**FORM 10-Q**

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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

 

 

**For the quarterly period ended September 30, 2002**

 

**OR**

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

 

**Commission File Number 0–9859**

 

**BANCTEC, INC.**

(Exact name of registrantas 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 been subjectto 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 12, 2002**                | ** ** |
|                                   |   |                                 |       |
| Common  Stock, $0.01 par value         |   | 17,003,838                           |       |   |
| Class  A Common Stock, $0.01 par value |   | 1,181,946                            |       |   |

 

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**BANCTEC, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** ****(In thousands, exceptshare data)**

 
|                                                                                                                                      |   | **September 30,** |    | **December 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|------------------|--------|
|                                                                                                                                      |   | **2002**          |    | **2001**         |   |
|                                                                                                                                      |   | **(Unaudited)**   |    |             |   |
| CURRENT ASSETS:                                                                                                                           |   |              |    |             |   |
| Cash and cash equivalents, including restricted cash of $2,167  at  September 30, 2002 and $2,050 at December 31, 2001                    |   | $                 | 33,417  |             | $      | 28,577 |   |
| Accounts receivable, less allowance for doubtful accounts of  $6,213  at September 30, 2002 and $7,675 at December 31, 2001               |   | 61,825            |    | 81,942           |   |
| Inventories                                                                                                                               |   | 40,891            |    | 51,712           |   |
| Prepaid expenses                                                                                                                          |   | 6,668             |    | 6,374            |   |
| Other current assets                                                                                                                      |   | 1,388             |    | 810              |   |
| Total current assets                                                                                                                      |   | 144,189           |    | 169,415          |   |
|                                                                                                                                      |   |              |    |             |   |
| PROPERTY, PLANT AND EQUIPMENT, net                                                                                                        |   | 62,988            |    | 76,213           |   |
|                                                                                                                                      |   |              |    |             |   |
| GOODWILL                                                                                                                                  |   | 48,336            |    | 48,281           |   |
| OTHER ASSETS                                                                                                                              |   | 20,472            |    | 21,140           |   |
| TOTAL ASSETS                                                                                                                              |   | $                 | 275,985 |             | $      | 315,049 |   |
|                                                                                                                                      |   |              |    |             |   |
| CURRENT LIABILITIES:                                                                                                                      |   |              |    |             |   |
| Revolving credit facilities                                                                                                               |   | $                 | 9,800   |             | $      | 28,838 |   |
| Trade accounts payable                                                                                                                    |   | 17,051            |    | 22,016           |   |
| Other accrued expenses and liabilities                                                                                                    |   | 47,696            |    | 62,147           |   |
| Deferred revenue                                                                                                                          |   | 57,934            |    | 61,218           |   |
| Income taxes                                                                                                                              |   | 2,666             |    | 4,166            |   |
| Total current liabilities                                                                                                                 |   | 135,147           |    | 178,385          |   |
| LONG-TERM DEBT, less current maturities                                                                                                   |   | 299,173           |    | 304,798          |   |
|                                                                                                                                      |   |              |    |             |   |
| OTHER LIABILITIES                                                                                                                         |   | 38,040            |    | 31,232           |   |
|                                                                                                                                      |   |              |    |             |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                             |   |              |    |             |   |
|                                                                                                                                      |   |              |    |             |   |
| MANDATORY REDEEMABLE PREFERRED STOCK-Series A                                                                                             |   | 14,343            |    | 13,151           |   |
|                                                                                                                                      |   |              |    |             |   |
| STOCKHOLDERS’ DEFICIT:                                                                                                               |   |              |    |             |   |
| Cumulative convertible preferred stock - authorized,  1,000,000  shares of $0.01 par value  at  September 30, 2002 and December 31, 2001: |   |              |    |             |   |
| Series B preferred stock — issued and outstanding,  35,520  shares at September 30, 2002 and December 31, 2001                       |   | 7,831             |    | 6,532            |   |
| Common stock authorized,   32,000,000 shares of $0.01 par value  at September  30, 2002 and December 31, 2001:                       |   |              |    |             |   |
| Common stock-issued and outstanding  17,003,838  shares at September 30, 2002 and December 31, 2001                                       |   | 170               |    | 170              |   |
| Class A common stock-issued and outstanding 1,181,946 shares  at  September 30, 2002 and December 31, 2001                                |   | 12                |    | 12               |   |
| Subscription stock warrants                                                                                                               |   | 3,726             |    | 3,726            |   |
| Additional paid-in capital                                                                                                                |   | 131,942           |    | 134,432          |   |
| Accumulated deficit                                                                                                                       |   | (345,180          | )       | (345,972         | )      |
| Accumulated other comprehensive loss                                                                                                      |   | (9,219            | )       | (11,417          | )      |
|                                                                                                                                      |   |              |    |             |   |
| Total stockholders’ deficit                                                                                                          |   | (210,718          | )       | (212,517         | )      |
|                                                                                                                                      |   |              |    |             |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                          |   | $                 | 275,985 |             | $      | 315,049 |   |
|                                                                                                                                      |   |              |    |             |   |

 

Seenotes to unaudited condensed consolidated financial statements.

 

2

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**BANCTEC, INC.**

# **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                                |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|---------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                                |   | **September 30,**      |   | **September 30,**     |   |
|                                                                |   | **2002**               |   | **2001**              |   | **2002** |   | **2001** |   |
|                                                                |   | **(In thousands)**     |   |
| REVENUE                                                             |   |                   |   |                  |   |   |   |   |   |
| Equipment and software                                              |   | $                      | 43,940 |                  | $      | 50,876 |   | $ | 142,254  |   | $ | 161,901 |   |
| Maintenance and other services                                      |   | 65,479                 |   | 67,910                |   | 197,277 |   | 203,296 |   |
|                                                                |   | 109,419                |   | 118,786               |   | 339,531 |   | 365,197 |   |
| COST OF SALES                                                       |   |                   |   |                  |   |   |   |   |   |
| Equipment and software                                              |   | 30,589                 |   | 46,534                |   | 106,751 |   | 133,197 |   |
| Maintenance and other services                                      |   | 46,411                 |   | 53,433                |   | 145,652 |   | 169,324 |   |
|                                                                |   | 77,000                 |   | 99,967                |   | 252,403 |   | 302,521 |   |
| Gross profit                                                        |   | 32,419                 |   | 18,819                |   | 87,128 |   | 62,676 |   |
|                                                                |   |                   |   |                  |   |   |   |   |   |
| OPERATING EXPENSES                                                  |   |                   |   |                  |   |   |   |   |   |
| Product development                                                 |   | 4,316                  |   | 3,955                 |   | 11,770 |   | 12,145 |   |
| Selling, general and administrative                                 |   | 17,760                 |   | 21,589                |   | 53,097 |   | 62,468 |   |
| Goodwill amortization                                               |   | —                 |   | 803                   |   | — |   | 2,411 |   |
|                                                                |   | 22,076                 |   | 26,347                |   | 64,867 |   | 77,024 |   |
| Income (loss) from operations                                       |   | 10,343                 |   | (7,528                | )      | 22,261 |   | (14,348 | ) |
|                                                                |   |                   |   |                  |   |   |   |   |   |
| OTHER INCOME (EXPENSE):                                             |   |                   |   |                  |   |   |   |   |   |
| Interest income                                                     |   | 79                     |   | 64                    |   | 179 |   | 775 |   |
| Interest expense                                                    |   | (7,396                 | )      | (8,762                | )      | (22,636 | ) | (27,654 | ) |
| Sundry, net                                                         |   | 479                    |   | 715                   |   | 4,534 |   | (331 | ) |
|                                                                |   | (6,838                 | )      | (7,983                | )      | (17,923 | ) | (27,210 | ) |
|                                                                |   |                   |   |                  |   |   |   |   |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME   TAXES |   | 3,505                  |   | (15,511               | )      | 4,338 |   | (41,558 | ) |
| INCOME TAX EXPENSE                                                  |   | 1,426                  |   | 1,021                 |   | 3,546 |   | 2,912 |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONS                            |   | 2,079                  |   | (16,532               | )      | 792 |   | (44,470 | ) |
| LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX                       |   | —                 |   | (685                  | )      | — |   | (685 | ) |
| NET INCOME (LOSS)                                                   |   | $                      | 2,079  |                  | $      | (17,217 | ) | $ | 792 |   | $ | (45,155 | ) |
|                                                                |   |                   |   |                  |   |   |   |   |   |
| PREFERRED STOCK DIVIDENDS  AND ACCRETION  OF DISCOUNT               |   | (872                   | )      | (747                  | )      | (2,491 | ) | (1,938 | ) |
| NET INCOME (LOSS) APPLICABLE TO COMMON STOCK                        |   | $                      | 1,207  |                  | $      | (17,964 | ) | $ | (1,699 | ) | $ | (47,093 | ) |
|                                                                |   |                   |   |                  |   |   |   |   |   |

 

Seenotes to unaudited condensed consolidated financial statements.

 

3

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**BANCTEC, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                                                          |   | **Nine Months Ended September 30,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                          |   | **2002**                            |   | **2001** |   |
|                                                                                                          |   | **(In thousands)**                  |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                          |   |                                |   |   |   |
| Net income (loss) from continuing operations                                                                  |   | $                                   | 792    |   | $ | (45,155 | ) |
| Adjustments to reconcile net loss from continuing operation  to  cash flows provided by operating activities: |   |                                |   |   |   |
| Depreciation and amortization                                                                                 |   | 19,274                              |   | 27,629 |   |
| Provision for doubtful accounts, net of recoveries                                                            |   | (2,100                              | )      | 1,760 |   |
| Interest paid in-kind                                                                                         |   | —                              |   | 14,278 |   |
| Loss on disposition of property, plant and equipment                                                          |   | 778                                 |   | 836 |   |
| (Gain) loss on extinguishment of long-term debt                                                               |   | (3,387                              | )      | 1,840 |   |
| Other non-cash items                                                                                          |   | 291                                 |   | 422 |   |
| Changes in operating assets and liabilities                                                                   |   |                                |   |   |   |
| Decrease in accounts receivable                                                                               |   | 22,217                              |   | 27,094 |   |
| Decrease in inventories                                                                                       |   | 10,712                              |   | 7,838 |   |
| Increase in other assets                                                                                      |   | 3                                   |   | (5,065 | ) |
| Decrease in trade accounts payable                                                                            |   | (4,965                              | )      | (3,032 | ) |
| Increase (decrease) in deferred revenue                                                                       |   | (3,284                              | )      | 11,568 |   |
| Decrease in other accrued expenses and liabilities                                                            |   | (9,143                              | )      | (5,908 | ) |
| Cash flows provided by operating activities                                                                   |   | 31,188                              |   | 34,105 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                          |   |                                |   |   |   |
| Purchases of property, plant and equipment                                                                    |   | (6,220                              | )      | (10,121 | ) |
| Cash flows used in investing activities                                                                       |   | (6,220                              | )      | (10,121 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                          |   |                                |   |   |   |
| Proceeds from long-term borrowings                                                                            |   | —                              |   | 8,000 |   |
| Payments of long-term borrowings                                                                              |   | (2,238                              | )      | (70,000 | ) |
| Proceeds from (payments of) short-term borrowings, net                                                        |   | (19,055                             | )      | 25,722 |   |
| Debt issuance costs                                                                                           |   | (206                                | )      | (2,547 | ) |
| Net proceeds issuance of preferred stock                                                                      |   | —                              |   | 5,328 |   |
| Cash flows used in financing activities                                                                       |   | (21,499                             | )      | (33,497 | ) |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                       |   | 1,371                               |   | (805 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                          |   | 4,840                               |   | (10,318 | ) |
| CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD                                                                 |   | 28,577                              |   | 23,841 |   |
| CASH AND CASH EQUIVALENTS-END OF PERIOD                                                                       |   | $                                   | 33,417 |   | $ | 13,523 |   |
|                                                                                                          |   |                                |   |   |   |
| SUPPLEMENTAL DISCLOSURE INFORMATION:                                                                          |   |                                |   |   |   |
| Cash paid during the period for:                                                                              |   |                                |   |   |   |
| Interest                                                                                                      |   | $                                   | 19,075 |   | $ | 9,371 |   |
| Taxes                                                                                                         |   | $                                   | 5,422  |   | $ | 6,030 |   |
|                                                                                                          |   |                                |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:                                                               |   |                                |   |   |   |
| DEFERRAL OF SPONSOR NOTES QUARTERLY INTEREST PAYMENTS                                                         |   | $                                   | — |   | $ | 17,735 |   |

 

Seenotes to unaudited condensed consolidated financial statements.

 

4

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**BANCTEC, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The accompanyingunaudited condensed consolidatedbalance sheet at September 30, 2002, and the unaudited condensed consolidated statements of operations and cash flows forthe interim periods ended September 30, 2002 and 2001, should be read inconjunction with BancTec, Inc. and subsidiaries (“BancTec” or the “Company”)consolidated financial statements and notes thereto in the most recent AnnualReport on Form 10–K filed with the Securities and ExchangeCommission.  As disclosed in the notesto that report, the condensed consolidatedstatements of operations and cash flows for the interim periods ended September30, 2001 have been restated. In the opinion of management, the accompanying condensed consolidated financialstatements contain all material adjustments, consisting principally of normalrecurring adjustments, necessary for a fair presentation of the financialposition and results of operations of the Company. All significant intercompanybalances and transactions have been eliminated in consolidation.

 

 

**2. **** INVENTORIES**

 

Inventoryconsists of the following: 

 
|             |   | **September 30,**  |   | **December 31,** |   |
|------------------|--------|--------------------|--------|------------------|--------|
|             |   | **2002**           |   | **2001**         |   |
|             |   | **(In thousands)** |   |
|             |   |               |   |             |   |
| Raw materials    |   | $                  | 4,809  |             | $      | 9,053 |   |
| Work-in-progress |   | 19,602             |   | 24,793           |   |
| Finished goods   |   | 16,480             |   | 17,866           |   |
|             |   | $                  | 40,891 |             | $      | 51,712 |   |
|             |   |               |   |             |   |

 

 

**3.  PROPERTY, PLANT AND EQUIPMENT**

 

Property,plant and equipment consist of the following:

 
|                                      |   | **September 30,**  |   | **December 31,** |   |
|-------------------------------------------|--------|--------------------|--------|------------------|--------|
|                                      |   | **2002**           |   | **2001**         |   |
|                                      |   | **(In thousands)** |   |
| Land                                      |   | $                  | 2,860  |             | $      | 2,860 |   |
| Field support spare parts                 |   | 70,503             |   | 78,055           |   |
| Systems and software                      |   | 64,491             |   | 64,294           |   |
| Machinery and equipment                   |   | 52,609             |   | 53,261           |   |
| Furniture, fixtures and other             |   | 24,711             |   | 24,108           |   |
| Buildings                                 |   | 28,822             |   | 28,358           |   |
|                                      |   | 243,996            |   | 250,936          |   |
| Accumulated depreciation and amortization |   | (181,008           | )      | (174,723         | )      |
|                                      |   |               |   |             |   |
| Property, plant and equipment, net        |   | $                  | 62,988 |             | $      | 76,213 |   |

 

 

5

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**4.  OTHER ACCRUED EXPENSES AND LIABILITIES**

 

Otheraccrued expenses and liabilities consist of the following:

 
|                                   |   | **September 30,**  |   | **December 31,** |   |
|----------------------------------------|--------|--------------------|--------|------------------|--------|
|                                   |   | **2002**           |   | **2001**         |   |
|                                   |   | **(In thousands)** |   |
| Salaries, wages and other compensation |   | $                  | 12,693 |             | $      | 17,602 |   |
| Accrued taxes, other than income taxes |   | 6,168              |   | 8,446            |   |
| Advances from customers                |   | 617                |   | 1,859            |   |
| Accrued interest payable               |   | 2,691              |   | 5,939            |   |
| Accrued invoices and costs             |   | 4,942              |   | 5,534            |   |
| Accrued contract completion costs      |   | 3,245              |   | 2,599            |   |
| Other                                  |   | 17,340             |   | 20,168           |   |
|                                   |   |               |   |             |   |
| Total                                  |   | $                  | 47,696 |             | $      | 62,147 |   |

 

 

 

 

**5.  DEBT AND OTHER OBLIGATIONS**

 

Debtand other obligations consist of the following: 

 
|                                            |   | **September 30,**  |    | **December 31,** |   |
|-------------------------------------------------|--------|--------------------|---------|------------------|--------|
|                                            |   | **2002**           |    | **2001**         |   |
|                                            |   | **(in thousands)** |    |
|                                            |   |               |    |             |   |
| 7.5% Senior Notes, due 2008                     |   | $                  | 105,325 |             | $      | 110,950 |   |
| Revolver                                        |   | 9,800              |    | 25,040           |   |
| Subordinated Sponsor Notes, unsecured, due 2009 |   | 193,848            |    | 193,848          |   |
| Other                                           |   | —             |    | 3,798            |   |
|                                            |   | 308,973            |    | 333,636          |   |
| Less: Current portion                           |   | (9,800             | )       | (28,838          | )      |
|                                            |   | $                  | 299,173 |             | $      | 304,798 |   |

 

Revolving Credit Facility. The Company has a $60.0 million revolving credit facility (the“Revolver”) provided by Heller Financial, Inc. (“Heller”), which will mature onMay 30, 2006. The Revolver is secured by substantially all the assets of theCompany, subject to the limitations on liens contained in the Company’sexisting Senior Notes. Funds availability under the Revolver is determined by aborrowing base formula equal to a specified percentage of the value of theCompany’s eligible accounts receivable, inventory and real estate.  At September 30, 2002, the Company had $9.8million outstanding under the Revolver and an outstanding balance on letters ofcredit totaling $15.2 million.  Thebalance remaining under the Revolver that the Company can draw was $6.4 millionat September 30, 2002.  A commitment feeof 0.5% per annum on the unused portion of the Revolver is payable quarterly.

 

The interest rate on loans under the Revolver is, at the Company’soption, either (i) 1.25% over prime or (ii) 2.75% over LIBOR. Beginning August1, 2002, the interest rate margins over prime and LIBOR may be increased by0.25% increments up to a total rate increase of 0.5% when borrowingavailability falls below certain thresholds or decreased by 0.25% increments upto a total rate decrease of 0.5% when borrowing availability exceeds certainthresholds. At September 30, 2002, the Company’s weighted average rate on theRevolver was 5.5%.

 

Under the Revolver, substantially all of the Company’s domestic cashreceipts (including proceeds from accounts receivable and asset sales) must beapplied to repay the outstanding loans, which may be re-borrowed subject toavailability in accordance with the borrowing base formula. The Revolvercontains restrictions on the use of cash for dividend payments or non-scheduledprincipal payments on certain indebtedness. Restricted cash at September 30, 2002 of $2.2 million represents lockboxcash receipts to be applied to the outstanding borrowings under the Revolver.

 

The Revolver contains various representations, warranties andcovenants, including financial covenants as to maximum capital expenditures,minimum fixed charge coverage ratio and minimum average borrowing availability.At September 30, 2002, the Company was in compliance with all financialcovenants under the Revolver.

 

6

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Senior Notes.  Interest onthe Senior Notes is fixed at 7.5% and is due and payable in semi-annualinstallments. Payments began December 1, 1998. The Notes contain covenantsplacing limitations on the Company’s ability to permit subsidiaries to incurcertain debts, incur certain loans, and engage in certain sale and leasebacktransactions. During the third quarter of2002, the Company repurchased Senior Notes with a face amount of $1.0 million.The Company wrote off a proportionate share of deferred financing fees,resulting in a gain of approximately $0.6 million, which was reported as sundry(other) income in the condensed consolidated statements of operationsfor the interim periods ended September 30, 2002. As of August 14, 2002, the Company was not in compliance with the Senior Notes’reporting requirements for the quarters ended March 31, 2002 and June30, 2002. The Company was in a 60-day cureperiod, and delivery of the financial statements in the Company’s Form 10-Qfilings remedied this non- compliance condition for the quarters endedMarch 31, 2002 and June 30, 2002.  The estimated fair value of theSenior Notes as of September 30, 2002, is approximately $41 million based on anaverage value of recently completed market trades. The number of actual tradesis limited, therefore the result may vary if a widely traded market environmentexisted.

 

Subordinated Unsecured Sponsor Notes. The Company’s $160.0 million in SponsorNotes are issued in U.S. dollars, with interest at 10.0% due and payablequarterly. The payments began September 30, 1999. However, as provided underthe agreement, the Sponsor Notes’ holder, WCAS, elected to defer quarterlyinterest payments of $4.0 million for each of the September 2000 throughSeptember 2001 quarterly periods. Such election required a deferred financingfee of 30.0% of each of the interest payments being deferred.  The Company accounts for the additionalfinancing fees as a change in the effective interest rate of the debt. AtSeptember 30, 2002, the Company had $33.8 million outstanding in WCAS notesrepresenting deferred interest. WCAS may, at its election, defer each futurequarterly payment under similar terms. WCAS did not elect to defer the quarterly payments due since September2001. The estimated fair value of the Sponsor Notes and deferred interest andfees as of September 30, 2002, is approximately $80 million assuming a similaryield to maturity to that which is implied for the Senior Notes based on recentmarket trades.

 

The Company had no outstanding balances onforeign credit agreements at September 30, 2002.

 

 

**6.             GOODWILL AND INTANGIBLE ASSETS**

 

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

 

SFAS No. 142 requires atwo-step process for testing impairment. First, the fair value of eachreporting unit is compared to its carrying value to determine whether anindication of impairment exists. If impairment is indicated, then under thesecond step the fair value of the reporting unit’s goodwill is determined byallocating the unit’s fair value to its assets and liabilities (including anyunrecognized intangible assets) as if the reporting unit had been acquired in abusiness combination. The amount of impairment for goodwill is measured as theexcess of its carrying value over its fair value. During the six months endedJune 30, 2002, the Company completed its analysis of the first step of theimpairment test of goodwill measured as of January 1, 2002. Upon completion ofthe second step of the analysis, the Company anticipates recording as acumulative effect of a change in accounting principle, a charge of between  $9 and $21 million, after applicable incometaxes, to write off a portion of the carrying value of goodwill.  Thischarge will be recorded before December 31, 2002, and will not affect theCompany’s operations.

 

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

 

 

7

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|                                           |   |               |         | **Computer**      |   |              |   |            |   |      |   |
|------------------------------------------------|--------|--------------------|--------------|-------------------|--------|-------------------|--------|-----------------|--------|-----------|--------|
|                                           |   | **US**             |         | **& Network** |   |              |   |            |   |      |   |
|                                           |   | **Solutions**      |         | **Services**      |   | **International** |   | **Unallocated** |   | **Total** |   |
|                                           |   | **(In thousands)** |         |
| Balance at December 31, 2001                   |   | $                  | 40,211  |              | $      | —            |   | $               | 2,229  |      | $      | 5,841 |   | $ | 48,281 |   |
| Changes due to foreign  Currency  translation  |   | —             |         | —            |   | 127               |   | —          |   | 127       |   |
| Allocation of previously unallocated  Goodwill |   | 1,025              |         | —            |   | 4,816             |   | (5,841          | )      | —    |   |
|                                           |   |               |         |              |   |              |   |            |   |      |   |
| Balance at September 30, 2002                  |   | $                  | 41,236  |              | $      | —            |   | $               | 7,172  |      | $      | — |   | $ | 48,408 |   |

 

 

The following is a summary comparison of net income (loss) for thethree and nine months ended September 30, 2002 and 2001, as adjusted to removethe amortization of goodwill and intangible assets with indefinite useful livesfor the three and nine months ended September 30, 2001:

 

|                             |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|----------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                             |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                             |   | **(In  thousands)**                   |   | **(In  thousands)**                  |   |
| Net income  (loss) - as reported |   | $                                     | 2,079  |                                 | $      | (17,217 | ) | $ | 792 |   | $ | (45,155 | ) |
| Goodwill  amortization           |   | —                                |   | 803                                  |   | — |   | 2,411 |   |
| Net income  (loss) - as adjusted |   | $                                     | 2,079  |                                 | $      | (16,414 | ) | $ | 792 |   | $ | (42,744 | ) |

 

 

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

 

 

**7.             COMPREHENSIVE INCOME (LOSS)**

 

The components of comprehensive income (loss) were as follows:

 
|                                      |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|-------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                      |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                      |   | **(In  thousands)**                   |   | **(In  thousands)**                  |   |
| Net income  (loss)                        |   | $                                     | 2,079  |                                 | $      | (17,217 | ) | $ | 792 |   | $ | (45,155 | ) |
| Foreign currency  translation adjustments |   | (255                                  | )      | 896                                  |   | 2,198 |   | (1,174 | ) |
| Total  comprehensive income (loss)        |   | $                                     | 1,824  |                                 | $      | (16,321 | ) | $ | 2,990 |   | $ | (46,329 | ) |

 

**8.**             **BUSINESSSEGMENT DATA**

 

TheCompany segments its operations based on geographical areas  (U.S. Solutions (“USS”) and International Solutions(“INTL”)) and product lines (Computer and Network Services (“CNS”)). INTLoffers similar products as USS and consists primarily of operations throughoutthe world excluding the United States. The Company recently realigned itsreporting structure and began reporting under the new alignment in the firstquarter of 2002. Under this new structure, USS includes the operations of AdvancedEnterprise Solutions (“AES”) and INTLreporting includes both the U.S. and international operations of Plexus® products (“Plexus”). The operations of AES and Plexus are not material to USS or toINTL operations. Under the new structure, the composition of CNS remainsunchanged.  Prior-period information hasbeen reclassified to reflect the new alignment.

 

8

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|                                          |   |               |         | **Computer**      |   |              |   |           |   |      |   |
|-----------------------------------------------|--------|--------------------|--------------|-------------------|--------|-------------------|--------|----------------|--------|-----------|--------|
|                                          |   | **US**             |         | **& Network** |   |              |   |           |   |      |   |
|                                          |   | **Solutions**      |         | **Services**      |   | **International** |   | **Corp/Elims** |   | **Total** |   |
|                                          |   | **(In thousands)** |         |
| For the three months ended September 30, 2002 |   |               |         |              |   |              |   |           |   |      |   |
|                                          |   |               |         |              |   |              |   |           |   |      |   |
| Revenue from external customers               |   | $                  | 34,652  |              | $      | 36,073            |   | $              | 38,694 |      | $      | — |   | $ | 109,419 |   |
| Intersegment revenues                         |   | 3,340              |         | —            |   | 789               |   | (4,129         | )      | —    |   |
| Segment gross profit (loss)                   |   | 10,411             |         | 10,859            |   | 10,442            |   | 707            |   | 32,419    |   |
| Segment operating income (loss)               |   | 1,968              |         | 7,982             |   | 1,220             |   | (827           | )      | 10,343    |   |
| Segment identifiable assets                   |   | 100,648            |         | 36,060            |   | 84,622            |   | 54,655         |   | 275,985   |   |
| Capital expenditures                          |   | 724                |         | 363               |   | 676               |   | 36             |   | 1,799     |   |
|                                          |   |               |         |              |   |              |   |           |   |      |   |
| For the three months ended September 30, 2001 |   |               |         |              |   |              |   |           |   |      |   |
|                                          |   |               |         |              |   |              |   |           |   |      |   |
| Revenue from external customers               |   | $                  | 39,853  |              | $      | 36,592            |   | $              | 42,341 |      | $      | — |   | $ | 118,786 |   |
| Intersegment revenues                         |   | 7,314              |         | —            |   | 1,417             |   | (8,731         | )      | —    |   |
| Segment gross profit (loss)                   |   | (9                 | )            | 6,563             |   | 12,850            |   | (585           | )      | 18,819    |   |
| Segment operating income (loss)               |   | (9,363             | )            | 1,640             |   | 2,467             |   | (2,272         | )      | (7,528    | )      |
| Segment identifiable assets                   |   | 144,758            |         | 41,710            |   | 112,147           |   | 44,118         |   | 342,733   |   |
| Capital expenditures                          |   | 1,129              |         | 362               |   | 1,471             |   | 214            |   | 3,176     |   |
|                                               |        |                    |              |                   |        |                   |        |                |        |           |        |  |  |  |  |  |  |

 

 
|                                         |   |               |          | **Computer**      |   |              |   |           |    |      |   |
|----------------------------------------------|--------|--------------------|---------------|-------------------|--------|-------------------|--------|----------------|---------|-----------|--------|
|                                         |   | **US**             |          | **& Network** |   |              |   |           |    |      |   |
|                                         |   | **Solutions**      |          | **Services**      |   | **International** |   | **Corp/Elims** |    | **Total** |   |
|                                         |   | **(In thousands)** |          |
| For the nine months ended September 30, 2002 |   |               |          |              |   |              |   |           |    |      |   |
|                                         |   |               |          |              |   |              |   |           |    |      |   |
| Revenue from external customers              |   | $                  | 110,130  |              | $      | 109,000           |   | $              | 120,401 |      | $      | — |   | $ | 339,531 |   |
| Intersegment revenues                        |   | 9,434              |          | —            |   | 3,667             |   | (13,101        | )       | —    |   |
| Segment gross profit (loss)                  |   | 24,923             |          | 28,073            |   | 33,094            |   | 1,038          |    | 87,128    |   |
| Segment operating income (loss)              |   | 152                |          | 19,717            |   | 6,080             |   | (3,688         | )       | 22,261    |   |
| Segment identifiable assets                  |   | 100,648            |          | 36,060            |   | 84,622            |   | 54,655         |    | 275,985   |   |
| Capital expenditures                         |   | 2,713              |          | 951               |   | 2,301             |   | 255            |    | 6,220     |   |
|                                         |   |               |          |              |   |              |   |           |    |      |   |
| For the nine months ended September 30, 2001 |   |               |          |              |   |              |   |           |    |      |   |
|                                         |   |               |          |              |   |              |   |           |    |      |   |
| Revenue from external customers              |   | $                  | 121,779  |              | $      | 109,572           |   | $              | 133,846 |      | $      | — |   | $ | 365,197 |   |
| Intersegment revenues                        |   | 23,761             |          | —            |   | 4,144             |   | (27,905        | )       | —    |   |
| Segment gross profit (loss)                  |   | 11,657             |          | 14,326            |   | 37,288            |   | (595           | )       | 62,676    |   |
| Segment operating income (loss)              |   | (16,714            | )             | (1,345            | )      | 5,866             |   | (2,155         | )       | (14,348   | )      |
| Segment identifiable assets                  |   | 144,758            |          | 41,710            |   | 112,147           |   | 44,118         |    | 342,733   |   |
| Capital expenditures                         |   | 3,316              |          | 1,332             |   | 4,098             |   | 1,375          |    | 10,121    |   |

 

 

**9.  PREFERRED STOCK**

 

**REDEEMABLE PREFERRED STOCK**

 

The Company allocated the proceeds from itsSeries A preferred stock issuance based upon the relative fair value of thepreferred stock and warrants issued. The related discount is being accretedsuch that the carrying amount of the mandatory redeemable preferred stock willequal the mandatory redemption amount at September 22, 2008. For the ninemonths ended September30, 2002, accretion of the related discountand accrued but unpaid dividends totaled $1.2 million, increasing the carryingamount to $14.39 million. As of September 30, 2002, the stated value of the Series A preferredstock, including accumulated but unpaid dividends, was $172.34 per share.

 

**SERIES BPREFERRED STOCK**

 

For the nine months ended September 30, 2002, the Company accrued additional unpaid dividends for its Series Bpreferred stock totaling $1.3 million, increasing the carrying amount to $7.8million.  As of September 30, 2002, the stated value of the Series Bpreferred stock, including accumulated but unpaid dividends, was $220.47 pershare.

 

 

9

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**10.  RECENT ACCOUNTING PRONOUNCEMENTS**

 

In August 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.” SFAS No. 143 requires entities to record the fairvalue of a liability for an asset retirement obligation in the period in whichit is incurred. The Company will adopt SFAS No. 143 in fiscal year 2003. The Companyhas not determined the impact of the provisions of SFAS No. 143 on itsfinancial condition or results of operations.

 

In May 2002, the FASB issued SFASNo. 145 , “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFASNo. 13, and Technical Corrections” . Among other things, SFAS 145rescinds various pronouncements regarding early extinguishment of debt andallows extraordinary accounting treatment for early extinguishment only whenthe provisions of Accounting Principles Board Opinion No. 30, “Reportingthe Results of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransaction”, are met. The Company adopted the provisions of SFAS 145regarding early extinguishment of debt during the second quarter of 2002.During the nine months ended September 30, 2002, the Company repurchased SeniorNotes with a face amount of $5.6 million. The Company wrote off a proportionateshare of deferred financing fees, resulting in a gain of approximately $3.4million, which was reported as sundry (other) income in the condensed consolidated statements of operations forthe nine months ended September 30, 2002.

 

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

 

 

**11.  SUBSEQUENT EVENTS**

 

Since September 30, 2002, the Company repurchasedSenior Notes with a total face amount of $2.45 million. The Company wrote off aproportionate share of deferred financing fees, resulting in a gain ofapproximately $1.5 million, which will be reflected in sundry (other) income asa result of the early adoption of SFAS No. 145.

 

 

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND**

**RESULTS OF OPERATIONS.**

 

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

 

**FORWARD-LOOKING STATEMENTS**

 

*This Quarterly Report on Form 10-Q, including FactorsAffecting the Company’s Business and Prospects set forth in Management’sDiscussion and Analysis of Financial Condition and Results of Operations andQuantitative and Qualitative Disclosure About Market Risk, containsforward-looking statements as that term is defined in the Private SecuritiesLitigation Reform Act of 1995 (the “PSLRA”) that involve risks anduncertainties, as well as assumptions that, if they never materialize or proveincorrect, could cause the results of BancTec, Inc. and its consolidatedsubsidiaries (the “Company”) to differ materially from those expressed orimplied by such forward-looking statements. All statements other thanstatements of historical fact are statements that could be deemedforward-looking statements, including any projections of earnings, revenues, orother financial items; any statements of the plans, strategies, and objectivesof management for future operations; any statements concerning proposed newproducts, services, or developments; any statements regarding future economicconditions or performance; statements of belief and any statement ofassumptions underlying any of the foregoing. The risks, uncertainties andassumptions referred to above include the ability of the Company to retain andmotivate key employees; the timely development, production and acceptance ofproducts and services and their feature sets; the challenge of managing assetlevels, including inventory; the flow of products into third-party distributionchannels; the difficulty of keeping expense growth at modest levels whileincreasing revenues; and other risks that are described from time to time inthe Company’s Securities and Exchange Commission reports, including but notlimited to the items discussed in “Factors Affecting the Company’s Business andProspects” set forth in this report, and items described in the Company’s otherfilings with the Securities and Exchange Commission. The Company undertakes noobligation to update or revise forward-looking statements to reflect changes inassumptions, the occurrence of unanticipated results or changes to future operatingresults over time.*

 

The Company believes several factors continued to create a challengingand competitive sales and cost containment environment during the nine monthsended September 30, 2002.  These factorsinclude: general economic conditions and reduced corporate customer technologyspending; ongoing competitive pressures; an ongoing planned change in revenuemix 

 

 

10

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within the Company’s U.S. Solutions (“USS”) and International Solutions(“INTL”) segments; and a highly leveraged financial position.  The change in revenue mix is partially aresult of trends in payment processing, including truncation, which impactsdomestic and international markets.  TheCompany has undertaken a process of evaluating the recovery of all itsinvestments in inventory and long-lived assets.  This evaluation has resulted in write-downs and impairments ofinventory and other long-lived assets in response to current business conditionsand other decisions reached during the planning process.

 

Expected economic and business conditions for the remainder of 2002indicate a cautious outlook regarding the Company’s near-term revenue andearnings growth prospects.  Most of theCompany’s product offerings represent a significant capital expenditure for itscustomers.  The general economicconditions have recently caused a significant weakening in demand forsystems-solutions products offered by USS and INTL. The Company has concentratedits emphasis on cost reductions and on existing offerings. Product developmentefforts are currently focused on payment, check and document processingtechnologies, in addition to investments in Electronic Document Management(“EDM”) vertical solutions and an investment in archiving solutions for allmarkets, as well as hardware enhancements. By incorporating more third-partyproducts into the Company’s solutions rather than developing the products, theCompany can more easily target its efforts and expenditures to these coreproducts and solutions.

 

**RESULTS OF OPERATIONS**

 

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

 

Consolidated revenue of $109.4 million for thethree months ended September 30, 2002 decreased by $9.4 million or 7.9% fromthe comparable prior-year period. Decreases in USS of $5.2 million and INTL of $3.6 million resultedprimarily from the overall weakness in hardware sales.  The decrease in INTL also resulted from theimpact of longer acceptance  periods onhighly customized products in the prior-year period.  These products, scheduled for acceptance in 2000, achievedacceptance in 2001 along with those products scheduled for acceptance in2001.  A decrease in CNS of $0.6 millionresulted from pricing decreases resulting from competitive pressure.  In addition, USS experienced declines inmaintenance revenue due to Company installed products reaching the end of theiruseful lives and from increased competition. The Company expects these trends to continue in the foreseeable future.Factors impacting future revenue include lower corporate-customer spending forlarge systems solutions as a result of the continuing weakness in the economy,customer and prospective customer mergers, on-going competitive pressures, andfluctuations in international currencies, especially the euro and the yen.

 

Consolidated gross profit of $32.4 millionincreased by $13.6 million or 72.3% from the comparable prior-year period.Increases in USS of $10.4 million and CNS of $4.3 million were partially offsetby a decrease in INTL of $2.4 million. The USS increase was principally related to lower costs resulting fromthe Company’s cost containment efforts. CNS’ gross profit increase was primarily attributable to an improvedlabor model, with additional benefit provided through a reduction in supportcosts, including streamlining the number of districts and the expandedautomation of its call center operations.The INTL decrease resulted primarily from a decrease in the Company’s Europeantraditional businesses. The margin decline in the Company’s subsidiaries inEurope was due primarily to lower revenues without a corresponding percentagedecline in fixed expenses, as well as fluctuations of the euro, yen and otherinternational currencies. The Company is in the process of transitioningits product offering focus to proven deliverables and new targeted offerings,including EDM solutions, its other archive solutions and hardwareenhancements.  Incorporating morethird-party products into the Company’s solutions rather than developing theproducts has enabled the concentration of efforts and expenditures on thetargeted items which, along with the Company’s ongoing cost containmentefforts, allowed for cost reductions to help offset revenue declines.  The Company will continue to monitor theeffects of the business climate and its strategic plans on the recoverabilityof its investment in inventory and long-lived assets, all of which may continueto have a negative impact on gross profit in the future.

 

Operating expenses of $22.1 million decreased$4.3 million compared to the comparable prior-year period. Operating expenses,by component, changed as follows: Product development expenses increased by$0.3 million or 9.1% primarily due to concentration on developing targeted newapplications for the Company’s product lines and selective expansion ofexisting products. Selling, general, and administrative expenses decreased by$3.8 million or 17.7%due primarily to on-going efforts to realign the cost structure.  Goodwill amortization ceased in 2002 as aresult of the implementation of SFAS 142. Goodwill amortization for the threemonths ended September 30, 2001 was$0.8 million.

 

Interest expense for the three months ended September 30, 2002 decreasedto $7.4 million from $8.8 million in the comparable prior-year period. Thedecrease was due mainly to the repurchase of a portion of the Senior Notes, alower outstanding balance on the revolvingcredit facilities and declining interest rates, partially offset by a$6.1 million increase in debt related to Sponsor Notes subsequent to June 30, 2001.

 

Sundry items resulted in a net income of $0.5 million during the threemonths ended September 30, 2002 ascompared to a net income of $0.7 million during the comparable prior-year period. This increase is primarily due to a gain of approximately $0.5 millionfrom the Company’s repurchase of Senior Notes during the current year periodpartially offset by foreign exchange losses of $0.1million, compared to foreignexchange gains of $1.1million in the prior-year period.

 

11

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Pre-tax income in foreign tax jurisdictions resulted in an income taxprovision of $1.4 million for the three months ended September 30, 2002 compared to a corresponding prior-year periodincome tax provision of $1.0 million. The income tax provisions for both periods related to income from theCompany’s international subsidiaries and a valuation allowance provided toreduce the Company’s deferred tax assets to an amount management believes ismore likely than not to be realized. The Company’s effective tax rate was approximately 40.7% for the threemonths ended September 30, 2002 ascompared to (6.6%) for the corresponding prior-year period.

 

**Comparison of Nine Months Ended September 30, 2002 and NineMonths Ended September 30, 2001**

 

Consolidated revenue of $339.5 million for thenine months ended September 30, 2002 decreased by $25.7 million or 7.0% fromthe comparable prior-year period. The CNS decrease of $0.6 million resultedfrom pricing decreases resulting from competitive pressure.  The INTL decrease of $13.4 million resultedprimarily from the impact of longer acceptance periods on highly customizedproducts in the prior-year period. These products, scheduled for acceptance in 2000, achieved acceptance in2001 along with those products scheduled for acceptance in 2001.  The USS decrease of $11.6 million wasprincipally related to the impact of continued economic weakness, and declinesin maintenance revenue due to Company installed products reaching the end oftheir useful lives and from increased competition.  The Company expects these trends to continue in the foreseeablefuture. Factors impacting future revenue include lower corporate-customerspending for large systems solutions as a result of the continuing weakness inthe economy, customer and prospective customer mergers, on-going competitivepressures, and fluctuations in international currencies, especially the euroand the yen.

 

Consolidated gross profit of $87.1 millionincreased by $24.5 million or 39.0% from the comparable prior-year period. Theincrease occurred primarily in CNS of $13.7 million and USS of $13.3 million,offset partially by a decrease in INTL of $4.2 million. CNS’ gross profit increasewas primarilyattributable to an improved labor model, with additional benefit providedthrough a reduction in support costs, including streamlining the number ofdistricts and the expanded automation of its call center operations. The INTL decrease occurred primarily from adecrease in the Company’s European traditional businesses. The margin declinein the Company’s subsidiaries in Europe was due primarily to lower revenueswithout a corresponding percentage decline in fixed expenses, as well as fluctuationsof the euro, yen and other international currencies.  USS gross profit increased despite decreased revenues due tosignificantly lower cost of sales resulting from the Company’s cost containmentefforts. 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 products intothe Company’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, all of which may continue to have a negative impact ongross profit in the future.

 

Operating expenses of $64.9 million decreased$12.2 million compared to the comparable prior-year period. Operating expenses,by component, changed as follows: Product development expenses decreased by$0.4 million or 3.1% primarily due to concentration on developing targeted newapplications for the Company’s product lines. Selling, general, and administrative expenses decreased by $9.4 millionor 15.0% dueprimarily to on-going efforts to realign the cost structure.  Goodwill amortization ceased in 2002 as aresult of the implementation of SFAS 142. Goodwill amortization for the ninemonths ended September 30, 2001 was$2.4 million.

 

Interest expense for the nine months ended September 30, 2002 decreasedto $22.6 million from $27.7 million in the comparable prior-year period. Thedecrease was due mainly to the repurchase of a portion of the Senior Notes, alower outstanding balance on the revolvingcredit facilities and declining interest rates, partially offset by a$6.1 million increase in debt related to Sponsor Notes subsequent to June 30, 2001.

 

Sundry items resulted in a net income of $4.5 million during the ninemonths ended September 30, 2002 ascompared to a net expense of $0.3 million during the comparable prior-year period. This increase is primarily due to foreign-exchange gains of $1.1 millionand a gain of approximately $3.4 million from the Company’s repurchase ofSenior Notes during the current year period, compared to foreign exchange gainsof $1.0 million and a loss of $1.8 million as a result of the extinguishment ofa previous credit facility in the prior-year period.

 

Pre-tax income in foreign tax jurisdictions resulted in an income taxprovision of $3.5 million for the nine months ended September 30, 2002 compared to a corresponding prior-year periodincome tax provision of $2.9 million. The income tax provisions for both periods related to income from theCompany’s international subsidiaries and a valuation allowance provided toreduce the Company’s deferred tax assets to an amount management believes ismore likely than not to be realized. The Company’s effective tax rate was approximately 81.7% for the ninemonths ended September 30, 2002 ascompared to (7.0%) for the corresponding prior-year period.

 

12

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**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s working capital requirements are generally provided bycash and cash equivalents, funds available under the Company’s revolving creditagreement, as discussed below, which matures May 30, 2006, and by internallygenerated funds from cash flows from operations. Funds availability under therevolving credit agreement is determined by a borrowing-base formula equal to aspecified percentage of the value of the Company’s eligible accountsreceivable, inventory and real estate. General economic conditions, the current weakness in demand for theCompany’s systems solutions products offered by USS and the requirement toobtain performance bonds or similar instruments for future advances from asignificant customer could have a material impact on the Company’s futureliquidity.

 

The Company’s cash and cash equivalents totaled$33.4 million at September30, 2002, compared with $28.6 million atDecember 31, 2001. Working capital increased $18.0 million during the ninemonths ended September 30, 2002 to$9.0 million compared to a working capital deficit of $9.0 million at December31, 2001.  The change in working capitalincluded a current liability decrease of $19.0 million from the revolvingcredit agreement and current asset decreasesin accounts receivable of $20.1 million and inventory of $10.8 million.

 

During the nine months ended September 30, 2002, the Company relied primarily on cash flows generated fromoperating activities and short-term borrowings under its revolvingcredit agreement to fund operations. At September30, 2002 the Company had available $10.4million of borrowing capacity under the Revolver, of which the Companycan draw $6.4 million.

 

Operating activities provided $31.2 million and$34.1 million of cash in the nine months ended September 30, 2002and 2001, respectively, a decrease of $2.9 million.  Although netincome from continuing operations increased $45.9 million, $31.9 million ofthis improvement resulted from lower depreciation and amortization, interestpaid in-kind, and other non-cash transactions. In addition, cash generated by the conversion of operating assets andliabilities was $17.0 million less than in the prior-year period.

 

Investing activities used net cash of $6.2million and $10.1 million in the nine months ended September 30, 2002and 2001, respectively. Both uses of cash related to purchases of property,plant and equipment.

 

Financing activities used $21.5 million and $33.5million of net cash in the nine months ended September 30, 2002and 2001, respectively. The $12.0 million change related primarily to thereduction of the Company’s debt, offset by the issuance of preferred stock of$5.3 million in the nine months ended September 30, 2001.

 

At September 30, 2002, the Company’s principal outstanding debtinstruments consisted of (i) $9.8 million outstanding under the revolvingcredit facility maturing May 30, 2006 (which is more fully described below),(ii)  $105.3 million of 7.5% SeniorNotes due 2008, and (iii) $193.8 million of Sponsor Notes due 2009. The Companyor its affiliates may from time to time purchase, redeem or pay deferredinterest on some of its outstanding debt or equity securities.  The Company would only make these paymentsin 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.

 

**RevolvingCredit Facility.**The Company has a $60 million revolving credit facility(the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which willmature on May 30, 2006.  The Revolver is secured by substantiallyall the assets of the Company, subject to the limitations on liens contained inthe Company’s existing Senior Notes. Funds availability under the Revolver is determined by a borrowing-baseformula equal to a specified percentage of the value of the Company’s eligibleaccounts receivable, inventory and real estate.  At September 30, 2002, the Company had $9.8 million outstandingunder the Revolver and an outstanding balance on letters of credit totaling$15.2 million.  The balance remainingunder the Revolver that the Company can draw was $6.4 million at September 30,2002.  A commitment fee of 0.5% perannum on the unused portion of the Revolver is payable quarterly.

 

The interest rate on loans under the Revolver is, at the Company’soption, either (i) 1.25% over prime or (ii) 2.75% over LIBOR.  Beginning August 1, 2002, the interest ratemargins over prime and LIBOR may be increased by 0.25% increments up to a totalrate increase of 0.5% when borrowing availability falls below certainthresholds or decreased by 0.25% increments up to a total rate decrease of 0.5%when available borrowing capacity exceeds certain thresholds. At September 30, 2002,the Company’s weighted average rate on the Revolver was 5.5%.

 

Under the Revolver, substantially all of the Company’s domestic cashreceipts (including proceeds from accounts receivable and asset sales) must beapplied to repay the outstanding loans, which may be re-borrowed subject toavailability in accordance with the borrowing-base formula. The Revolvercontains restrictions on the use of cash for dividend payments or 

 

13

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non-scheduled principal payments on certain indebtedness.  Restricted cash at September 30, 2002 of$2.2 million represents lockbox cash receipts to be applied to the outstandingborrowings under the Revolver.  TheRevolver contains various representations, warranties and covenants, includingfinancial covenants as to maximum capital expenditures, minimum fixed-chargecoverage ratio and minimum average borrowing availability.  At September 30, 2002, the Company was incompliance with all financial covenants under the Revolver. The Company was notin compliance with the reporting requirements of the Revolver for the yearended December 31, 2001.  On July 30, 2002, the Company and Heller amendedthe Revolver, which reduced the Company’s fixed-charge coverage ratio covenantduring quarters 1, 2 and 3 of 2002, and reduced the minimum undrawnavailability requirement from $10.0 million to $4.0 million.  The amendment also waived the reportingrequirement violation upon submission of the audited financial statements inthe Company’s Form 10-K, which was filed on August 9, 2002

 

**Senior Notes**. In August 1998, the Companyexchanged the public Senior Notes (the “Senior Notes”) for the notes sold in aMay 1998 Rule 144A private offering. Interest is fixed at 7.5% and is due andpayable in semi-annual installments, which began December 1, 1998. The SeniorNotes contain covenants placing limitations on the Company’s ability to permitsubsidiaries to incur certain debts, incur certain loans, and engage in certainsale and leaseback transactions. During the nine months ended September 30,2002, the Company repurchased Senior Notes with a face amount of $5.6 million.The Company wrote off a proportionate share of deferred financing fees,resulting in a gain of approximately $3.4 million, which was reported as sundry(other) income in the condensed consolidated statements of operations for the ninemonths ended September 30, 2002.

 

**SubordinatedUnsecured Sponsor Notes**. The Company’s $160.0 million in Sponsor Notes bear interest at 10.0%,due and payable quarterly. The payments began September 30, 1999. However, asprovided under the agreement, the Sponsor Notes’ holder, WCAS, elected to deferquarterly interest payments of $4.0 million for each of the June 2000 throughSeptember 2001 quarterly periods. Such election required a deferred financingfee of 30.0% of each of the interest payments being deferred.  The Company accounts for the additionalfinancing fees as a change in the effective interest rate of the debt. AtSeptember 30, 2002, the Company had $33.8 million outstanding indeferred-interest notes. WCAS may, at its election, defer each future quarterlypayment under similar terms. WCAS did not elect to defer the  quarterly payments since September 2001 andcurrently does not intend to elect deferral of the quarterly payments in thenear future.

 

**Preferred Stock — Series A**.****The Company allocated theproceeds from its Series A preferred stock issuance based upon the relativefair value of the preferred stock and warrants issued. The related discount is beingaccreted such that the carrying amount of the mandatory redeemable preferredstock will equal the mandatory redemption amount at September 22, 2008. For thenine months ended September30, 2002, accretion of the related discountand accrued but unpaid dividends totaled $1.2 million, increasing the carryingamount to $14.3 million. As of September 30, 2002, the stated value of the Series A preferred stock, including accumulatedbut unpaid dividends, was $172.34 per share.

 

**Preferred Stock — Series B**.****For nine months ended September 30, 2002, the Company accrued additional unpaid dividends for its Series Bpreferred stock totaling $1.3 million, increasing the carrying amount to $7.8million.  As of September 30, 2002, the stated value of the Series B preferredstock, including accumulated but unpaid dividends, was $220.47 per share.

 

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

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

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

 

Under SFAS No. 142, theCompany is required to perform transitional impairment tests for its goodwilland intangible assets with indefinite useful lives as of the date ofadoption.  SFAS No. 142 requires atwo-step process for testing impairment. First, the fair value of eachreporting unit is compared to its carrying value to determine whether anindication of impairment exists. If impairment is indicated, then under thesecond step the fair value of the reporting unit’s goodwill is determined byallocating the unit’s fair value to its assets and liabilities (including anyunrecognized intangible assets) as if the reporting unit had been acquired in abusiness combination. The amount of impairment for goodwill is measured as theexcess of its carrying value over its fair value. During the six months endedJune 30, 2002, the Company completed its analysis of the first step of theimpairment test of goodwill measured as of January 1, 2002.

 

Upon completion of thesecond step of the analysis, the Company anticipates recording as a cumulative effectof a change in accounting principle, a non-cash charge of between  $9 and $21 million, after applicable incometaxes, to write off a portion of the carrying value of goodwill.  Thisnon-cash charge will be recorded before December 31, 2002, and will not affectthe Company’s operations.

 

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

 

InMay 2002, the FASB issued SFAS No. 145 , “Rescission of SFAS Nos. 4,44, and 64, Amendment of SFAS No. 13, and Technical Corrections” . Amongother things, SFAS 145 rescinds various pronouncements regarding earlyextinguishment of debt and allows extraordinary accounting treatment for earlyextinguishment only when the provisions of Accounting Principles Board OpinionNo. 30, “Reporting the Results of Operations—Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transaction”, are met. The Company adoptedthe provisions SFAS 145 regarding early extinguishment of debt during thesecond quarter of 2002. During the nine months ended September 30, 2002, theCompany repurchased Senior Notes with a face amount of $5.6 million. TheCompany wrote off a proportionate share of deferred financing fees, resultingin a gain of approximately $3.4 million, which was reported as sundry (other)income in the condensed consolidatedstatements of operations for the nine months ended September 30, 2002.

 

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

 

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

 

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

 

***General Economic Conditions***

 

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

 

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

 

***Dependence on Suppliers***

 

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

 

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

 

***Declining Financial Operating Results andIndebtedness***

 

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

 

15

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***International Activities***

 

The Company’s international operations are a significant part of theCompany’s business.  The success andprofitability of international operations are subject to numerous risks anduncertainties, such as economic and labor conditions, political instability,tax laws (including U.S. taxes on foreign subsidiaries) and changes in thevalue of the U.S. dollar versus the local currency in which products aresold.  Any unfavorable change in one 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,competition and other factors. The Company’s business is sensitive to thespending patterns of its customers, which in turn are subject to prevailingeconomic conditions and other factors beyond the Company’s control. Anyunfavorable change in one or more of these factors could have a materialadverse effect on the Company.

 

***Technological Changes and ProductTransitions***

 

The Company’s industry is characterized by continuing improvement intechnology, which results in the frequent introduction of new products, shortproduct-life cycles and continual improvement in product price/performancecharacteristics.  The Company mustincorporate these new technologies into its products and solutions in order toremain competitive. There can be no assurance that the Company will be able tocontinue to manage technological transitions. A failure on the part of the Company to effectively manage these transitionsof its product lines to new technologies on a timely basis could have amaterial 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.

 

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKETRISK.**

 

The Company utilizes a revolving credit facilityto support working capital needs. The interest rate on loans under the Revolver is, atthe Company’s option, either (i) 1.25% over prime or (ii) 2.75% over LIBOR. Assuming the level of outstanding variable rateborrowings at September 30, 2002 of $9.8 million, a one hundred basis pointchange in the bank’s prime or LIBOR rate would impact net interest expense by$98,000 over a twelve-month period.

 

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

During the audit of theCompany’s 2000 financial statements, the Company’s certifying accountant,Deloitte & Touche, LLP (D&T) noted what D&T considered to bematerial weaknesses in internal control design and in the operation of internalcontrols.  See Current Report on Form8-K filed November 5, 2001 for additional information regarding this item andthe subsequent change in the Company’s independent accountant.  The Company’s current independentaccountant, KPMG, LLP, (KPMG) also informally noted certain internal controlweaknesses as a result of the 2001 audit, some of which are the same asweaknesses noted by D&T in their report.

 

The Company has addressedcertain of the individual internal control weaknesses noted by D&T andKPMG, but correction of some control factors has yet to be completed.  In addition, as a result of Exchange ActRule 13a-14, the Company has begun to put in place procedures addressing theadequacy of disclosure controls, including obtaining certifications from eachmember of management involved in the preparation and review of this Form10Q.  The Company is continuing itsefforts to correct the internal control weaknesses noted by D&T andKPMG.  Additional steps that have beenimplemented to address internal control weaknesses include policies coveringloss contracts, inventory reserves, allowance for doubtful accounts, revenuerecognition, and project costing. Although the Company believes that it has implemented adequate controlsand procedures for the preparation of this report, the actions taken by theCompany to correct certain of the previously identified weaknesses will not befully tested by the Company’s independent accountants until the next annualaudit.

 

Within the 90 days priorto the filing date of this report, the Chief Executive Officer and the ChiefFinancial Officer of the Company, with the participation of the Company’smanagement, began an evaluation of the effectiveness of the Company’sdisclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon the evaluation completed to date,and the new procedures put in place, the Chief Executive Officer and the ChiefFinancial Officer believe that the Company’s disclosure controls and proceduresare effective in making known to them material information relating to theCompany (including its consolidated subsidiaries) required to be included inthis report.  The Company will continueto evaluate disclosure controls on an ongoing basis and plans to complete theinitial evaluation by the end of 2002.

 

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

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls, known to the Chief Executive Officer orthe Chief Financial Officer, subsequent to the date of the evaluation.

 

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 **PART II**

**BANCTEC, INC.**

 

**ITEM 5.   Other Information**

 

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

 

 

**ITEM 6. Exhibits and Reports on Form8-K**

 

 

(a)          Exhibits:

 

99.1— Certificate ofChief Executive Officer *

 

99.2— Certificate ofChief Financial Officer *

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* Filed herewith

 

 

(b)         Reports on Form 8-K:

 

None.

 

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**SIGNATURES**

 

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

 

**BancTec, Inc.**

 
| By     |  /s/ Brian  R. Stone         |
|--------|-----------------------------------|
|   | *Brian R. Stone*                  |
|   | *Senior Vice President and Chief* |
|   | *Financial Officer*               |
|   |                              |
|   |
|   |
|   |
|        |                                   |  |

 

 

Dated:November 14, 2002

 

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**Certifications**

 

 

 

I,Craig D. Crisman, certify that:

 

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

 

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

 

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

4.         BancTec, Inc.’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrantand have: 
|   | a) designed such disclosure controls and  procedures to ensure that material information relating to the registrant,  including its consolidated subsidiaries, is made known to us by others within  those entities, particularly during the period in which this quarterly report  is being prepared; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                        |
|   | b) evaluated the effectiveness of the  registrant’s disclosure controls and procedures as of a date within  90 days prior to the filing date of this quarterly report (the  “Evaluation Date”); and                                                                                |
|   |                                                                                                                                                                                                                                                                                                        |
|   | c) presented in this quarterly report our  conclusions about the effectiveness of the disclosure controls and procedures  based on our evaluation as of the Evaluation Date;                                                                                                                           |

5.         BancTec, Inc.’s other certifying officers and I havedisclosed, based on our most recent evaluation, to BancTec, Inc.’s auditors andthe audit committee of BancTec, Inc.’s board of directors: 
|   | a) all significant deficiencies in the design  or operation of internal controls which could adversely affect the  registrant’s ability to record, process, summarize and report financial data  and have identified for the registrant’s auditors any material weaknesses in  internal controls; and |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                 |
|   | b) any fraud, whether or not material, that  involves management or other employees who have a significant role in the  registrant’s internal controls; and                                                                                                                                                |

6.          BancTec, Inc.’s other certifying officersand I have indicated in this quarterly report whether there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:   November 14, 2002 | /s/  Craig D. Crisman                    |   |
|--------------------------------|------------------------------------------|--------|
|                           | *Craig D. Crisman*                       |   |
|                           | *President and Chief Executive  Officer* |   |
|                                |                                          |        |  |

 

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**Certifications**

 

 

 

I,Brian R. Stone, certify that:

 

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

 

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

 

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

4.         BancTec, Inc.’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrantand have: 
|   | a) designed such disclosure controls and  procedures to ensure that material information relating to the registrant,  including its consolidated subsidiaries, is made known to us by others within  those entities, particularly during the period in which this quarterly report  is being prepared; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                        |
|   | b) evaluated the effectiveness of the  registrant’s disclosure controls and procedures as of a date within  90 days prior to the filing date of this quarterly report (the  “Evaluation Date”); and                                                                                |
|   |                                                                                                                                                                                                                                                                                                        |
|   | c) presented in this quarterly report our  conclusions about the effectiveness of the disclosure controls and procedures  based on our evaluation as of the Evaluation Date;                                                                                                                           |

5.         BancTec, Inc.’s other certifying officers and I havedisclosed, based on our most recent evaluation, to BancTec, Inc.’s auditors andthe audit committee of BancTec, Inc.’s board of directors: 
|   | a) all significant deficiencies in the design  or operation of internal controls which could adversely affect the  registrant’s ability to record, process, summarize and report financial data  and have identified for the registrant’s auditors any material weaknesses in  internal controls; and |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                 |
|   | b) any fraud, whether or not material, that  involves management or other employees who have a significant role in the  registrant’s internal controls; and                                                                                                                                                |

6.          BancTec, Inc.’s other certifyingofficers and I have indicated in this quarterly report whether there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:   November 14, 2002 | /s/  Brian R. Stone                                  |   |
|--------------------------------|------------------------------------------------------|--------|
|                           | *Brian R. Stone*                                     |   |
|                           | *Senior Vice President and Chief  Financial Officer* |   |

 

 

 

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