing capacity. A commitmentfee of 0.5% per annum on the unused portion of the New Facility is payablequarterly.

 

Under the New Facility, substantially all of the Company’s domesticcash receipts (including proceeds from accounts receivable and asset sales)must be applied to repay the outstanding loans, which may be re-borrowedsubject to availability in accordance with the borrowing base formula.  Restricted cash at September 30, 2001included the accompanying balance sheet represents lockbox cash receipts to beapplied to the outstanding borrowings under the New Facility.

 

The New Facility contains various representations, warranties andcovenants, including financial covenants as to maximum capital expenditures,minimum fixed charge coverage ratio and minimum average borrowing availability.At September 30, 2001, the Company was in compliance with all covenants underthe New Facility.  The Company believesthis facility, along with cash from operations, will be sufficient to cover thenext 12 months’ cash requirements.

 

Senior Notes. In August 1998, theCompany exchanged the public 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. Payments began December 1, 1998. The Notes containcovenants placing limitations on the Company’s ability to permit subsidiariesto incur certain debts, incur certain loans, and engage in certain sale andleaseback transactions. As of September 30, 2001, the Company is in compliancewith all covenants.  The estimated fairvalue of the Senior Notes as of September 30, 2001 is approximately $108.0million based on a yield of 14.0%.

 

Term Loan. In the fourth quarter of1999, the Company used $30.0 million of the proceeds from the sale of itscommunity banking business to pay down the Term Loan to $45.0 million. Aspermitted under the terms of the agreements, BancTec exercised its option todefer quarterly principal payments until March 30, 2001; thus a portion of the$30.0 million pay down in 1999 was used to cover the third and fourth quarterpayments originally scheduled for payment in 2000. The Company paid the $2.5million quarterly payment in full on its March 2001 due date. The Term Loan,due June 2004, was payable in fourteen consecutive quarterly installments.Effective with the execution of the first amendment to the credit agreements,interest rates increased at the beginning of 2000. Interest under theseagreements, at the Company’s option, was LIBOR plus 3.25%, or prime plus 2.25%.Collateral for these credit facilities included all tangible and intangibleassets of the Company, subject to certain limitations contained in the SeniorNotes agreements.  On May 31, 2001, theCompany paid off the outstanding balance of the Term Loan with proceeds fromthe New Facility. 

 

Revolver. At May 31, 2001, theCompany had a $50.0 million Revolver under which maximum borrowings allowed,including letters of credit, was $43.6 million.  Interest under the Revolver, at the Company’s option, was LIBORplus 3.25%, or prime plus 2.25%. A commitment fee of 0.5% on the unused portionof the Revolver was payable quarterly. On May 31, 2001, the Company paid offthe $25.0 million of borrowings outstanding under the Revolver with proceedsfrom the New Facility.  In connectionwith the pay-off of the Term Loan and Revolver on May 31, 2001, the Companyrecorded an extraordinary loss of $1.8 million, as a result of the write-off ofunamortized deferred financing costs.

 

 

Subordinated Unsecured Sponsor Notes.The Company’s $160.0 million in Sponsor Notes are issued in U.S. dollars, withinterest at 10.0% due and payable quarterly. The payments began September 30,1999. However, as provided under the agreement, the Sponsor Notes’ holder,Welsh, Carson, Anderson and Stowe (“WCAS”), elected to defer the March 2001,June 2001 and September 2001 quarterly interest payments of $4.0 million each.Such election requires a deferred financing fee of 30.0% of the interestpayment being deferred.  The Companyaccounts for the additional financing fees as a change in the effectiveinterest rate of the debt, which was determined to be 13.0% at September 30,2001.  For the three and nine months endedSeptember 30, 2001, the Company had increased the outstanding deferred interestnotes by $6.1 million and $17.7 million, respectively.  These increases were comprised of the $4.0million quarterly deferrals, plus financing fees and interest thereon.  WCAS may, at its election, defer eachquarterly payment under similar terms. The estimated fair value of the Sponsor Notes and deferred interest andfees as of September 30, 2001 is approximately $147.0 million based on adiscount rate of 15.0%.

 

The Company had no outstanding borrowings on foreign credit agreementsas of September 30, 2001.

 

**6.             COMPREHENSIVELOSS**

 

The components of comprehensive loss were as follows:

 
|                                      |   | **Three Months Ended September 30,** |    | **Nine Months Ended September 30,** |   |
|-------------------------------------------|--------|--------------------------------------|---------|-------------------------------------|--------|
|                                      |   | **2001**                             |    | **2000**                            |   | **2001** |   | **2000** |   |
|                                      |   | **(In thousands)**                   |    | **(In thousands)**                  |   |
| Net loss                                  |   | $                                    | (17,155 | )                                   | $      | (15,466 | ) | $ | (41,308 | ) | $ | (44,323 | ) |
| Foreign currency  translation adjustments |   | 896                                  |    | (1,446                              | )      | (1,174 | ) | (3,978 | ) |
| Total comprehensive  loss                 |   | $                                    | (16,259 | )                                   | $      | (16,912 | ) | $ | (42,482 | ) | $ | (48,301 | ) |

 

**7.             BUSINESSSEGMENT DATA**

 

The Company recently realigned its reporting structure and beganreporting under the new alignment in the first quarter of 2001. Under this newstructure, North American Systems has been renamed U.S. Solutions("USS"), and excludes Canadian operations and Plexus products. Thenewly formed Advanced Enterprise Solutions ("AES") develops and sellsthe Company’s OpenARCHIVEÔand other archive solutions. In the table below, AES and Plexus products aregrouped in the column titled “Other”. International Solutions (“INTL”)reporting now includes the Canadian operations. Canadian operations are notmaterial to USS or to INTL operations. Under the new structure, the compositionof Computer and Network Services remains unchanged. The information for thethree and nine months ended September 30, 2000 has been reclassified to reflectthe new alignment.

 
|                                                     |   | **U.S. Solutions** |   | **Computer & Network Services** |   | **International Solutions** |   | **Other** |   | **Corp/Other Eliminations** |   | **Total** |   |
|----------------------------------------------------------|--------|--------------------|--------|-------------------------------------|--------|-----------------------------|--------|-----------|--------|-----------------------------|--------|-----------|--------|
| **For  the three months ended**

**September  30, 2001** |   |               |   |                                |   |                        |   |      |   |                        |   |      |   |
| Revenue from  external customers                         |   | $                  | 38,610 |                                | $      | 37,859                      |   | $         | 39,502 |                        | $      | 3,903     |   | $ | - |   | $ | 119,874 |   |
| Intersegment  revenues                                   |   | 7,314              |   | -                                   |   | 843                         |   | 574       |   | (8,731                      | )      | -         |   |
| Segment gross  profit (loss)                             |   | (97                | )      | 7,830                               |   | 9,761                       |   | 2,091     |   | (585                        | )      | 19,000    |   |
| Segment  operating income (loss)                         |   | (7,201             | )      | 4,004                               |   | 1,438                       |   | (1,175    | )      | (4,413                      | )      | (7347     | )      |
| Segment  identifiable assets                             |   | 143,114            |   | 41,710                              |   | 106,037                     |   | 5,852     |   | 43,758                      |   | 340,471   |   |
|                                                     |   |               |   |                                |   |                        |   |      |   |                        |   |      |   |
| **For  the three months ended**

**September  30, 2000** |   |               |   |                                |   |                        |   |      |   |                        |   |      |   |
| Revenue from  external customers                         |   | $                  | 47,318 |                                | $      | 37,101                      |   | $         | 39,333 |                        | $      | 4,660     |   | $ | - |   | $ | 128,412 |   |
| Intersegment  revenues                                   |   | 7,063              |   | -                                   |   | 1,262                       |   | 319       |   | (8,644                      | )      | -         |   |
| Segment gross  profit (loss)                             |   | 7,729              |   | 1,310                               |   | 6,130                       |   | 1,342     |   | (42                         | )      | 16,469    |   |
| Segment operating  loss                                  |   | (844               | )      | (1,219                              | )      | (3,812                      | )      | (1,909    | )      | (3,111                      | )      | (10,895   | )      |
| Segment  identifiable assets                             |   | 185,533            |   | 60,346                              |   | 109,208                     |   | 6,257     |   | 100,474                     |   | 461,818   |   |

 

 
|                                                    |   | **U.S. Solutions** |    | **Computer & Network Services** |   | **International Solutions** |   | **Other** |    | **Corp/Other Eliminations** |   | **Total** |   |
|---------------------------------------------------------|--------|--------------------|---------|-------------------------------------|--------|-----------------------------|--------|-----------|---------|-----------------------------|--------|-----------|--------|
| **For  the nine months ended**

**September  30, 2001** |   |               |    |                                |   |                        |   |      |    |                        |   |      |   |
| Revenue from  external customers                        |   | $                  | 125,860 |                                | $      | 113,807                     |   | $         | 123,906 |                        | $      | 12,178    |   | $ | - |   | $ | 375,751 |   |
| Intersegment  revenues                                  |   | 23,738             |    | -                                   |   | 2,719                       |   | 1,448     |    | (27,905                     | )      | -         |   |
| Segment gross  profit (loss)                            |   | 14,314             |    | 18,561                              |   | 28,401                      |   | 6,161     |    | (595                        | )      | 66,842    |   |
| Segment  operating income (loss)                        |   | (7,774             | )       | 6,050                               |   | 3,556                       |   | (3,693    | )       | (8,321                      | )      | (10,182   | )      |
| Capital  expenditures                                   |   | 3,225              |    | 1,332                               |   | 4,055                       |   | 134       |    | 1,375                       |   | 10,121    |   |
|                                                    |   |               |    |                                |   |                        |   |      |    |                        |   |      |   |
| **For  the nine months ended**

**September  30, 2000** |   |               |    |                                |   |                        |   |      |    |                        |   |      |   |
| Revenue from  external customers                        |   | $                  | 152,881 |                                | $      | 104,319                     |   | $         | 131,241 |                        | $      | 8,821     |   | $ | - |   | $ | 397,262 |   |
| Intersegment  revenues                                  |   | 27,495             |    | -                                   |   | 2,112                       |   | 1,808     |    | (31,415                     | )      | -         |   |
| Segment gross  profit (loss)                            |   | 20,388             |    | 5,751                               |   | 26,275                      |   | (3,096    | )       | 893                         |   | 50,211    |   |
| Segment  operating loss                                 |   | (9,695             | )       | (2,600                              | )      | (2,939                      | )      | (9,587    | )       | (7,963                      | )      | (32,784   | )      |
| Capital  expenditures                                   |   | 7,690              |    | 4,650                               |   | 3,945                       |   | 126       |    | 934                         |   | 17,345    |   |

 

**8.             SERIESB PREFERRED STOCK**

** **

In February 2001, the Company issued 35,520 shares of  $0.01 par value Series B Preferred Stock(“Series B Preferred”) to its primary owners, WCAS. In exchange, WCAScontributed an additional $5.3 million in cash to the Company. The Series BPreferred has a cumulative annual cash dividend rate of 25.0% of the then“Stated Value”. The Stated Value equals $150.00 per share, plus accumulated andunpaid dividends. Dividends are paid when declared by the Company’s Board ofDirectors. The aggregate liquidation preference/redemption value is $5.3 million,plus accumulated and unpaid dividends. The Company has the right to redeem theSeries B Preferred at any time. In addition, upon the occurrence of certainevents (for example, a merger or a sale of substantially all of the assets ofthe Company, a division or a subsidiary), and upon the approval of a majorityof the holders of the Series B Preferred, the Company would be required toredeem the shares. Each share of Series B Preferred is convertible into sharesof Common Stock at any time. The number of shares of Common Stock is determinedby multiplying the number of shares being converted by $150.00 and dividing theresult by $8.325 per share. The conversion rate is subject to variousadjustments.  The Company is required tokeep available approximately 640,000 shares for issuance upon conversion of alloutstanding shares of Series B Preferred.

 

Dividends accrued on the Series B Preferred on June 1, 2001 andSeptember 1, 2001.  The dividendsincreased the stated value of the Series B Preferred to $169.50 per share atSeptember 30, 2001.

 

**9.             DERIVATIVEFINANCIAL INSTRUMENTS**

** **

As of September 30, 2001, BancTec had three yen-denominated foreigncurrency forward contracts entered into in August 2000.  These instruments are recorded in theaccompanying balance sheet at fair value with changes in fair value recorded tothe Sundry line item in the accompanying income statement.  As of September 30, 2001, the Company hadrecognized an inception-to-date unrealized gain of approximately $1.3 millionon these instruments.

 

**10.          RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS**

 

In June 2001, the Financial Accounting Standards Board approved theissuance of Statement of Financial Accounting Standards ("SFAS") No.141, Business Combinations, and SFAS No. 142, Goodwill and Other IntangibleAssets. These statements establish accounting and reporting standards forbusiness combinations, goodwill and other intangibles. SFAS No. 141 requiresall business combinations entered into subsequent to June 30, 2001 to beaccounted for using the purchase method of accounting.  SFAS No. 142 provides that goodwill andother intangible assets deemed to have indefinite lives will not be amortized,but will be tested for impairment on an annual basis. These standards areeffective for the Company beginning January 1, 2002.  The Company has not yet quantified the impact resulting from theadoption of these statements including the impact, if any, of completion of thetransitional or annual impairment tests. However, the historical impact of notamortizing goodwill would have been to reduce the Company’s net loss by $0.8million for each of the three months ended September 30, 2001 and 2000 and by$2.4 million for each of the nine months ended September 30, 2001 and 2000.

 

SFAS No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets, addresses accounting and reporting for the impairment or disposal oflong-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.SFAS No. 144 establishes a single accounting model for long-lived assets to bedisposed of by sale and expands on the guidance provided by SFAS No. 121 withrespect to cash flow estimations. SFAS No. 144 is effective for the Companybeginning January 1, 2002. The Company is evaluating SFAS No. 144 and has notyet determined the impact of adoption on its financial position and results ofoperations.

 

**BANCTEC,INC.**

**MANAGEMENT’SDISCUSSION AND ANLYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

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

 

There are many factors that affect the Company’s business and theresults of its operations.  Please see“Factors Affecting the Company’s Business and Prospects” elsewhere in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations for a description of some of the important factors that may causethe actual results of the Company’s operations in future periods to differmaterially from those currently expected or desired.

 

**Overview**

 

The Company believes several factors continued to create a challengingand competitive sales and cost containment environment during the three andnine months ended September 30, 2001. These factors include: general economic conditions and reduced corporatecustomer technology spending; ongoing competitive pressures; an ongoing plannedchange in revenue mix within the Company’s U.S. Solutions (“USS”) andInternational Solutions (“INTL”) segments; and a highly leveraged financialposition.  Additionally, during thethree months ended September 2001, the USS segment experienced additionalunexpected revenue declines, the duration of which the Company cannotpredict.  In response to the continueddifficult business climate, the year-end planning process and the developmentof the 2002 operating plan, the Company is undertaking a process of evaluatingthe recovery of all its investments in inventory and long-lived assets.  Write-downs and impairments of inventory andother long-lived assets may become necessary if business conditions do notimprove or as a result of other decisions reached during the planning process.

 

Expected economic and business conditions for the remainder of 2001 andinto 2002 indicate a cautious outlook regarding the Company’s near-term revenueand earnings growth prospects.  Most ofthe Company’s product offerings represent a significant capital expenditure forits customers.  The general economicconditions have recently caused a significant weakening in demand for systemssolutions products offered by USS. The Company has concentrated its emphasis oncost reductions and on existing offerings. Product development efforts are focused on Electronic Data Management(“EDM”) solutions, Advanced Enterprise Solutions’ (“AES”) OpenARCHIVETM andother archive solutions, and hardware enhancements. By incorporating morethird-party products into the Company’s solutions rather than developing theproducts, the Company can more easily target its efforts and expenditures tothese core products and solutions. The Company cautions investors that therecan be no assurances that actual results or business conditions will not differmaterially from those projected or suggested in such forward–lookingstatements as a result of various factors. The Company undertakes no obligationto update or revise forward-looking statements to reflect changes inassumptions, the occurrence of unanticipated results or changes to futureoperating results over time.

 

**Results of Operations**

 

**Comparison of Three Months EndedSeptember 30, 2001 and Three Months Ended September 30, 2000**

 

Consolidated revenue of $119.9 million for the three months endedSeptember 30, 2001 decreased by $8.5 million or 6.6% compared to the threemonths ended September 30, 2000.   Adecline of $8.7 million occurred in USS while AES and Plexus (“Other”)experienced a decline of $0.8 million. Computer and Network Services (“CNS”)increased $0.8 million and INTL increased $0.2 million.  The USS decrease was principally in itsintegrated business solutions and manufacturing businesses.  Lower revenues from its hardware andsoftware sales due to general economic conditions, increased pricing pressures,competition, and the impact of longer acceptance periods on highly customizedproducts accounted for a significant portion of the decrease. The increasedrevenue from the CNS operations was primarily attributable to growth inwarranty repair in the Original Equipment Manufacturer (“OEM”) market during2001. The remainder of the CNS increase was primarily due to on-going OEMpartner relationships and to strategic alliances comprised of its outsource andsystem integration partners. The INTL increase resulted from increases in EDMsolution sales in the Company’s subsidiary in Japan offset by decreases due tothe Company’s targeted sales focus in the European traditional businesses.  Factors contributing to the overall declinein revenues included lower corporate customer spending for large systemssolutions as a result of the weakening economy, mergers, on-going competitivepressures, and a general decline in international currencies, especially theEuro and the Yen.

 

Consolidated gross profit of $19.0 million increased by $2.5 million or15.4% from the three months ended September 30, 2000. Gross profit increased$6.5 million for CNS, $3.6 million for INTL and $0.7 million for OTHER. Grossprofit for USS decreased $7.8 million for the same period.  The CNS increase was primarily attributableto an improved labor model, effectively capping costs on some jobs. The USSgross profit decrease was principally a result of the decline in revenue aswell as additions to its inventory reserve for obsolete inventory items.  The Company is in the process oftransitioning its product offering focus to proven deliverables and newtargeted offerings, including EDM solutions, its other archive solutions andhardware enhancements. Incorporating more third-party products into theCompany’s solutions rather than developing the products has enabled theconcentration of efforts and expenditures on the targeted items which, alongwith the Company’s ongoing cost containment efforts, allowed for costreductions to help offset revenue declines. The Company will continue to monitor the effects of the business climateand its strategic plans on the recoverability of its investment in inventoryand long-lived assets which may have a negative impact on gross profit in thefourth quarter and for the full year of 2001.

 

Operating expenses of $26.3 million decreased $1.0 million compared tothe three months ended September 30, 2000. Operating expenses, by component,changed as follows: Product development expenses decreased by $0.4 million or9.4% as the Company continues to concentrate on developing new applications forthe Company’s product lines and expanding existing products.  Selling, general, and administrativeexpenses decreased by $0.6 million or 2.7% due primarily to on-going efforts torealign the cost structure as a result of lower revenues.  Goodwill amortization remained relativelyflat for the comparative quarters.

 

Interest expense decreased to $8.9 million during the three monthsended September 30, 2001 from $9.7 million during the three months endedSeptember 30, 2000.  The decrease wasdue mainly a lower outstanding balance on the New Facility and to declininginterest rates, offset by a $6.1 million increase in debt related tosubordinated unsecured notes (“Sponsor Notes”).

 

Sundry income of $0.7 million increased $1.9 million during the threemonths ended September 30, 2001 primarily due to foreign currency lossesresulting from exchange rate fluctuations in the prior year as opposed to gainsin the current year.

 

Pre-tax income in foreign tax jurisdictions resulted in an income taxprovision of $1.0 million for the three months ended September 30, 2001compared to a corresponding prior year period income tax benefit of $6.0million on a pre-tax loss of $21.5 million. The current income tax provision related to income from the Company’sinternational subsidiaries.  A valuationallowance was provided to reduce the Company’s deferred tax assets to an amountmanagement believes is more likely than not to be realized.  The increase had the effect of decreasingthe Company’s effective tax rate to approximately 6.6% from a benefit of 28.0%for the corresponding prior-year period.

 

A $0.7 million loss from discontinued operations related to anadjustment to the estimated net realizable value of remaining assets related toits community banking business discontinued in 1999.

 

**Comparison of Nine Months EndedSeptember 30, 2001 and Nine Months Ended September 30, 2000**

 

Consolidated revenue of $375.8 million for the nine months endedSeptember 30, 2001 decreased by $21.5 million or 5.4% compared to the ninemonths ended September 30, 2000. A decline of $27.0 million occurred in USS andwas offset partly by an increase in CNS of $9.5 million and an increase inOTHER of $3.4 million.  INTL decreased$7.3 million.  The USS decrease wasprincipally in its integrated business solutions and manufacturingbusinesses.  Lower revenues from itshardware and software sales due to general economic conditions, increasedpricing pressures, competition, and the impact of longer acceptance periods onhighly customized products accounted for a significant portion of the decrease.Additionally, increased competition in maintenance contributed to a loss ofbusiness in that area. The increased revenue from the CNS operations wasprimarily attributable to growth in warranty repair revenues in the OEM marketduring 2001.  The remainder of the CNSincrease was primarily due to on-going OEM partner relationships and tostrategic alliances comprised of its outsource and system integration partners.The INTL decrease resulted from a combination of the decrease due to theCompany’s targeted sales focus in the European traditional businesses, offsetpartially by increases in EDM solution sales in the Company’s subsidiary inJapan.  Factors contributing to theoverall decline in revenues included lower corporate customer spending forlarge systems solutions as a result of the weakening economy, mergers, on-goingcompetitive pressures, and a general decline in international currencies,especially the Euro and the Yen.

 

Consolidated gross profit of $66.8 million increased by $16.6 millionor 33.1% from the nine months ended September 30, 2000. Gross profit increased$12.8 million for CNS, $9.3 million for Other and $2.1 million for INTL. Grossprofit for USS decreased $6.1 million for the same period. The CNS increase wasprimarily attributable to an improved labor model, effectively capping costs onsome jobs. The USS gross profit decrease was principally a result of thedeclining sales in the current year period as well as additions to itsinventory reserve for obsolete inventory items.  The Company is in the process of transitioning its productoffering focus to proven deliverables and new targeted offerings, including EDMsolutions, its other archive solutions and hardware enhancements.Incorporating  more third-party productsinto the Company’s solutions rather than developing the products has enabledthe concentration of efforts and expenditures on the targeted items which,along with the Company’s ongoing cost containment efforts, allowed for costreductions to help offset revenue declines. The Company will continue to monitor the effects of the business climateand its strategic plans on the recoverability of its investment in inventoryand long-lived assets which may have a negative impact on gross profit in thefourth quarter and for the full year of 2001.

 

Operating expenses of $77.0 million decreased $6.0 million compared tothe nine months ended September 30, 2000. Operating expenses, by component,changed as follows: Selling, general, and administrative expenses decreased by$5.9 million or 8.6% due primarily to on-going efforts to realign the coststructure as a result of lower revenues. Product Development expenses andGoodwill amortization remained relatively flat for the comparative periods.

 

Interest expense increased to $28.0 million during the nine monthsended September 30, 2001 from $27.6 million during the nine months endedSeptember 30, 2000. The increase was due mainly to a $17.7 million increase indebt related to Sponsor Notes offset by a lower outstanding balance on the NewFacility and to declining interest rates.

 

Sundry income of $1.5 million increased $3.2 million during the ninemonths ended September 30, 2001 primarily due to the recognition of unrealizedgains related to its derivative contracts in the current year and to higherforeign currency losses resulting from exchange rate fluctuations in the prioryear.

 

Pre-tax income in foreign tax jurisdictions resulted in an income taxprovision of $2.9 million for the nine months ended September 30, 2001 comparedto a corresponding prior year period income tax benefit of $17.2 million on apre-tax loss of $61.6 million.  Thecurrent income tax provision related to income from the Company’s internationalsubsidiaries.  A valuation allowance wasprovided to reduce the Company’s deferred tax assets to an amount managementbelieves is more likely than not to be realized.  The increase had the effect of decreasing the Company’s effectivetax rate to approximately 8.1% from a benefit of 28.0% for the correspondingprior-year period. 

 

A $1.8 million extraordinary loss related to the early extinguishmentof debt.  A $0.7 million loss fromdiscontinued operations related to an adjustment to the estimated netrealizable value of remaining assets related to its community banking businessdiscontinued in 1999.

 

**Liquidity and Capital Resources**

 

The Company’s cash and cash equivalents totaled $13.5 million atSeptember 30, 2001, compared with $23.8 million at December 31, 2000.  This decrease was due primarily to a netrepayment of borrowings of $36.3 million and purchases of property, plant andequipment of $10.1 million, partially offset by cash flows provided byoperating activities of $34.8 million and proceeds of $5.3 million from theissuance of Series B Preferred Stock (“Series B Preferred”) to Welsh, Carson,Anderson and Stowe (“WCAS”).

 

The Series B Preferred has a cumulative annual cash dividend rate of25.0% of the then “Stated Value”. The Stated Value equals $150.00 per share,plus accumulated and unpaid dividends. Dividends are paid when declared by theCompany’s board of directors.  Eachshare of Series B Preferred is convertible into shares of Common Stock at anytime. The Company has the right to redeem the Series B Preferred at any time.In addition, upon the occurrence of certain events (for example, a merger or asale of substantially all of the assets of the Company, a division or a subsidiary),and upon the approval of a majority of the holders of the Series B Preferred,the Company would be required to redeem the shares. As of September 30, 2001,the stated value of the Series B Preferred was $169.50.

 

The $34.1 million of cash provided by operating activities compares to$11.4 million of cash used in operating activities for the nine months endedSeptember 30, 2000. The change for the nine months ended September 30, 2001when compared to the nine months ended September 30, 2000 was due primarily tothe following items: a decrease in loss before extraordinary item of $5.5million; an increase in interest paid in-kind of $6.1 million; a $17.8 milliongreater decrease in accounts receivable; a $17.4 million lower increase inother assets; a $10.6 million greater decrease in inventories and a $5.0million greater decrease in accrued expenses and other liabilities.

 

At September 30, 2001, the Company’s principal outstanding debtinstruments consisted of (i) a $100.0 million revolving credit facility (the“New Facility”) maturing May 30, 2006 (which is more fully described below),(ii)  $150.0 million of 7.5% SeniorNotes due 2008, and (iii) $193.8 million of Sponsor Notes due 2009.  As of September 30, 2001, the Company’sforeign subsidiaries had no outstanding borrowings.  The Company or its affiliates may from time to time purchase,redeem or pay deferred interest on some of its outstanding debt or equitysecurities.  The Company would only makethese payments in compliance with the covenants of its debt instruments.

 

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

 

General economic conditions, a recent significant weakening in demandfor the Company’s systems solutions products offered by USS and the potentialrequirements to obtain performance bonds or similar instruments for futureadvances from a significant customer could have a material impact on theCompany’s near-term liquidity.  TheCompany believes that it has sufficient financial resources available tosupport its anticipated requirements to fund operations and cash interestobligations over the next 12 months.

 

**NewCredit Facility**

 

The New Facility, prior to amendment on November 8, 2001, was a $100 millionrevolving credit facility provided by Heller Financial, Inc., which will matureMay 30, 2006. The interest rate on loans under the New Facility is, at theCompany’s option, either (i) 1.25% over prime or (ii) 2.75% over LIBOR.  At September 30, 2001, the Company’sweighted average rate on the New Facility was 6.5%.  Beginning August 1, 2002, the interest rate margins over primeand LIBOR may be increased or decreased by up to 0.5% based upon the Company’savailable borrowing capacity.  TheCompany had $21.4 million available on the New Facility at September 30,2001.  A commitment fee of 0.5% perannum on the unused portion of the New Facility is payable quarterly.

 

Efforts by Heller to syndicate the New Facility have beenunsuccessful.  As a result of the failedsyndication efforts of Heller and a desire of the Company to reduce commitmentfee expenses, on November 8, 2001, the Company and Heller entered into anamendment to the New Facility which reduced the committed amount to $60.0million while the sub-limit related to Letter of Credit availability wasincreased from $5.0 million to $20.0 million. The sub-limit increase will allow the Company greater flexibility goingforward to obtain performance bonds or similar instruments for future advancesfrom a significant customer.

 

The New Facility 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 New Facility will bedetermined by a borrowing base formula equal to a specified percentage of thevalue of the Company’s eligible accounts receivable, inventory and realestate.  The Company had an outstandingbalance on letters of credit totaling $0.7 million at September 30, 2001.  At September 30, 2001, the Company’savailable borrowing base was approximately $50.6 million, of which $25.6million was outstanding.

 

Under the New Facility, substantially all of the Company’s  domestic cash  receipts (including proceeds from accounts receivable and assetsales) must be applied to repay the outstanding loans, which may be reborrowedsubject to availability in accordance with the borrowing base formula.  Restricted cash at September 30, 2001included the accompanying balance sheet represents lockbox cash receipts to beapplied to the outstanding borrowings under the New Facility.  The New Facility contains variousrepresentations, warranties and covenants, including financial covenants as tomaximum capital expenditures, minimum fixed charge coverage ratio and minimumaverage borrowing availability.  AtSeptember 30, 2001, the Company was in compliance with all covenants under theNew Facility.

 

**Derivatives**

 

As of September 30, 2001, BancTec had three yen-denominated foreigncurrency forward contracts entered into in August 2000.  These instruments are recorded in theaccompanying balance sheet at fair value with changes in fair value recorded tothe Sundry line item in the accompanying income statement.  As of September 30, 2001, the Company had recognizedan inception-to-date unrealized gain of approximately $1.3 million on theseinstruments.

 

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

 

**Recently Issued AccountingPronouncements**

 

In June 2001, the Financial Accounting Standards Board approved theissuance of Statement of Financial Accounting Standards ("SFAS") No.141, Business Combinations, and SFAS No. 142, Goodwill and Other IntangibleAssets.  These statements establishaccounting and reporting standards for business combinations, goodwill andother intangibles. SFAS No. 141 requires all business combinations entered intosubsequent to June 30, 2001 to be accounted for using the purchase method ofaccounting.  SFAS No. 142 provides thatgoodwill and other intangible assets deemed to have indefinite lives will notbe amortized, but will be tested for impairment on an annual basis. Thesestandards are effective for the Company beginning January 1, 2002.  The Company has not yet quantified theimpact resulting from the adoption of these statements including the impact, ifany, of completion of the transitional or annual impairment tests. However, thehistorical impact of not amortizing goodwill would have been to reduce theCompany’s net loss by $0.8 million for each of the three months ended September30, 2001 and 2000 and by $2.4 million for each of the nine months endedSeptember 30, 2001 and 2000.

 

SFAS No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets, addresses accounting and reporting for the impairment or disposal oflong-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.SFAS No. 144 establishes a single accounting model for long-lived assets to bedisposed of by sale and expands on the guidance provided by SFAS No. 121 withrespect to cash flow estimations. SFAS No. 144 is effective for the Companybeginning January 1, 2002. The Company is evaluating SFAS No. 144 and has notyet determined the impact of adoption on its financial position and results ofoperations.

 

**FactorsAffecting the Company’s Business and Prospects**

 

From time to time, information provided by the Company or statementsmade by its employees may contain “forward–looking” information, as thatterm is defined in the Private Securities Litigation Reform Act of 1995 (the“Act”). The Company cautions investors that there can be no assurances thatactual results or business conditions will not differ materially from thoseprojected or suggested in such forward–looking statements as a result ofvarious factors. The Company undertakes no obligation to update or reviseforward-looking statements to reflect changes in assumptions, the occurrence ofunanticipated results or changes to future operating results over time. Thereare many factors that affect the Company’s business and the results of itsoperations. The following is a description of some of the important factorsthat may cause the actual results of the Company’s operations in future periodsto differ materially from those currently expected or desired.

 

***General EconomicConditions***

 

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

 

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

 

***Declining Financial Operating Results and Indebtedness***

 

As a result of increased leverage and reduced performance over the lastfew years, certain negative consequences of the Company’s indebtedness couldoccur; however, the Company has seen few consequences to date.  The Company’s future operating flexibilitymay be impacted.  In addition, theCompany may be more vulnerable to an increase in interest rates, a downturn inits operating performance or a decline in general economic conditions.

*** ***

***International Activities***

 

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

 

***Fluctuations in Operating Results***

 

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

 

***Technological Changes and Product Transitions***

 

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

 

***Product Development Activities***

 

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

 

 

**BANCTEC,INC.**

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOUSURES ABOUT MARKET RISK**

 

There were no material changes from the informationreported in the Company's Form 10-K.

 

**PART II**

**BANCTEC,INC.**

 

**Item 1.     Legal Proceedings**

 

NONE

 

**Item 2.     Changes in Securities and Use of Proceeds**

 

In February 2001, theCompany issued 35,520 shares of  $0.01par value Series B Preferred Stock to its primary owners, WCAS. In exchange,WCAS contributed an additional $5.3 million in cash to the Company. The SeriesB Preferred has a cumulative annual cash dividend rate of 25.0% of the then“Stated Value”. The Stated Value equals $150.00 per share, plus accumulated andunpaid dividends. Dividends are paid when declared by the Company’s Board ofDirectors. The aggregate liquidation preference/redemption value is $5.3million, plus accumulated and unpaid dividends. The Company has the right toredeem the Series B Preferred at any time. In addition, upon the occurrence ofcertain events (for example, a merger or a sale of substantially all of theassets of the Company, a division or a subsidiary), and upon the approval of amajority of the holders of the Series B Preferred, the Company would berequired to redeem the shares. Each share of Series B Preferred is convertibleinto shares of Common Stock at any time. The number of shares of Common Stockis determined by multiplying the number of shares being converted by $150.00and dividing the result by $8.325 per share. The conversion rate is subject tovarious adjustments.  The Company isrequired to keep available approximately 640,000 shares for issuance uponconversion of all outstanding shares of Series B Preferred. The Preferred Stockissuance was exempt pursuant to the exemption offered by Section 4(2) of theSecurities Act of 1933, as amended. The Company or its affiliates may from timeto time purchase, redeem or pay deferred interest on some of its outstandingdebt or equity securities.  The Companywould only make these payments in compliance with the covenants of its debtinstruments.

 

**Item 3.     Defaults Upon Senior Securities**

 

NONE

 

**Item 4.     Submission of Matters to a Vote of SecurityHolders**

 

NONE

 

**Item 5.     Other Information**

 

On May 31, 2001, theCompany replaced its existing bank debt facilities provided by a syndicate oflenders led by The Chase Manhattan Bank with a $100.0 million revolving creditfacility (the “New Facility”) provided by Heller Financial, Inc. (“Heller”),which will mature on May 30, 2006. Efforts by Heller to syndicate the New Facility have beenunsuccessful.  As a result of the failedsyndication efforts of Heller and a desire of the Company to reduce commitmentfee expenses, on November 8, 2001, the Company and Heller entered into anamendment to the New Facility which reduced the committed amount to $60.0million while the sub-limit related to Letter of Credit availability wasincreased from $5.0 million to $20.0 million. The sub-limit increase will allow the Company greater flexibility goingforward to obtain performance bonds or similar instruments for future advancesfrom a significant customer.

 

The New Facility issecured by substantially all the assets of the Company, subject to thelimitations on liens contained in the Company’s existing Senior Notes. Fundsavailability under the New Facility will be determined by a borrowing baseformula equal to a specified percentage of the value of the Company’s eligibleaccounts receivable, inventory and real estate.  The Company had an outstanding balance on letters of credittotaling $0.7 million at September 30, 2001. At September 30, 2001, the Company’s available borrowing base wasapproximately $50.6 million, of which $25.6 million was outstanding.

 

The interest rate onloans under the New Facility is equal to, at the Company’s option, either (i)1.25% over prime or (ii) 2.75% over LIBOR. At September 30, 2001, the Company's weighted average rate is 6.5%.  Beginning August 1, 2002, the interest ratemargins over prime and LIBOR may be increased or decreased by up to 0.5% basedupon the Company’s available borrowing capacity.  A commitment fee of 0.5% per annum on the unused portion of theNew Facility is payable quarterly.

 

Under the New Facility,substantially all of the Company’s domestic  cash receipts(including proceeds from accounts receivable and asset sales) must be appliedto repay the outstanding loans, which may be  reborrowed subject toavailability in accordance with the borrowing base formula.  Restricted cash at September 30, 2001included the accompanying balance sheet represents lockbox cash receipts to beapplied to the outstanding borrowings under the New Facility.

 

The New Facility containsvarious representations, warranties and covenants, including financialcovenants as to maximum capital expenditures, minimum fixed charge coverageratio and minimum average borrowing availability. The Company believes thisfacility along with cash from operations will be sufficient to cover the next12 months’ cash requirements.

 

EffectiveMay 7, 2001, John D. Staedke was elected Chairman of the Board of Directors ofthe Company and Craig D. Crisman was elected President and Chief ExecutiveOfficer.  Mr. Crisman was previouslyChief Executive Officer of Applied Magnetics Corporation.  Prior to joining Applied MagneticsCorporation, Mr. Crisman was Chief Executive Officer of several companies.

 

EffectiveMay 7, 2001, Brian R. Stone was elected Senior Vice President and ChiefFinancial Officer of the Company. Mr. Stone has previously served as ChiefExecutive Officer of Magnetic Data Technologies and Acting Chief FinancialOfficer of Applied Magnetics Corporation. Mr. Stone has also provided management consulting services to numerousU.S. companies.

 

**Item 6.     Exhibits and Reports on Form 8–K**

 

a)  Exhibits

 

3.1               Certificate ofIncorporation, incorporated by reference to Exhibit 3.1 to the Company’s AnnualReport on Form 10-K for the year ended December 31, 1999.

3.2               Amendment toCertificate of Incorporation, incorporated by reference to Exhibit 3.2 to theCompany’s Annual Report on Form 10-K for the year ended December 31, 1999.

3.3               By-Laws,incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form10-K for the year ended December 31, 1999.

4.1               Certificate ofDesignations, Preferences and Rights of Series A and B Preferred Stock,incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form10-K for the year ended December 31, 2000.

4.2               SecuritiesPurchase Agreement dated as of September 22, 2000 with respect to Series APreferred Stock, incorporated by reference to Exhibit 4.1 to the Company’sQuarterly Report on Form 10-Q for the period ended September 30, 2000.

4.3               SecuritiesPurchase Agreement dated as of February 27, 2001 with respect to Series BPreferred Stock, incorporated by reference to Exhibit 4.4 to the Company’sAnnual Report on Form 10-K for the year ended December 31, 2000.

4.4               Indenture datedMay 22, 1998 by and between the Company and The First National Bank of Chicago,incorporated by reference to Exhibit 4.2 to the Company’s RegistrationStatement on Form S-4 dated August 28, 1998.

10.1             Loan and SecurityAgreement, dated as of May 30, 2001, between Heller Financial, Inc. andBancTec, Inc., incorporated by reference to Exhibit 10.1 to the Company’sQuarterly Report on Form 10-Q for the period ended June 30, 2001. 

10.2             First Amendmentto Loan and Security Agreement, dated as of November 8, 2001, between HellerFinancial, Inc. and BancTec, Inc. * 

                    

----

*                  Filed Herewith 

 

b)  Reports onForm 8-K

 

The Company fileda Current Report on Form 8-K dated November 5, 2001, regarding the dismissal ofDeloitte & Touche LLP as its independent accountant and the engagement ofKPMG LLP as its independent accountant.

 

**SIGNATURES**

 

 

 

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

 

 

 
|   |                    | BANCTEC, INC.              |
|--------|-------------------------|----------------------------|
|   |                    |                       |
|   |                    |                       |
|   |                    |                       |
|   |                    | /s/ Brian R. Stone         |   |
|   |                    | Brian R. Stone             |
|   |                    | Senior Vice President  and |
|   |                    | Chief Financial Officer    |
|   |                    |                       |
| Dated: |  November 14, 2001 |                       |