<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 March 31, 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 MAY 10, 1999
----- ------------
Common Stock, $.01 par value 19,472,748
<PAGE>
BANCTEC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
----- ----
(UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 12,312 $ 25,313
Short-term investments 379 837
Accounts receivable, less allowance for doubtful accounts of
$9,442 at March 31, 1999 and $10,758 at December 31, 1998 189,084 178,851
Inventories 71,772 68,535
Current deferred tax asset 27,912 27,912
Other 10,646 9,511
---------------- ---------------
TOTAL CURRENT ASSETS 312,105 310,959
PROPERTY, PLANT AND EQUIPMENT - NET 129,973 125,038
GOODWILL, less accumulated amortization of
$31,384 at March 31, 1999 and $30,205 at December 31, 1998 79,658 81,075
OTHER ASSETS 13,786 13,133
---------------- ---------------
TOTAL ASSETS $ 535,522 $ 530,205
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facilities $ - $ 5,024
Current maturities of long-term debt 842 878
Trade accounts payable 25,209 24,451
Other accrued expenses and liabilities 71,577 77,600
Deferred revenue 44,515 31,560
Income taxes 6,674 8,068
---------------- ---------------
TOTAL CURRENT LIABILITIES 148,817 147,581
LONG-TERM DEBT, less current maturities 150,142 150,352
OTHER LIABILITIES 12,126 12,191
STOCKHOLDERS' EQUITY:
Preferred stock-authorized, 1,000 shares of $.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 $.01 par value:
issued and outstanding 19,462,000 at March 31, 1999 and
19,373,000 at December 31, 1998 194 194
Additional paid-in capital 171,143 170,318
Retained earnings 59,751 54,932
Foreign currency translation adjustments (5,151) (3,736)
Unearned compensation (1,500) (1,627)
---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 224,437 220,081
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 535,522 $ 530,205
================ ===============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
BANCTEC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 1998
----------- -----------
REVENUE:
<S> <C> <C>
Equipment and software $ 78,484 $ 71,471
Maintenance and other services 70,341 70,911
--------------- ---------------
148,825 142,382
COST OF SALES:
Equipment and software 54,859 47,934
Maintenance and other services 55,370 52,484
--------------- ---------------
110,229 100,418
--------------- ---------------
GROSS PROFIT 38,596 41,964
OPERATING EXPENSES:
Product development 4,246 4,114
Selling, general and administrative 22,608 19,771
Goodwill amortization 1,308 1,354
--------------- ---------------
28,162 25,239
--------------- ---------------
INCOME FROM OPERATIONS 10,434 16,725
OTHER INCOME (EXPENSE):
Interest income 170 173
Interest expense (2,967) (1,727)
Sundry-net 11 549
--------------- ---------------
(2,786) (1,005)
--------------- ---------------
INCOME BEFORE INCOME
TAXES 7,648 15,720
INCOME TAX PROVISION 2,830 5,659
--------------- ---------------
NET INCOME $ 4,818 $ 10,061
=============== ===============
NET INCOME PER SHARE:
Basic $ 0.25 $ 0.47
Diluted $ 0.25 $ 0.46
COMMON SHARES AND COMMON
SHARE EQUIVALENTS USED IN
COMPUTING PER SHARE AMOUNTS:
Basic 19,353 21,541
Diluted 19,449 21,789
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
BANCTEC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 4,818 $ 10,061
Adjustments to reconcile net income to cash flows
provided by operating activities
Depreciation and amortization 11,541 10,653
Disposition of property, plant and equipment 379 151
Other non-cash items 186 (454)
(Increase) decrease in accounts receivable (10,233) 2,730
Increase in inventories (4,593) (2,576)
Increase in other assets (896) (2,631)
Increase (decrease) in trade accounts payable 758 (1,097)
Increase in deferred revenue 12,955 11,008
Decrease in other accrued expenses
and liabilities (7,482) (6,132)
--------------- ---------------
CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES 7,433 21,713
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (14,655) (14,039)
Purchases of businesses acquired, net of cash - (2,041)
Investment in unconsolidated subsidiaries (892) -
--------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES (15,547) (16,080)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of current portion of long-term debt and
capital lease obligations (246) (2,987)
Net payments from long-term borrowings - (4,000)
Net payments on short-term borrowings (4,788) -
Repurchase of common stock - (9,258)
Proceeds from sales and issuances of common stock 825 3,350
--------------- ---------------
CASH FLOWS USED IN FINANCING
ACTIVITIES (4,209) (12,895)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (678) (130)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (13,001) (7,392)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,313 21,686
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,312 $ 14,294
=============== ===============
SUPPLEMENTAL DISCLOSURE INFORMATION:
Cash paid during the period for:
Interest $ 88 $ 1,517
Income taxes $ 4,965 $ 1,491
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1. BASIS OF PRESENTATION AND OTHER ACCOUNTING INFORMATION
The accompanying unaudited balance sheet at March 31, 1999, and the consolidated
statements of operations and cash flows for the interim periods ending March 31,
1999 and 1998 should be read in conjunction with the 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 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 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 contract. 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.
5
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
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 BancTec, Inc.
("BancTec" or the "Company") in the first quarter of the year ending December
31, 2000. 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:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 26,781 $ 28,557
Work-in-progess 4,492 3,830
Finished goods 40,499 36,148
---------------- -------------------
$ 71,772 $ 68,535
================ ===================
</TABLE>
In conjunction with the Company's announced reorganization in the fourth quarter
of 1998, BancTec's wrote off $13.4 million of inventory determined to be in
excess of future usage needs, and therefore, not realizable.
As of March 31, 1999 (see Note 8), the excess inventory was moved to a separate
facility. BancTec has received offers to purchase these components for
approximately $0.2 million scrap value. The Company expects to complete the sale
of any salvageable inventory by the end of the 1999 second quarter, at which
time any unsold items will be discarded.
6
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. PROPERTY, PLANT AND EQUIPMENT CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
(IN THOUSANDS)
Land $ 2,860 $ 3,030
Field support spare parts 106,818 102,262
Systems and software 59,510 58,094
Machinery and equipment 56,002 55,431
Furniture, fixtures and other 26,016 23,967
Building 29,943 28,848
------------ ------------
281,149 271,632
Accumulated depreciation (151,176) (146,594)
------------ ------------
$ 129,973 $ 125,038
============ ============
</TABLE>
4. OTHER ACCRUED EXPENSES AND LIABILITIES CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Salaries, wages and other compensation $ 31,981 $ 31,622
Advances from customers 8,736 9,493
Accrued taxes, other than income taxes 3,701 5,918
Accrued invoices and costs 8,345 8,545
Accrued reorganization costs 3,101 3,879
Other 15,713 18,143
------------ ------------
$ 71,577 $ 77,600
============ ============
</TABLE>
5. EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net Income $ 4,818,000 $ 10,061,000
=============== ===============
Weighted average number of shares
outstanding during the period
Effect of diluted securities
attributable to stock options and unearned
compensation from restricted stock awards 96,845 247,884
--------------- ---------------
Weighted average number of shares
outstanding, as adjusted 19,448,946 21,789,169
=============== ===============
Diluted net income per common and common
equivalent share $ 0.25 $ 0.46
=============== ===============
</TABLE>
7
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
At March 31, 1999 and 1998, 1,388,499 stock options and 120,948 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
$14.41 to $25.81 per share and $25.81 to $27.00 per share, respectively, at
March 31, 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
ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net income $ 4,818 $ 10,061
Foreign currency translation adjustments (1,415) 173
-------------- --------------
Total comprehensive income $ 3,403 $ 10,234
============== ==============
</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 beginning with the second quarter of 1999.
The segment data required to be disclosed under the provisions of SFAS No. 131
will be captured for periods subsequent to the completion of the reorganization
plan which is expected to occur by the end of fiscal 1999. The table below
reflects the historical presentation of segment data.
8
<PAGE>
BANCTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
MANFACTURING US MAINTENCE WORLDWIDE CORPORATE/
AND SUPPLIES AND SERVICE SYSTEMS ELIMINATIONS TOTAL
---------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
For the three months ended
March 31, 1999
Revenues from
external customers $ 13,654 $ 58,194 $ 76,977 $ - $ 148,825
Intersegment
revenues 13,170 (63) 1,809 (14,916) -
Segment operating
income (loss) 2,849 10,325 4,031 (6,771) 10,434
Segment identifiable
assets 63,896 145,735 231,116 94,775 535,522
For the three months ended
March 31, 1998
Revenues from
external customers $ 12,737 $ 59,026 $ 70,619 $ - $ 142,382
Intersegment
revenues 11,527 - 2,356 (13,883) -
Segment operating
income (loss) 2,234 13,356 3,430 (2,295) 16,725
Segment identifiable
assets 83,105 121,650 205,540 92,461 502,756
</TABLE>
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 growing computer services business and, at
the same time, to create a single organization to serve the needs of its
traditional transaction processing customer base. 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 future increases in revenue. Little impact on 1999 revenue is
expected due to the significant implementation efforts and the newness of the
organizational structure. 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 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 by June 30, 1999. The remaining $3.4
million is related to severance costs for 62 domestic employees. Of the
severance accrual, approximately $1.3 million has been paid as of March 31,
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.
9. SUBSEQUENT EVENT
On April 5, 1999, the Company announced a definitive agreement to merge with a
corporation formed by Welsh, Carson, Anderson & Stowe ("WCAS"), a leading New
York-based private investment firm. Under the terms of the merger agreement,
approximately 97% of the Company's common stock will be converted into the right
to receive $18.50 in cash per share. The Company's current stockholders will
retain the remaining shares, which will be approximately 6.5% of the post-merger
common stock. The transaction is structured to be accounted for as a
recapitalization and is expected to be completed during the third quarter of
1999, pending approval by a majority of the Company's stockholders and other
customary conditions.
9
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------
1998
- ----
Total revenue of $148.8 million for the first quarter of 1999 increased $6.4
million or 4.5% compared to the first quarter of 1998. Revenue from sales of
equipment and software increased $7.0 million primarily due to increased
shipments of large systems for international customers and increased Plexus
software sales. Revenue from maintenance and other services decreased $0.6
million from the prior period due to the expiration of some maintenance
contracts on older document processing systems.
Gross profit of $38.6 million for the first quarter of 1999 declined $3.4
million from the first quarter of 1998. Gross profit as a percentage of net
sales for equipment and software of 30.1% decreased as compared to the
corresponding prior year quarter of 32.9% due to increased sales of lower margin
products. In addition, gross profit as a percentage of net sales for maintenance
and other services declined by 4.7% to 21.3% from the corresponding prior year
quarter due to the continued effects of increased network services revenue which
has lower margins as compared to traditional products, and additional costs
related to a contractual service obligation.
Operating expenses in the first quarter of 1999 totaled $28.2 million, an
increasing by $2.9 million from the first quarter of 1998. Product development
expenses of $4.2 million increased $0.1 million primarily due to development
work on new products during the first quarter of 1999. Sales and marketing
expenses of $13.4 million increased by $0.6 million primarily due to the higher
level of operating activities. General and administrative expenses of $9.2
million increased $2.2 million primarily due to the amortization of costs
incurred in the implementation of a new internal information system which became
operational in July 1998.
Interest expense of $3.0 million increased from $1.7 million in the first
quarter of 1998 primarily due to a $50.1 million increase in net borrowings and
to increased rates thereon.
Sundry income for the first quarter of 1999, compared to the corresponding prior
year quarter, decreased $0.5 million primarily due to foreign currency
transaction gains in the prior year.
The current quarter income tax provision decreased by 50%, or $2.8 million,
compared to the corresponding prior year quarter, due to a similar percentage
decrease in pre-tax income. The effective tax rate was 37% for the first quarter
of 1999 and 36% for the first quarter of 1998.
10
<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 growing computer services business and, at
the same time, to create a single organization to serve the needs of its
traditional transaction processing customer base. 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 future increases in revenue. Little impact on 1999 revenue is
expected due to the significant implementation efforts and the newness of the
organizational structure. 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 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 by June 30, 1999. The remaining $3.4
million is related to severance costs for 62 domestic employees. Of the
severance accrual, approximately $1.3 million has been paid as of March 31,
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 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 million of bank debt, with the remaining proceeds
to be used for other requirements.
11
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and cash equivalents as of March 31, 1999 decreased to $12.3 million from
$25.3 million as of December 31, 1998 due primarily to the repayment of $5.0
million on unsecured foreign lines of credit, payment of approximately $3.0
million of foreign taxes by the Company's Japanese subsidiary and payment of
miscellaneous liabilities accrued at December 31, 1998. Accounts receivable and
deferred revenue increased from $178.9 million and $31.6 million, respectively,
at December 31, 1998 to $189.1 million and $44.5 million, respectively, at March
31, 1999. The increase in deferred revenue and accounts receivable was primarily
due to annual billings on service contracts. Also, an increase in the Company's
Japanese subsidiary's accounts receivable of approximately $7.9 million was due
to an increase in sales during the quarter. Total borrowings were $151.0 million
as of March 31, 1999 compared to $156.3 million as of December 31, 1998. Total
working capital remained flat at approximately $163.0 million for the same
period.
Cash provided by operations decreased to $7.4 million for the first quarter of
1999 from $21.7 million for the first quarter of 1998. The major components of
the decrease in cash flow from operations were as follows: a decrease in net
income of $5.3 million, an increase in accounts receivable change of $13.0
million and a $2.0 million increase in inventory change, partially offset by an
increase in accounts payable change of $1.9 million and an increase in deferred
revenue change of $2.0 million.
The Company believes that it has sufficient financial resources available to
support its requirements to fund operations, and is not aware of any trends,
demands or commitments that would have a material adverse impact on the
Company's long or short-term liquidity.
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.
At March 31, 1999, the Company had the following debt instruments in place: 1)
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 March 31, 1999.
The Company has available a revolving credit facility of $70.0 million. The
Company also has available uncommitted lines of credit with a group of domestic
banks totaling $60.0 million. These lines have a maximum term of 30 days. The
weighted average interest rates on the unsecured foreign lines of credit and on
domestic borrowings were 1.5% and 6.3%, respectively, at March 31, 1999.
12
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
Liquidity and Capital Resources - (Continued)
---------------------------------------------
The Company's backlog of orders scheduled for delivery over the next twelve-
month period decreased 10% to $79.5 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.
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, 2000. 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. In the Company's
case, it 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 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 that may
encounter a Y2K issue. The plan sets forth objectives, scope,
13
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED)
YEAR 2000 ISSUES - (CONTINUED)
------------------------------
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.
During the third quarter of 1998, the Company completed the implementation of an
enterprise resource planning information system, for use in all 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 cost
approximately $30.0 million, and the cost 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.
Implementation of the remainder of the Y2K master plan is estimated to cost $8.2
million, of which $4.0 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. 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 cost 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 75% complete
with the execution of the plan as of April 16, 1999. Substantial completion, or
90% completion, of mission-critical systems is expected to occur by June 30,
1999. The Company anticipates full implementation of mission-critical project
tasks by September 30, 1999. Nevertheless, the Company expects some level of
project activity to continue into the year 2000, including implementation of
non-mission-critical items and ongoing customer support.
14
<PAGE>
BANCTEC, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
YEAR 2000 ISSUES - (CONTINUED)
------------------------------
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 new web pages include
the Y2K status of about 150 BancTec products, plus frequently asked questions, a
worldwide contact list, and links to other Y2K web resources.
The process of ensuring that the Company's major vendors are addressing their
Y2K concerns is ongoing and substantially complete. Substantially all vendors
(over 1,000) 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 should 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.
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.
15
<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)
--------------------------------------------------------------------
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
verses 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.
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.
16
<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.
The Company's $150 million in senior notes are issued in U.S. dollars at a fixed
interest rate of 7 1/2%. Interest is due and payable in semi-annual installments
beginning December 1, 1998. The notes mature on June 1, 2008. The fair market
value of the senior notes as of March 31, 1999 approximates its respective
carrying value.
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 March 31, 1999.
17
<PAGE>
PART II
BANCTEC, INC.
Item 1. LEGAL PROCEEDINGS
-----------------
As of the date of this filing, the Company is aware of four lawsuits that have
been 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. Each of the
lawsuits names the Company, its directors and Colonial as defendants. The
plaintiff in each lawsuit seeks to represent a purported class of all public
holders of the Company's common stock.
The lawsuits allege, 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 lawsuits allege 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 lawsuits seek, among other
things, preliminary and permanent injunctive relief prohibiting consummation of
the merger, unspecified damages, attorney's fees and other relief. The Company
expects that these four lawsuits will be consolidated into a single action. The
Company intends to contest these lawsuits vigorously.
ITEM 2. CHANGES IN SECURITIES
---------------------
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
NONE
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
-----------------------------------------------------
NONE
ITEM 5. OTHER INFORMATION
-----------------
NONE
18
<PAGE>
PART II
BANCTEC, INC.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS - (CONTINUED)
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) Exhibits
27.0 Financial Data (Electronic Filing Only)
b) Reports on Form 8-K
On April 7, 1999, the Company filed a Form 8-K incorporating the press
release dated April 5, 1999 concerning the definitive agreement to
merge with a corporation formed by WCAS.
19
<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: May 17, 1999
20
<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: May 17, 1999
21
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