<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] 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 registrant as specified in its charter)
DELAWARE 75-1559633
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4851 LBJ Freeway, Dallas, TX 75244
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 341-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class July 22, 1999
----- -------------
Common Stock, $.01 par value 19,474,663
<PAGE>
BANCTEC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
---------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 16,621 $ 25,313
Short-term investments 371 837
Accounts receivable, less allowance for
doubtful accounts of $8,967 at June 30, 1999
and $10,758 at December 31, 1998 177,750 178,851
Inventories 79,279 68,535
Current deferred tax asset 27,912 27,912
Other 11,334 9,511
---------- ------------
TOTAL CURRENT ASSETS 313,267 310,959
PROPERTY, PLANT AND EQUIPMENT - NET 126,825 125,038
GOODWILL, less accumulated amortization of
$32,481 at June 30, 1999 and $30,205 at
December 31, 1998 78,496 81,075
OTHER ASSETS 15,673 13,133
---------- ------------
TOTAL ASSETS $ 534,261 $ 530,205
========== ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facilities $ - $ 5,024
Current maturities of long-term debt 750 878
Trade accounts payable 26,136 24,451
Other accrued expenses and liabilities 68,419 77,600
Deferred revenue 37,701 31,560
Income taxes 9,518 8,068
---------- ------------
TOTAL CURRENT LIABILITIES 142,524 147,581
LONG-TERM DEBT, less current maturities 150,000 150,352
OTHER LIABILITIES 12,096 12,191
STOCKHOLDERS' EQUITY:
Preferred stock-authorized, 1,000 shares
of $0.01 par value:
Series A - no shares issued and outstanding - -
Series B - no shares issued and outstanding - -
Common stock-authorized, 45,000,000 shares
of $0.01 par value:
issued and outstanding 19,473,000 at June 30,
1999 and 19,373,000 at December 31, 1998 195 194
Additional paid-in capital 171,280 170,318
Retained earnings 65,272 54,932
Foreign currency translation adjustments (5,610) (3,736)
Unearned compensation (1,496) (1,627)
---------- ------------
TOTAL STOCKHOLDERS' EQUITY 229,641 220,081
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 534,261 $ 530,205
========== ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Equipment and software $ 83,925 $ 74,630 $ 162,409 $ 146,101
Maintenance and other services 64,798 71,323 135,139 142,234
----------- ----------- ----------- -----------
148,723 145,953 297,548 288,335
COST OF SALES:
Equipment and software 52,744 50,936 107,603 98,850
Maintenance and other services 57,869 54,992 113,239 107,497
----------- ----------- ----------- -----------
110,613 105,928 220,842 206,347
----------- ----------- ----------- -----------
GROSS PROFIT 38,110 40,025 76,706 81,988
OPERATING EXPENSES:
Product development 4,503 5,174 8,749 9,288
Selling, general & administrative 20,897 20,278 43,505 40,051
Goodwill amortization 1,258 1,558 2,566 2,912
----------- ----------- ----------- -----------
26,658 27,010 54,820 52,251
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 11,452 13,015 21,886 29,737
OTHER INCOME (EXPENSE):
Interest income 86 735 256 908
Interest expense (3,039) (1,329) (6,006) (3,056)
Sundry-net 264 (587) 275 (38)
----------- ----------- ----------- -----------
(2,689) (1,181) (5,475) (2,186)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 8,763 11,834 16,411 27,551
INCOME TAX PROVISION 3,242 4,257 6,072 9,919
----------- ----------- ----------- -----------
NET INCOME $ 5,521 $ 7,577 $ 10,339 $ 17,632
=========== =========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.29 $ 0.36 $ 0.53 $ 0.83
Diluted $ 0.28 $ 0.36 $ 0.53 $ 0.82
COMMON SHARES AND COMMON
SHARE EQUIVALENTS USED IN
COMPUTING PER SHARE AMOUNTS:
Basic 19,363 21,073 19,356 21,315
Diluted 19,604 21,148 19,531 21,476
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,339 $ 17,632
Adjustments to reconcile net income to
cash flows provided by operating activities:
Depreciation and amortization 23,085 21,503
Disposition of property, plant and
equipment 929 205
Other non-cash items 630 (1,700)
(Increase) decrease in accounts
receivable 1,101 (1,196)
Increase in inventories (12,100) (101)
Increase in other assets (1,988) (3,957)
Increase (decrease) in trade accounts
payable 1,685 (2,437)
Increase in deferred revenue 6,141 5,715
Decrease in other accrued expenses
and liabilities (7,826) (7,947)
----------- -----------
CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES 21,996 27,717
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (22,660) (28,472)
Purchase of businesses acquired net of cash - (2,041)
Investment in unconsolidated subsidiary (2,375) -
----------- -----------
CASH FLOWS USED IN INVESTING
ACTIVITIES (25,035) (30,513)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of current portion of long-term
debt and capital lease obligations (481) (11,455)
Net proceeds from long-term borrowings - 139,442
Net payments on short-term borrowings (4,767) (79,750)
Repurchase of common stock - (24,491)
Proceeds from sales and issuances of common stock 955 3,502
----------- -----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES (4,293) 27,248
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,360) 1,029
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (8,692) 25,481
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,313 21,686
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,621 $ 47,167
============== ==============
SUPPLEMENTAL DISCLOSURE INFORMATION:
Cash paid during the period for:
Interest $ 5,896 $ 2,218
Income taxes $ 5,422 $ 5,749
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 1999 and 1998
(Unaudited)
1. Basis of presentation and other accounting information
The accompanying unaudited balance sheet at June 30, 1999, and the consolidated
statements of operations and cash flows for the interim periods ended June 30,
1999 and 1998 should be read in conjunction with BancTec, Inc. ("BancTec" or
the "Company") consolidated financial statements and notes thereto in the most
recent Annual Report on Form 10-K filed with the Securities and Exchange
Commission. In the opinion of management, the accompanying consolidated
financial statements contain all material adjustments, consisting principally of
normal recurring adjustments, necessary for a fair presentation of the results
of operations.
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing net income by the weighted average
number of common shares outstanding, adjusted to reflect the assumed exercise of
all outstanding stock options which are dilutive.
The Company's revenue recognition policies for its principal sources of revenue
are:
Equipment and software sales--Revenue from sales of established products is
recognized upon shipment of completed product in conformity with certain
provisions of AICPA Statement of Position No. 97-2, "Software Revenue
Recognition." Revenue for new products is generally recognized at the time
of acceptance by the customer. Contracts with lengthy software development
periods are accounted for in conformity with Accounting Research Bulletin
No. 45, "Long-Term Construction-Type Contracts." Under such contracts,
the excess of engineering costs and other related miscellaneous equipment
costs over advance billings on such contracts are recorded in other current
assets. All customer contract costs, including equipment and software, are
charged to cost of sales at the time the related revenue is recognized.
Maintenance--Revenue from maintenance contracts is recognized ratably over
the term of the contract.
Leasing--Revenue from operating leases of equipment is recognized ratably
over the terms of the related contracts. Revenue from sales type leases is
recorded as the present value of the minimum lease payments (net of
executory costs), computed at the interest rate implicit in the lease in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
13, "Accounting for Leases."
Data Centers--The Company owns and operates six service bureau facilities
that provide check and data processing services. The Company enters into
multi-year contracts with customers to provide such services. Revenue from
the related contracts is recognized as services are provided. See Note 9
related to the pending sale of the Company's data centers.
5
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Six Months Ended June 30, 1999 and 1998
(Unaudited)
1. Basis of presentation and other accounting information-(continued)
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and for Hedging Activities" which
requires companies to value derivative financial instruments, including those
used for hedging foreign currency exposures, at current market value with the
impact of any change in the market value being charged against earnings in each
period. SFAS No. 133 will be effective for and adopted by the Company in the
first quarter of the year ending December 31, 2001. The Company anticipates that
SFAS No. 133 will not have a material impact on its consolidated financial
statements.
Certain amounts have been reclassified to conform with the current year
presentation.
2. Inventories consisted of the following:
June 30, December 31,
1999 1998
---- ----
(In thousands)
Raw materials $ 26,609 $ 28,557
Work-in-progress 4,471 3,830
Finished goods 48,199 36,148
------------ ------------
$ 79,279 $ 68,535
============ ============
In conjunction with the Company's reorganization announced in the fourth quarter
of 1998, BancTec wrote off $13.4 million of inventory determined to be in excess
of future usage needs, and therefore, not realizable. (See Note 8 --
Reorganization and Other Charges).
The excess inventory was moved to a separate facility and the sale of the
salvageable inventory for approximately $0.2 million scrap value was completed
in July 1999.
6
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Six Months Ended June 30, 1999 and 1998
(Unaudited)
3. Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Land $ 2,860 $ 3,030
Field support spare parts 106,619 102,262
Systems and software 63,393 58,094
Machinery and equipment 55,685 55,431
Furniture, fixtures and other 26,623 23,967
Building 29,558 28,848
------------ ------------
284,738 271,632
Accumulated depreciation (157,913) (146,594)
------------ ------------
$ 126,825 $ 125,038
============ ============
</TABLE>
4. Other accrued expenses and liabilities consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Salaries, wages and other compensation $ 15,877 $ 20,332
Advances from customers 10,849 9,493
Accrued taxes, other than income taxes 4,826 5,918
Accrued invoices and costs 9,294 8,545
Accrued reorganization costs 2,001 3,879
Other 25,572 29,433
------------ ------------
$ 68,419 $ 77,600
============ ============
</TABLE>
5. Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 5,521,000 $ 7,577,000 $ 10,339,000 $ 17,632,000
============== ============== ============== ==============
Weighted average number of shares
outstanding during the period 19,363,340 21,072,832 19,356,242 21,314,655
Effect of diluted securities
attributable to stock options
and unearned compensation from
restricted stock awards 240,938 74,951 174,943 161,689
-------------- -------------- -------------- --------------
Weighted average number of shares
outstanding, as adjusted 19,604,278 21,147,783 19,531,185 21,476,344
============== ============== ============== ==============
Diluted income per common and common
equivalent share $ 0.28 $ 0.36 $ 0.53 $ 0.82
============== ============== ============== ==============
</TABLE>
7
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Six Months Ended June 30, 1999 and 1998
(Unaudited)
5. Earnings Per Share-(continued)
At June 30, 1999 and 1998, 1,352,895 stock options and 689,604 stock options,
respectively, were not considered to be common stock equivalents in the
computation of diluted weighted average shares outstanding because they were
antidilutive. Exercise prices on such antidilutive stock options ranged from
$15.38 to $25.81 per share and $24.56 to $25.81 per share, respectively, at June
30, 1999 and 1998.
6. Comprehensive Income
For the Company, comprehensive income includes net income and foreign currency
translation adjustments. The components of comprehensive income for the quarter
and six months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ----- ---- ----
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net income $ 5,521 $ 7,577 $ 10,339 $ 17,632
Foreign currency translation
adjustments (459) 738 (1,874) 911
----------- ----------- ----------- -----------
Total comprehensive income $ 5,062 $ 8,315 $ 8,465 $ 18,543
=========== =========== =========== ===========
</TABLE>
7. Business Segment Data
As of December 31, 1998, BancTec adopted SFAS No. 131, which requires disclosure
of business segment data in accordance with the "management approach." The
Company's operations historically have been organized into three business
segments as follows: Manufacturing and Supplies, US Maintenance and Service, and
Worldwide Systems. The Company is in the process of completing a reorganization
of its operations into two primary businesses for which certain related
disclosures will be available subsequent to the completion of the reorganization
plan. The following table reflects the historical presentation of segment data
(in thousands):
8
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Six Months Ended June 30, 1999 and 1998
(Unaudited)
7. Business Segment Data - (continued)
<TABLE>
<CAPTION>
Manufacturing US Maintenance Worldwide Corporate/
and Supplies and Service Systems Eliminations Total
------------ -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
For the three months ended
June 30, 1999
Revenues from
external customers $ 13,044 $ 52,845 $ 82,834 $ - $ 148,723
Intersegment
revenues 14,230 - 2,728 (16,958) -
Segment operating
income (loss) 5,073 2,689 8,488 (4,798) 11,452
Segment identifiable
assets 65,560 141,004 242,489 85,208 534,261
For the three months ended
June 30, 1998
Revenues from
external customers $ 11,564 $ 60,240 $ 74,149 $ - $ 145,953
Intersegment
revenues 12,466 - 2,188 (14,654) -
Segment operating
income (loss) 2,085 11,797 1,594 (2,461) 13,015
Segment identifiable
assets 84,117 125,237 210,313 122,278 541,945
For the six months ended
June 30, 1999
Revenues from
external customers $ 26,698 $ 111,039 $ 159,811 $ - $ 297,548
Intersegment
revenues 27,400 - 4,537 (31,937) -
Segment operating
income (loss) 7,922 13,014 12,519 (11,569) 21,886
Segment identifiable
assets 65,560 141,004 242,489 85,208 534,261
For the six months ended
June 30, 1998
Revenues from
external customers $ 24,301 $ 119,266 $ 144,768 $ - $ 288,335
Intersegment
revenues 23,993 - 4,544 (28,537) -
Segment operating
income (loss) 4,319 25,153 5,024 (4,759) 29,737
Segment identifiable
assets 84,117 125,237 210,313 122,278 541,945
</TABLE> 9
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Six Months Ended June 30, 1999 and 1998
(Unaudited)
8. Reorganization and Other Charges
On October 26, 1998, BancTec announced a planned reorganization of its
operations into two primary businesses--Worldwide Financial Systems and Computer
and Network Services. The purpose of the reorganization was to give greater
visibility to the Company's computer services business and, at the same time, to
create a single organization to serve the needs of its traditional transaction
processing customer base. BancTec's new business structure is considered to be
of a long-term strategic nature. Management anticipates that the reorganization
of its operations into more natural and cohesive business segments will improve
customer focus and optimize its selling efforts, thereby leading to faster
growth. In addition, management expects to benefit from more meaningful analyses
of operations due to the more rational organization of the business. The
reorganization will also allow the Company to eliminate redundant overhead
costs. While costs have already been reduced by the actions taken in the fourth
quarter of 1998, as discussed below, most of the savings will not be realized
until the year 2000 and beyond due to certain offsetting implementation costs as
well as the transition time necessary to fully establish the new organizational
structure. The anticipated impact on sales and income from continuing operations
in fiscal 2000 is not yet known. The Company expects to complete the
reorganization plan by the end of fiscal 1999.
In conjunction with this reorganization, the Company recorded charges in the
fourth quarter of 1998 of approximately $22.1 million, of which $13.6 million
related to inventory obsolescence costs and $4.1 million related to the
impairment of goodwill. The remaining charges totaled approximately $4.4
million, of which approximately $1.0 million related to the planned closure of
the Company's operations in Australia, which was completed in June 1999. The
remaining $3.4 million is related to severance costs for 62 domestic employees.
Of this severance accrual, approximately $1.5 million has been paid as of June
30, 1999, and a substantial amount of the remaining accrual will be paid by
year-end. The accrued amounts will be paid from cash on hand and from cash flows
generated from the Company's operations.
Also in conjunction with the Company's reorganization announced in the fourth
quarter of 1998, management accelerated the transition of certain older
generation inventory models to newer inventory models within the same lines of
products that are manufactured and sold by the Company.
9. Subsequent Events
On April 5, 1999, the Company announced a definitive agreement to merge with a
corporation formed by Welsh, Carlson, Anderson & Stowe ("WCAS"), a New York-
based private investment firm. The Company's shareholders voted to approve the
merger at a special meeting held on July 22, 1999 and the merger was completed
the same day. The transaction was structured to be accounted for as a
recapitalization. Under the terms of the merger agreement, shareholders received
$18.50 in cash per common share.
10
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Six Months Ended June 30, 1999 and 1998
(Unaudited)
9. Subsequent Events - (Continued)
The Company borrowed and then distributed approximately $240.0 million to the
former shareholders. Additional equity investments by the new owners totaled
approximately $145.0 million. The $240.0 million in borrowings consisted of the
following: (1) $160.0 million subordinated unsecured "Sponsor" notes due 2009,
bearing interest at 10.0%, (2) a $75.0 million Tranche A term loan due June
2004, payable in sixteen consecutive quarterly installments beginning September
30, 2000, bearing interest at prime plus 1.75 percent and (3) $5.0 million in
borrowings under a $50.0 million revolving credit facility providing for
borrowing rate options including variable rates at prime plus 1.75 percent.
As a result of the merger, WCAS became a majority owner of the Company with a
93.5% ownership. Convergent Equity Partners, L.P, a Dallas-based private
investment firm, purchased approximately 6.5% of the Company's post-merger
capital stock.
On July 6, 1999, the Company signed a non-binding expression of interest for the
sale of the Company's community banking and data center operations to Jack Henry
& Associates ("Jack Henry") for approximately $50.0 million in cash and the
assumption of certain liabilities. The Company will record a gain from the
sale, based on the final terms of the sales agreement, upon completion of the
transaction, which is expected to occur in the third quarter of 1999.
11
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Comparison of Three Months Ended June 30, 1999 and Three Months Ended June 30,
- ------------------------------------------------------------------------------
1998
- ----
Total revenue of $148.7 million for the second quarter of 1999 increased $2.8
million or 1.9% compared to the second quarter of 1998. Revenue from sales of
equipment and software increased $9.3 million primarily due to increased
shipments of financial transaction and document management systems to worldwide
customers and increased Plexus software sales. Revenue from maintenance and
other services decreased $6.5 million from the prior period due to the
expiration of some large contracts that were not renewed and to the expiration
of some maintenance contracts on older document processing systems.
Gross profit of $38.1 million for the second quarter of 1999 declined $1.9
million from the second quarter of 1998. For equipment and software, gross
profit of $31.2 million represented a $7.5 million increase over the
corresponding prior year quarter and a 5.4% improvement in the gross margin as a
percentage of sales for the same period. The increase was due primarily to
increased sales of higher margin products. Gross profit of $6.9 million for
maintenance and other services declined by $9.4 million from the corresponding
prior year quarter due primarily to the lower revenue and to the continued
effects of lower margins on computer and network services' revenue compared to
traditional products' revenue.
Operating expenses in the second quarter of 1999 totaled $26.7 million,
decreasing by $0.4 million from the second quarter of 1998. Product development
expenses of $4.5 million decreased $0.7 million primarily due to a reduction in
the development work on new products during the second quarter of 1999. Sales
and marketing expenses of $13.0 million were comparable to the corresponding
prior year quarter. General and administrative expenses of $7.9 million
increased $0.6 million primarily due to the amortization of costs incurred in
the implementation of a new internal information system, which became
operational in July 1998. The decrease in goodwill amortization from the
corresponding prior year quarter was due to the $4.1 million write-off of
impaired goodwill in the fourth quarter of 1998.
Interest income for the second quarter of 1998 was $0.6 million lower primarily
due to the investment of excess cash from the proceeds of the $150.0 million
debt offering in the second quarter of 1998.
Interest expense of $3.0 million increased from $1.3 million in the second
quarter of 1998 primarily due to the $150.0 million of 7.50% Senior Notes which,
in May 1998, replaced $105.0 million of bank debt with a lower effective
interest rate.
Sundry income for the second quarter of 1999 increased $0.9 million primarily
due to larger foreign currency transaction losses in the corresponding prior
year quarter.
12
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Results of Operations
Comparison of Three Months Ended June 30, 1999 and Three Months Ended June 30,
- ------------------------------------------------------------------------------
1998 - (Continued)
- ------------------
The current quarter income tax provision decreased by $1.0 million, compared to
the corresponding prior year quarter, due to a similar decrease in pre-tax
income.
13
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Results of Operations
Comparison of Six Months Ended June 30, 1999 and Six Months Ended June 30, 1998
- -------------------------------------------------------------------------------
Total revenue of $297.5 million for the first half of 1999 increased $9.2
million or 3.2% compared to the first half of 1998. Revenue from sales of
equipment and software increased $16.3 million primarily due to an increase in
sales of large-scale financial transaction processing systems. Revenue from
maintenance and other services decreased $7.1 million from the prior period
primarily due to the expiration of some large service contracts that were not
renewed and to the expiration of some maintenance contracts on older document
processing systems.
Total gross profit of $76.7 million for the first half of 1999 decreased $5.3
million or 6.4% compared to the first half of 1998. For equipment and software,
gross profit of $54.8 million represented a $7.6 million increase over the
corresponding prior year first half and reflected a 5.2% improvement in the
gross margin as a percentage of sales for the same period. The increase was due
primarily to stronger sales of higher margin products. Gross profit of $21.9
million for maintenance and other services declined by $12.8 million from the
corresponding prior year first half due primarily to the lower revenue and to
the continued effects of lower margins on computer and network services' revenue
compared to traditional products' revenue.
Operating expenses in the first half of 1999 totaled $54.8 million, an increase
of $2.6 million from last year's first half. Product development expenses of
$8.7 million decreased $0.5 million primarily due to a reduction in the
development work on new products during the first half of 1999. Sales and
marketing expenses of $26.4 million increased by $0.6 million due to the higher
level of operating activities. General and administrative expenses increased
$2.9 million to $17.1 million primarily due to the amortization of costs
incurred in the implementation of a new internal information system which became
operational in July 1998. The decrease in goodwill amortization from the
corresponding prior year first half was due to the $4.1 million write-off of
impaired goodwill in the fourth quarter of 1998.
Interest income of $0.9 million for the first half of 1999 was $0.7 million
lower than the prior year's first half, primarily due to the investment of
excess cash from the proceeds of the $150.0 million debt offering in the second
quarter of 1998.
Interest expense of $6.0 million increased from $3.1 million in the first half
of 1998 primarily due to the $150.0 million of 7.5% Senior Notes which, in May
1998, replaced $105.0 million of bank debt with a lower effective interest rate.
Sundry income for the first half of 1999 increased $0.3 million due primarily
to larger foreign currency transaction losses in the corresponding prior year
first half.
14
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Results of Operations
Comparison of Six Months Ended June 30, 1999 and Six Months Ended June 30, 1998
- -------------------------------------------------------------------------------
- - (Continued)
- -------------
The current income tax provision decreased $3.8 million, compared to the
corresponding prior year first half, due to a similar decrease in pre-tax
income.
15
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Reorganization and Other Charges
--------------------------------
On October 26, 1998, BancTec announced a planned reorganization of its
operations into two primary businesses Worldwide Financial Systems and Computer
and Network Services. The purpose of the reorganization was to give greater
visibility to the Company's computer services business and, at the same time, to
create a single organization to serve the needs of its traditional transaction
processing customer base. BancTec's new business structure is considered to be
of a long-term strategic nature. Management anticipates that the reorganization
of its operations into more natural and cohesive business segments will improve
customer focus and optimize its selling efforts, thereby leading to faster
growth. In addition, management expects to benefit from more meaningful analyses
of operations due to the more rational organization of the business. The
reorganization will also allow the Company to eliminate redundant overhead
costs. While costs have already been reduced by the actions taken in the fourth
quarter of 1998, as discussed below, most of the savings will not be realized
until the year 2000 and beyond due to certain offsetting implementation costs as
well as the transition time necessary to fully establish the new organizational
structure. The anticipated impact on sales and income from continuing operations
in fiscal 2000 is not yet known. The Company expects to complete the
reorganization plan by the end of fiscal 1999.
In conjunction with this reorganization, the Company recorded charges in the
fourth quarter of 1998 of approximately $22.1 million, of which $13.6 million
related to inventory obsolescence costs and $4.1 million related to the
impairment of goodwill. The remaining charges totaled approximately $4.4
million, of which approximately $1.0 related to the planned closure of the
Company's operations in Australia, which was completed in June 1999. The
remaining $3.4 million is related to severance costs for 62 domestic employees.
Of this severance accrual, approximately $1.5 million has been paid as of June
30, 1999, and a substantial amount of the remaining accrual will be paid by
year-end. The accrued amounts will be paid from cash on hand and from cash flows
generated from the Company's operations.
Liquidity and Capital Resources
-------------------------------
On May 22, 1998, the Company sold $150.0 million of 7 1/2% Senior Notes due June
1, 2008 in a Rule 144A private offering. On August 28, 1998, the Senior Notes
were registered as public debt. Proceeds of the offering were used to retire
the Company's approximately $105.0 million of bank debt, with the remaining
proceeds to be used for other general operating requirements.
Cash and cash equivalents as of June 30, 1999 decreased to $16.6 million from
$25.3 million as of December 31, 1998 due primarily to purchases of property,
plant and equipment of $22.7 million and to the repayment of $5.0 million on
unsecured foreign lines of credit, offset by cash flows provided by operating
activities of $22.0 million.
16
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Liquidity and Capital Resources - (Continued)
---------------------------------------------
Cash provided by operations decreased to $22.0 million for the first half of
1999 from $27.7 million for the first half of 1998 primarily due to a decrease
in net income of $7.3 million. Also contributing to the decrease were the
following: a decrease in accounts receivable of $1.1 million and a $10.7 million
increase in inventory, partially offset by an increase in accounts payable of
$1.7 million and an increase in deferred revenue of $6.1 million.
At June 30, 1999, the Company had the following debt instruments in place: 1)
$150.0 million in 7 1/2% Senior Notes due 2008, 2) Revolving Credit Facility, 3)
Unsecured Foreign Lines of Credit, and 4) Uncommitted Domestic Lines of Credit.
The Company had no outstanding balances on the revolving credit facility, the
uncommitted domestic lines of credit or the unsecured foreign lines of credit as
of June 30, 1999. As of June 30, 1999, the Company had available borrowing
capacity of $70 million under the revolving credit facility and $60 million
under the domestic lines of credit. These lines had a maximum term of 30 days.
The weighted average interest rates on the unsecured foreign lines of credit and
on domestic borrowings were 1.4% and 6.7%, respectively, at June 30, 1999. There
was no weighted average interest rate on the revolving credit facility.
On April 5, 1999, the Company announced a definitive agreement to merge with a
corporation formed by Welsh, Carlson, Anderson & Stowe ("WCAS"), a New York-
based private investment firm. The Company's shareholders voted to approve the
merger at a special meeting held on July 22, 1999 and the merger was completed
the same day. The transaction was structured to be accounted for as a
recapitalization. Under the terms of the merger agreement, shareholders received
$18.50 in cash per common share.
The Company borrowed and then distributed approximately $240.0 million to the
former shareholders. Additional equity investments by the new owners totaled
approximately $145.0 million. The $240.0 million in borrowings consisted of the
following: (1) $160.0 million subordinated unsecured "Sponsor" notes due 2009,
bearing interest at 10.0%, (2) a $75.0 million Tranche A term loan due June
2004, payable in sixteen consecutive quarterly installments beginning September
30, 2000, bearing interest at prime plus 1.75 percent and (3) $5.0 million in
borrowings under a $50.0 million revolving credit facility which provides for
borrowing rate options including variable rates at prime plus 1.75 percent. The
Company believes that it has sufficient financial resources available to support
its requirements to fund operations, and is not aware of any undisclosed trends,
demands or commitments that would have a material adverse impact on the
Company's long or short-term liquidity.
On July 6, 1999, the Company signed a non-binding expression of interest for the
sale of the Company's community banking and data center operations to Jack Henry
for approximately $50.0 million in cash and the assumption of certain
liabilities. The transaction is expected to close in the third quarter of 1999.
The Company will record a gain from the sale, based on the final terms of the
sales agreement, upon completion of the transaction, which is expected to occur
in the third quarter of 1999.
17
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Liquidity and Capital Resources - (Continued)
---------------------------------------------
Funds to support the Company's operations, including capital expenditures, have
been derived from a combination of funds provided by operations, short-term bank
financing, long-term debt financing and, to a lesser extent, by sales of capital
stock under employee stock option and purchase plans.
The Company's backlog of orders scheduled for delivery over the next twelve-
month period decreased 3.8% to $84.7 million compared to $88.0 million at
December 31, 1998, primarily as a result of lower international orders for large
systems. The Company's backlog excludes contracts for recurring equipment and
software maintenance, as well as orders slated for immediate delivery.
18
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Liquidity and Capital Resources - (Continued)
---------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" which requires companies to value
derivative financial instruments, including those used for hedging foreign
currency exposures, at current market value with the impact of any change in the
market value being charged against earnings in each period. SFAS No. 133 will be
effective for and adopted by the Company in the first quarter of the year ending
December 31, 2001. The Company anticipates that SFAS No. 133 will not have a
material impact on its consolidated financial statements.
Inflation has not had a material effect on the operating results of the Company.
Year 2000 Issues
-----------------
The Year 2000 ("Y2K") problem relates to the inability of certain technology
products to properly recognize and process date-sensitive information relative
to the year 2000 and beyond. The Y2K issue is mostly the result of a once common
computer programming convention whereby dates were expressed with six digits
(mm/dd/yy) instead of eight digits (mm/dd/yyyy). Under this programming standard
the year was coded using two digits (yy). The potential problem lies in the fact
that programs with a two-digit year may not function properly in the future. For
example, 00 in the year 2000 may be interpreted as the year 1900, 1980, 00, or
"no known date." This could result in processing errors.
Y2K issues impact the Company and all companies in the industries in which the
Company operates. In fact, Y2K impacts nearly all organizations and has become a
societal issue due to the pervasive use of computer technology. BancTec is both
a user and supplier of technology products potentially affected by Y2K. While
simple to understand, Y2K issues are more difficult to address. The difficulty
arises from the following: (1) large numbers of systems, applications and
software involved, (2) vast archives of data created by computer programs, and
(3) large numbers of interdependent computer systems from different
manufacturers.
During 1998, the Company developed a master plan (the "Plan") to assess and
address potential risks it faces as a result of Y2K issues. The plan provides
strategic guidance for all products, services, systems, relationships, and
infrastructure components that may encounter a Y2K issue. The Plan sets forth
objectives, scope, responsibilities, and guidelines for project management,
testing, reporting, documentation and audit. The project was sub-divided into
approximately 20 major projects throughout the Company. A corporate Y2K
compliance team was formed to assist these various project teams in implementing
their individual Y2K plans under the master plan. The compliance team reports to
a senior officer of the Company. Y2K project teams report their progress monthly
to senior management. About 100 BancTec personnel are members of Y2K project
teams.
19
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Year 2000 Issues - (Continued)
------------------------------
During the third quarter of 1998, the Company completed the implementation of an
enterprise resource planning information system, for use in all of the Company's
domestic operations, which is represented to be Y2K compliant by SAP America,
Inc. ("SAP"), the software vendor. The implementation of this system and related
activities cost approximately $31.1 million, which cannot reasonably be
allocated to the portion attributable to Y2K issues. SAP replaced accounting,
manufacturing, purchasing, sales and distribution, and human resources systems.
A new customer service call management system that interfaces with SAP is being
implemented in 1999. The call management system will cost about $1.2 million,
and the portion attributable to Y2K issues is not identifiable. Internationally,
the Company has implemented or is implementing Y2K compliant management
information systems and call management systems, the costs of which are included
in the following paragraph.
Implementation of the remainder of the Y2K master plan is estimated to cost $8.2
million, of which $4.0 million relates to non-recurring internal (mostly non-
incremental) employee costs. Another $3.0 million is anticipated primarily for
new systems and upgrades. The remaining $1.2 million relates to incremental
costs of software, consultants, and other Y2K-related expenses. Of these costs,
the largest remaining expenditure is the potential replacement of non-compliant
personal computers, which is not expected to exceed $1.5 million. This estimate
does not include all internal costs of employees working on Y2K issues as these
costs are not tracked separately. Many systems, including the aforementioned
personal computers, may or may not have been replaced/upgraded in the absence of
the Y2K problem. These cost estimates are based on current information and
subject to change should conditions vary.
The Company has organized the overall project into five phases (awareness,
assessment, resolution, testing, and implementation) which are at various stages
of completion. Overall, the Company believes it is approximately 92% complete
with the execution of the plan as of July 29, 1999 and anticipates full
implementation of mission-critical project tasks by October 31, 1999.
Nevertheless, the Company expects some level of project activity to continue
into the year 2000, including possible implementation of non-mission-critical
items and ongoing customer support.
BancTec launched its Year 2000 web pages at www.banctec.com on December 21,
1998. The purpose of the Company's Y2K pages is to communicate relevant,
reliable and consistent Y2K information to customers, vendors, employees,
regulators, investors and other interested parties. The web pages include the
status of about 150 BancTec products, plus frequently asked questions, a
worldwide contact list, and links to other Y2K web resources.
20
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Year 2000 Issues - (Continued)
------------------------------
The process of ensuring that the Company's major vendors are addressing their
Y2K concerns is ongoing and substantially complete. Virtually all vendors (over
1,000) and key customers are being evaluated and no significant concerns have
been identified. Alternate vendors and strategies have been considered and will
be implemented if necessary.
Notwithstanding the Company's Y2K compliance efforts to date and in the future,
achieving Y2K compliance is dependent on many factors, some of which are not
completely within the Company's control. Should either the Company's systems or
the systems of one or more significant customers, vendors, or suppliers fail to
achieve Y2K compliance, the Company's business and financial condition could be
materially adversely affected. Some inherent risks of which the Company is aware
and managing include, but are not limited to, the following: on-time completion,
litigation, integration and complexity of data and telecommunications networks,
and validity of individual test plans and results.
The Company is developing contingency plans for mission critical areas that
might be affected by Y2K issues and expects to finalize these plans during the
third quarter of 1999. A major portion of these plans will likely pertain to
rapid response teams and the teams' availability to support customer systems if
necessary and to revert to manual processing where feasible.
NOTICE: This information is a "Year 2000 Readiness Disclosure" and conforms
with the Year 2000 Information and Readiness Disclosure Act of 1998.
21
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Factors Affecting the Company's Business and Prospects
------------------------------------------------------
From time to time, information provided by the Company or statements made by its
employees may contain "forward-looking" information, as that term is defined in
the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company
cautions investors that there can be no assurances that actual results or
business conditions will not differ materially from those projected or suggested
in such forward-looking statements as a result of various factors. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changes in assumptions, the occurrence of unanticipated results or
changes to future operating results over time. There are many factors that
affect the Company's business and the results of its operations. The following
is a description of some of the important factors that may cause the actual
results of the Company's operations in future periods to differ materially from
those currently expected or desired.
General Economic Conditions
The Company's business partly depends on general economic and business
conditions. The Company's sales are to businesses in a wide variety of
industries, including banking, financial services, insurance, health care,
governmental agencies and others. General economic conditions that cause
customers in such industries to reduce or delay their investments in products
such as those offered by the Company could have a material adverse effect on the
Company.
International Activities
The Company's international operations have provided a significant part of the
Company's growth during recent fiscal years. The success and profitability of
international operations are subject to numerous risks and uncertainties, such
as economic and labor conditions, political instability, tax laws (including
U.S. taxes on foreign subsidiaries) and changes in the value of the U.S. dollar
versus the local currency in which products are sold. Any adverse change in one
or more of these factors could have a material adverse effect on the Company.
Fluctuations in Operating Results
The Company's operating results may fluctuate from period to period and will
depend on numerous factors, including customer demand and market acceptance of
the Company's products, new product introductions, product obsolescence, varying
product mix, foreign currency exchange rates and other factors. The Company's
business is sensitive to the spending patterns of its customers, which in turn
are subject to prevailing economic conditions and other factors beyond the
Company's control. Any adverse change in one or more of these factors could
have a material adverse effect on the Company.
22
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Factors Affecting the Company's Business and Prospects - (Continued)
--------------------------------------------------------------------
Technological Changes and Product Transitions
The Company's industry is characterized by continuing improvement in technology,
which results in the frequent introduction of new products, short product life
cycles and continual improvement in product price/performance characteristics.
The Company must incorporate these new technologies into its products in order
to remain competitive. There can be no assurance that the Company will be able
to continue to effectively manage technology transitions. A failure on the part
of the Company to effectively manage the transitions of its product lines to new
technologies on a timely basis could have a material adverse effect on the
Company.
Product Development Activities
The strength of the Company's overall business is partially dependent on the
Company's ability to develop products based on new or evolving technology and
the market's acceptance of those products. There can be no assurance that the
Company's product development activities will be successful, that new
technologies will be available to the Company, that the Company will be able to
deliver commercial quantities of new products in a timely manner, that those
products will adhere to generally accepted industry standards or that products
will achieve market acceptance. The Company believes that it is necessary for
its products to adhere to generally accepted industry standards, which are
subject to change in ways that are beyond the control of the Company.
Impact of Merger with WCAS
As a result of the merger with WCAS, the Company incurred additional debt of
approximately $240.0 million, and entered into a revolving credit facility for
up to $50.0 million. The increased debt levels at higher interest rates than
rates on previous debt levels result in a more highly leveraged financial
position for the Company. Other than increased interest expense, management does
not anticipate any impact on operations as a result of the merger. Income from
operations is expected to be sufficient to service the debt and interest
payments thereon.
23
<PAGE>
BANCTEC, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks primarily related to fluctuations
in interest rates.
As of June 30, 1999, the Company had outstanding long-term debt of $150.0
million in Senior Notes issued in U.S. dollars at a fixed annual interest rate
of 7 1/2%. Interest is due and payable in semi-annual installments which began
December 1, 1998. The notes mature on June 1, 2008. The fair market value of the
Senior Notes as of June 30, 1999 approximates its carrying value. After the
merger, the Company put the following additional debt in place: (1) $160.0
million subordinated unsecured "Sponsor" notes due 2009, bearing interest at
10.0% and (2) a $75.0 million Tranche A term loan due June 2004, payable in
sixteen consecutive quarterly installments beginning September 30, 2000, bearing
interest at prime plus 1.75 percent. A $50.0 million revolving credit facility
providing for borrowing rate options including variable rates at prime plus 1.75
percent was also obtained.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-defined
interest rate risks and generally consist of interest rate swap and/or interest
rate cap agreements. There were no such instruments in place at June 30, 1999.
24
<PAGE>
PART II
BANCTEC, INC.
Item 1. Legal Proceedings
-----------------
Four lawsuits were filed by alleged stockholders of the Company relating to the
proposed merger of the Company with Colonial Acquisitions Corp. ("Colonial"), a
corporation created by Welsh, Carson, Anderson & Stowe. All four lawsuits were
filed in the Chancery Court for New Castle County, Delaware. The parties have
agreed to consolidate the four actions into a single consolidated civil action.
The lawsuit names the Company, its directors and Colonial as defendants. The
plaintiffs seek to represent a purported class of all public holders of the
Company's common stock.
The action alleges, among other things, that the directors of the Company
breached their fiduciary duties to the Company's stockholders by approving the
merger. In particular, the action alleges that the directors allowed the stock
price to be capped, depriving the plaintiffs of an opportunity to realize an
increase in the value of the Company's common stock, that the terms of the
transaction were not the result of an auction process or "active market check"
and that the merger consideration is inadequate. The lawsuit seeks, among other
things, preliminary and permanent injunctive relief prohibiting consummation of
the merger, unspecified damages, attorneys' fees and other relief.
On July 9, 1999, counsel for the parties to the action executed a Memorandum of
Understanding contemplating the settlement of all claims asserted. The parties
are currently negotiating a final Stipulation and Agreement of Compromise
Settlement and Release. The settlement amount is not expected to be material to
the Company's consolidated financial statements.
Item 2. Changes in Securities
---------------------
NONE
Item 3. Defaults Upon Senior Securities
-------------------------------
NONE
Item 4. Submission of Matters to a Vote of Securities Holders
-----------------------------------------------------
A special meeting of the stockholders of BancTec, Inc. was held on
July 22, 1999. The following item was voted upon:
Proposal to approve the merger of BancTec, Inc. with WCAS
For: 14,686,213
Against: 229,227
Abstain: 14,627
25
<PAGE>
PART II
BANCTEC, INC.
Item 5. Other Information
-----------------
NONE
Item 6. Exhibits and Reports on Form 8-K - (Continued)
----------------------------------------------
a) Exhibits
27.0 Financial Data (Electronic Filing Only)
b) Reports on Form 8-K
On June 21, 1999, the Company filed a Form 8-K concerning the sale
of 6.5% of the Company's post-merger capital stock to Convergent
Equity Partners, L.P., a Dallas-based private investment firm.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANCTEC, INC.
/s/ Scott J. Wilson
-------------------------
Scott J. Wilson
Vice President, Controller and
Assistant Treasurer
Dated: August 12, 1999
27
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