UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-9859
BANCTEC, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE |
| 75-1559633 |
(State or Other Jurisdiction of |
| (I.R.S. Employer |
2701 East Grauwyler, Irving, Texas 75061
(Address of Principal Executive Offices, including ZIP Code)
Registrant’s telephone number, including area code: (972) 821-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: o No: ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: o No: ý
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: ý No: o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer o Accelerated filer o Non-accelerated filer ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No: ý
As of December 31, 2005, the aggregate market value of common equity held by non-affiliates: Not applicable
Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date.
|
| Number of Shares Outstanding at |
Title of Each Class |
| March 15, 2006 |
|
|
|
Common Stock, $0.01 Par Value |
| 17,003,838 |
Class A common stock, $0.01 Par Value |
| 1,181,946 |
DOCUMENTS INCORPORATED BY REFERENCE
None
BancTec, Inc.
Annual Report
on
Form 10-K
Year Ended December 31, 2005
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Quantitative and Qualitative Disclosure About Market Risk in Item 7A, contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of BancTec, Inc. and its consolidated subsidiaries (the “Company”) to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operations; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the ability of the Company to retain and motivate key employees; the timely development, production and acceptance of products and services and their feature sets; the challenge of managing asset levels, including inventory; the flow of products into third-party distribution channels; the difficulty of keeping expense growth at modest levels while increasing revenues; and other risks that are described from time to time in the Company’s Securities and Exchange Commission reports, including but not limited to the items discussed in Factors Affecting the Company’s Business and Prospects set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below in this report, and items described in the Company’s other filings with the Securities and Exchange Commission. The Company assumes no obligation to update or revise these forward-looking statements.
TABLE OF CONTENTS
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Overview
BancTec, Inc. (BancTec or the Company), a Delaware corporation, helps clients around the world simplify the process of managing their information. The Company provides comprehensive payment, remittance, document, content and IT solutions that automate complex, high-volume and data-intensive business processes. BancTec’s offerings include business solutions, business process outsourcing, and infrastructure services, which address market-specific pressures for clients in the financial services, manufacturing, government, services and utilities industries. Worldwide, the Company employs approximately 2,750 people full-time and is headquartered in Irving, Texas.
Founded in 1972, the Company serves approximately 2,000 customers in more than 50 countries, with international revenue in 2005 representing approximately one-third of total revenues.
The Company markets its portfolio of solutions to specific target markets in which it believes it has extensive business process expertise and certain competitive advantages that allow it to maintain or achieve a leadership position.
Ownership
Welsh, Carson, Anderson & Stowe (“WCAS”), a private investment partnership, owns 93.5% of the Company through a two-tier holding company structure above the Company. All the outstanding capital stock of the Company and warrants to purchase capital stock of the Company (but not employee stock options) are held by BancTec Intermediate Holding, Inc., a Delaware corporation (“Intermediate Holding”). In turn, all the outstanding capital stock of Intermediate Holding is held by BancTec Upper-Tier Holding, LLC, a Delaware limited liability company (“Upper-Tier Holding”). Upper-Tier Holding also holds the Senior Subordinated Note Due 2009, together with pay-in-kind interest thereon, in an aggregate principal amount of approximately $193.8 million (the “Sponsor Note”).
WCAS is one of the largest private equity investment firms in the U.S. focused exclusively on investments in three industries: information and business services, healthcare, and communications. Since its founding in 1979, WCAS has organized 14 limited partnerships with total capital of more than $13 billion. The firm currently invests out of Welsh, Carson, Anderson & Stowe IX, L.P., a $3.8 billion equity fund, and WCAS Capital Partners IV, L.P., a $1.3 billion dedicated subordinated debt fund.
Offerings and Markets
Americas and EMEA. The solutions group is made up of the United States, Central and South America, and Canada (“Americas”) and Europe, Middle East and Asia (“EMEA”). These two groups offer a similar portfolio of business process outsourcing, business solutions, services and technology, and market to similar types of clients. The solutions offered focus primarily on payment and remittance processing, document and content processing and IT service management. The Company’s solutions help drive operational efficiencies through automation of mission critical processes for some of the world’s largest credit card companies, financial institutions, insurance companies, government entities and consumer goods manufacturers.
Business Process Outsourcing. Because BancTec has a strong tradition of technology experience, service excellence and solution expertise, the Company is uniquely positioned for leadership in the rapidly growing market for Business Process Outsourcing (BPO).
BancTec has a long history of offering BPO in the U.K., and launched services in the United States in 2005. As process experts, BancTec applies proven methods, technology and services that allow clients to delegate a part of their business for BancTec to manage and deliver with measurable performance metrics.
BancTec’s BPO solutions deliver process improvements in a structured and innovative way, and enables clients to switch to a variable cost structure, ensuring that payments are closely aligned with business volumes. In this way, BancTec becomes a seamless extension of the client’s in-house operations.
The Company’s solutions generally incorporate advanced applications software developed by the Company and by third parties. These solutions may also include hardware developed and manufactured by the Company as well as by third parties. Key applications provided by Americas and EMEA focus around the following market-specific solutions:
Document and Content Processing. The Company’s Document and Content Processing portfolio offers innovative solutions that simplify the capturing, processing and archiving of information across the enterprise. The Company has become a recognized leader in document and content processing by providing clients complete end-to-end solutions for credit card origination, loan/mortgage origination, accounts payable, scan to archive, credit card and loan exceptions, claims processing and mailroom automation.
While many BancTec solutions are available ‘out of the box’, they can also be tailored without incurring high development costs and lengthy implementation timescales. Each BancTec solution can be rapidly deployed and easily adapted to changing requirements.
The Company’s document and content processing software technology, marketed under the eFIRST brand, is highly scaleable, designed for high-volume, complex and distributed environments. eFIRST Capture provides a software solution to capture structured or unstructured documents from paper scanners, fax machines and e-mail and then extract key information needed to categorize, index and distribute the data to the appropriate person or department. eFIRST Process is a Business Process Management tool that enables business process automation through analysis,
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modeling, development and deployment. eFIRST Process provides intelligent workflow and routing of documents and cases in complex environments based on business rules. eFIRST Archive can store large volumes of highly complex documents and provide multiple indices for improved search and retrieval. These technologies are available as stand-alone, integrated with Banctec or third-party hardware, or as a foundation for a comprehensive outsourcing solution.
The DocuScan 9000, introduced in 2004, is a high-speed mixed document scanner designed to provide the highest hourly throughput in difficult paper handling applications. The Company introduced the DocuScan 6000 in 2005 which offers an entry-level high-speed scanner with a compact physical size that can still digitize and process up to 260 pages per minute. The S-Series is a color page scanner optimized for forms processing environments with standard or similar size documents.
The Company provides a complete line of products and services to address the high-volume check or mixed document imaging environment. In addition to the DocuScan Family and S-Series, the company offers the E-Series and X-Series transports. The E-Series is a high-speed transport that can read and sort between 10,000 and 1,000,000 check-size documents per day. The X-Series offers a mid-range transport for check and remittance processing which enables check and item-based transactions to be digitally captured, processed and retained. To help companies achieve optimal performance in day-to-day check imaging operations, the Company offers its advanced image quality software, Image Sentry.
Payment and Remittance Processing. The Company is focused on helping clients move into the new era of remittance processing by addressing current challenges around check conversion with ACH, ARC and check truncation with Check 21. The passage of the Check Clearing for the 21st Century Act (“Check 21”), which facilitates check truncation by authorizing substitute checks, is expected to result in decreased demand for payment and check clearing solutions. The Company’s suite of payment processing solutions take advantage of new technology advances, such as automatic image recognition and internet accessibility, to offset labor costs, facilitate timely research and handle complex transaction variations. The payment processing technology suite includes eCap, a data capture application that automates check and list processing and the extraction of data from invoices or payment advices. PayCourier Retail is a comprehensive remittance solution for processing payment transactions, such as return documents, customer correspondences, customer envelopes and checks. PayCourier Archive is a transaction archive solution that provides long-term data and image storage for remittance processing.
Infrastructure Services. The Company provides clients with worldwide system support for hardware and software products. The Company provides expertise in the installation, repair and maintenance of large mission critical computer driven electromechanical devices, such as reader/sorters and scanners, which involve imaging and paper handling. The Company employs customer service engineers located in the United States and international locations to perform such service. The Company’s maintenance contracts usually include both parts and labor, and the contracts are typically renewed for five to seven years. In addition, the Company markets a full range of consumable supplies that complement the Company’s document processing systems.
Information Technology Service Management (“ITSM”). ITSM provides quality integrated support services to the evolving Information Technology industry, with focused deployment and ongoing support solutions for the original equipment manufacturer (“OEM”), Enterprise and Fortune marketplaces. ITSM provides coverage in North America and Europe with OEM partners in providing warranty and fulfillment services and related support to manufacturers of desktop/enterprise products. In addition, ITSM enters into strategic alliances with industry recognized providers of outsourcing services and system integrators, as well as individual corporate customers. These customers include defense and aerospace companies, strategic outsourcing organizations, and consumer electronics manufacturers.
Information About Industry Segments
Operating segments are defined as components of a company about which separate financial information is available that is evaluated regularly by the company’s chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. In 2005, the Company reported its operations as three primary segments, Americas, EMEA, and ITSM. The operations of Americas and EMEA include manufacturing and supplies, maintenance of
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Company and third party manufactured equipment, integrated systems, BancTec software products sold through Plexus Software (“Plexus”), a division of BancTec, and business processing outsourcing services. The ITSM operations include personal computer repair services and administration of third-party extended-service contracts.
In 2003 and 2004, the Company reported its operations in three segments, U.S. Solutions (“USS”), which included all operations of Americas with the exception of Canada, International Solutions (“INTL”), which included all operations of EMEA plus Canada, and Computer and Network Services (“CNS”), which included all operations of ITSM.
Note M – Business Segment Data and Note N – Geographic Operations, contained in Notes to the Consolidated Financial Statements, include detailed financial information concerning the Company’s segments and geographic areas. The 2003 and 2004 segment information has been conformed to the 2005 presentation.
Geographical Locations
There are no significant risks associated with foreign operations other than the fluctuation of international currencies (in Europe), political environments and economic cycles. The Company does not currently hedge its foreign currency exposure. Note L – Geographic Operations, contained in Notes to the Consolidated Financial Statements, includes detailed financial information concerning the Company’s geographic operations.
Product Development
The Company is engaged in ongoing software and hardware product development activities for both new and existing products, employing approximately 110 people for such activities as of December 31, 2005.
The following table sets forth the Company’s product development expenses:
|
| For the years ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (dollars in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Product Development Expenses |
| $ | 8,823 |
| $ | 7,768 |
| $ | 12,548 |
|
Percent of Total Revenue |
| 2.6 | % | 2.2 | % | 3.3 | % | |||
Current expenditures are concentrated on developing new applications for the Company’s product lines and improving and expanding existing products. The Company is currently focusing on ECM solutions and image capture solutions. There can be no assurance that the Company’s development efforts will result in successful commercial products. Many risks exist in developing new product concepts, adapting new technology and introducing new products to the market.
BancTec’s Document and Content Processing business is organized around a set of high-level reusable components that form the basis of vertical solutions for specific markets. The three core modules in the eFIRST™ suite of solutions, generic capture system (eFIRST Capture), business process automation (eFIRST Process), and archiving (eFIRST Archive), can be integrated within the same environment and expanded. In addition, the Company will add key managed services capabilities to these products.
eFIRST Capture captures, sorts and processes data from many types of documents, such as e-mail, web, scanned documents, faxes and web-forms, and provides real-time access to this data for subsequent use.
eFIRST Process provides a technology platform and user tools to construct workflows, data views, user environments and access permission models that draw in existing systems and people to automate business processes.
eFIRST Archive addresses the secure, structured storage and future retrieval of data.
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Image Capture. In 2006, the Company plans to continue developing options for the DocuScan 9000 system and make strategic market-based investments in the E-Series and X-Series transports. All other products are now effectively in a sustaining mode only of development.
Sales and Distribution
The Company primarily relies on its internal sales force. BancTec’s distribution strategy is to employ multiple delivery channels to achieve the widest possible distribution. The Company’s products are sold to end-users, distributors, OEMs, value-added resellers and systems integrators.
International sales are subject to various risks, including fluctuations in exchange rates, import controls and the need for export licenses.
Customer Diversification
For the years ended December 31, 2005, 2004 and 2003, Dell, accounted for 19.7%, 17.4%, and 15.7%, respectively, of the total revenue of the Company. The Company’s ten largest customers accounted for 45.0%, 44.3%, and 42.7%, of the Company’s revenues for the years ended December 31, 2005, 2004, and 2003 respectively.
Competition
In marketing its products and services, the Company encounters aggressive competition from a wide variety of companies, some of which have substantially greater resources than BancTec. The Company believes that functionality, performance, quality, service and price are important competitive factors in the markets in which it operates. Generally, the Company emphasizes industry knowledge, unique product features, flexibility, quality and service to configure unique systems from standard components in its competitive efforts. While the Company believes that its offerings compete favorably based on each of these elements, the Company could be adversely affected if its competitors introduce innovative or technologically superior solutions or offer their products at significantly lower prices than the Company. No assurance can be given that the Company will have the resources, marketing and service capability, or technological knowledge to continue to compete successfully.
Backlog
The Company believes that backlog is not a meaningful indicator in understanding BancTec’s business nor a meaningful indicator of future business prospects due to the large volume of products delivered from shelf inventories and the relative portion of net revenue related to the Company’s services businesses. In addition, any backlog information would exclude ITSM contracts, recurring hardware and software maintenance contracts, and contracts for sales of supplies. Further, the Company’s backlog is subject to fluctuation due to various factors, including the size and timing of orders for the Company’s products and exchange rate fluctuations, and accordingly, is not necessarily indicative of the level of future revenue.
Manufacturing - Suppliers
The Company’s hardware and systems solutions are assembled using various purchased components such as PC monitors, minicomputers, encoders, communications equipment and other electronic devices. Certain products are purchased from sole source suppliers. The Company generally has contracts with these suppliers that are renewed periodically. The Company has not experienced, nor does it foresee, any significant difficulty in obtaining necessary components or subassemblies; however, if the supply of certain components or subassemblies was interrupted without sufficient notice, the result could be an interruption of product deliveries.
Patents
The Company owns numerous U.S. and foreign patents and holds licenses under numerous patents owned by others. The Company also owns a number of registered and common-law trademarks in the U.S. and other countries relating to the Company’s trade names and product names.
The validity of any patents issued, or that may be issued, to the Company may be challenged by others and the Company could encounter legal difficulties in enforcing its patent rights against infringement. In addition, there can be no assurance that other technology cannot or will not be developed, or that patents will not be obtained by others, that would render the Company’s patents obsolete.
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Employees
At December 31, 2005, the Company employed approximately 2,750 full-time employees. None of the Company’s employees is represented by a labor union. The Company has never experienced a work stoppage.
Website Access to BancTec’s Reports
BancTec’s internet website address is www.banctec.com.
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act) are available free of charge through our website.
Information provided by the Company in this Annual Report on Form 10-K and other documents filed with the Securities and Exchange Commission include “forward-looking” information, as that term is defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). All statements other than statements of historical fact could be deemed forward-looking statements. The Company cautions investors that actual results or business conditions may differ materially from those projected or suggested in such forward-looking statements as a result of numerous factors beyond the Company’s control. 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. 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.
Business and Economic Conditions
The Company’s business partially depends on business conditions in certain industries. The Company’s sales are concentrated to businesses in industries involving high volume transaction processing including banking, financial services, insurance, health care and high technology, and to governmental agencies. Business or economic conditions that cause customers in these industries to reduce or delay their investments in document processing products and solutions, such as those offered by the Company, could have a material adverse effect on the Company, including its business, operating results, financial condition and prospects.
Delays or reductions in technology spending could have a material adverse effect on demand for the Company’s products and services, and consequently 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 and solutions in order to remain competitive. The Company may not be able to continue to manage technological transitions. A failure on the part of the Company to effectively manage these transitions of its product lines to new technologies on a timely basis could have a material adverse effect, specifically reductions in sales, on the Company. In addition, the Company’s business depends on technology trends in its customers’ businesses. Many of the Company’s traditional products depend on the efficient handling of paper-based transactions. To the extent that technological changes impact the future volume of paper transactions, the Company’s traditional business may be adversely impacted.
Dependence on Suppliers
The Company’s hardware products depend on the quality of components that are procured from third-party suppliers. Reliance on suppliers, as well as industry supply conditions, generally involves several risks, including the possibility of defective parts (which can adversely affect the reliability and reputation of the Company’s products), a shortage of components and reduced control over delivery schedules (which can adversely affect the Company’s manufacturing efficiencies) and increases in component costs (which can adversely affect the Company’s profitability).
The Company has several single-sourced supplier relationships, either because alternative sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity or price considerations. If these sources are unable to provide timely and reliable supply, the Company could experience manufacturing interruptions, delays or inefficiencies, adversely affecting its results of operations. Even where alternative sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could affect operating results adversely.
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Indebtedness and Impact on Operating Results
As a result of the Company’s high debt to equity ratio, the Company is required to devote significant cash to debt service. This limits the Company’s future operating flexibility and could make the Company more vulnerable to a downturn in its operating performance or a decline in general economic conditions.
International Activities
The Company’s international operations are a significant part of the Company’s business. 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 unfavorable 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 the following: customer demand and market acceptance of the Company’s products and solutions, new product introductions, product obsolescence, varying product mix, foreign-currency exchange rates, competition and other factors. The Company’s business is sensitive to the spending patterns of its customers, which in turn are subject to prevailing economic conditions and other factors beyond the Company’s control. In addition, recent laws governing check truncation could reduce the demand for the Company’s payment products. Any unfavorable change in one or more of these factors could have a material adverse effect on the Company.
Product Development Activities
The strength of the Company’s overall business depends in part on the Company’s ability to develop products and solutions 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. Many of the Company’s customers use its products in highly regulated or technologically demanding industries. As a result of products introduced by the Company’s competitors, generally accepted industry standards can change rapidly in ways that are beyond the control of the Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
The principal executive offices of the Company are located in its Irving, Texas facility.
The Company consolidated additional personnel at its Irving, Texas facility in January 2002, vacating substantially all (90%) of an owned facility in Dallas, Texas. This facility was sold in October 2005 for $1.6 million, resulting in a loss of $1.2 million. In addition, during February 2005, the Company consolidated personnel from another owned facility in Dallas, Texas to its facility in Irving, Texas. This facility was also sold in November 2005 for $3.5 million, resulting in no gain or loss.
As of December 31, 2005, the Company owned or leased numerous facilities throughout the world to support its operations. The Company believes that these facilities are adequate to meet its ongoing needs. The loss of any of the Company’s principal facilities could have an adverse impact on operations in the short term. The Company has the option to renew its facility leases or believes it can replace them with alternate facilities at comparable cost. The Irving manufacturing facility, which the Company owns, is the primary location for the Company’s administration, assembly and manufacturing activities.
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The Company is a party to various legal proceedings. None of those current proceedings is expected to have an outcome that is material to the financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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| MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
None.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected consolidated historical financial data for the periods indicated. The selected historical consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of the Company for the three years ended December 31, 2005, 2004 and 2003, and the related notes thereto.
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| Years Ended |
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| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, |
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| (In thousands) |
| |||||||||||||
Revenue |
| $ | 344,898 |
| $ | 360,726 |
| $ | 378,891 |
| $ | 379,433 |
| $ | 427,264 |
|
Gross profit |
| 87,490 |
| 87,406 |
| 97,112 |
| 96,205 |
| 55,885 |
| |||||
Operating expenses |
| 73,935 |
| 71,598 |
| 73,242 |
| 70,968 |
| 94,364 |
| |||||
Interest expense |
| 19,166 |
| 19,098 |
| 19,473 |
| 33,080 |
| 35,527 |
| |||||
Income (loss) from continuing operations before income taxes |
| (5,672 | ) | (3,606 | ) | 6,456 |
| 700 |
| (52,258 | ) | |||||
Income tax expense (benefit) |
| 1,623 |
| 13,621 |
| (11,370 | ) | 344 |
| 445 |
| |||||
Net income (loss) |
| (7,295 | ) | (17,227 | ) | 17,826 |
| 59,126 |
| (45,826 | ) | |||||
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Total assets |
| 197,214 |
| 216,065 |
| 239,515 |
| 231,395 |
| 315,049 |
| |||||
Working capital (deficit) |
| (5,988 | ) | 11,531 |
| 12,337 |
| (8,877 | ) | (8,970 | ) | |||||
Long-term debt, less current maturities |
| 199,063 |
| 197,823 |
| 197,823 |
| 201,723 |
| 304,798 |
| |||||
Series A preferred stock |
| 18,040 |
| 18,040 |
| 16,568 |
| 14,856 |
| 13,151 |
| |||||
Series B preferred stock |
| 13,520 |
| 13,520 |
| 10,609 |
| 8,324 |
| 6,632 |
| |||||
Stockholders’ deficit |
| (171,985 | ) | (159,703 | ) | (152,636 | ) | (161,724 | ) | (219,049 | ) | |||||
(A) In November 2002, the Company completed the sale of BancTec Japan. For financial statement purposes, the sale was treated as a discontinued operation. As a result, the financial data above has been restated for 2002 and prior years to reflect the continuing operations of the Company.
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF | |
|
| OPERATIONS. |
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN THIS DOCUMENT.
The following discussion contains forward-looking statements as that term is defined in the PSLRA. See “Forward Looking Statements.” The Company cautions investors that there can be no assurance 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, including those described below under the caption “Factors Affecting the Company’s Business and Prospects.” 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.
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Highlights
The Company believes several factors continued to create a challenging and competitive sales and cost-containment environment during the year ended December 31, 2005. These factors include: general economic conditions and reduced corporate customer technology spending; ongoing competitive pressures; an ongoing planned change in revenue mix within the Company’s Americas and EMEA segments; and a highly leveraged financial position. The change in revenue mix is partially a result of trends in payment processing, including check truncation (the process whereby banks are able to truncate original checks and to process check information electronically), which impacts domestic and international markets. Additionally, during 2005, the Americas and EMEA segments experienced revenue declines in the maintenance business, the duration of which the Company cannot predict.
Expected economic and business conditions into 2006 indicate a cautious outlook regarding the Company’s near-term revenue and earnings growth prospects. Many of the Company’s product offerings represent a significant capital expenditure for its customers. General economic conditions and the impact of check truncation have caused a continued weakening in demand for payment and check solutions products offered in North America. The Company continues to introduce new product offerings in its ECM solutions as well as expand its managed services business into North America. In addition, the Company continues to seek reductions in operating costs. Product-development efforts are focused on ECM solutions as well as hardware enhancements. By incorporating more third-party products into the Company’s solutions rather than developing the products, the Company can more easily target its efforts and expenditures to these core products and solutions.
During the year ended December 31, 2005, the Company experienced declines in maintenance contract deposits due to two primary factors. First, the overall amount of extended maintenance contracts have declined as a result of continued declines in prices of personal computers. As businesses and consumers have paid less per unit for personal computers, the purchase of extended maintenance contracts has declined as businesses and individuals choose to replace rather than repair. Second, the price per contract has declined due to competitive pressure from other service providers and also due to declines in the per unit price of personal computers.
Critical Accounting Policies
The Company’s significant accounting policies and methods used in the preparation of the Consolidated Financial Statements are discussed in Note A of the Notes to Consolidated Financial Statements. The following is a listing of the Company’s critical accounting policies and a brief discussion of each:
• Revenue recognition
• Allowance for doubtful accounts
• Inventory valuation
• Goodwill
• Income taxes
• Stock-based compensation
Revenue Recognition. The Company derives revenue primarily from two sources: (1) equipment and software sales - systems integration solutions which address complex data and paper-intensive work processes, including advanced web-enabled imaging and workflow technologies with both BancTec-manufactured equipment and third-party equipment, and (2) maintenance and other services - consist primarily of application design, development and maintenance, all aspects of desktop outsourcing, including field engineering, as well as help desk and LAN/WAN network outsourcing.
The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” “Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” SAB No. 104, “Revenue Recognition,” Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” EITF No. 03-5, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.”
Software and software elements (including equipment, installation and training)
In the case of software arrangements that require significant production, modification, or customization of software, or the license agreements require the Company to provide implementation services that are determined to be essential to other elements of the arrangement, the Company follows the guidance in SOP 81-1, “Accounting for Performance of
11
Construction–Type and Certain Production–Type Contracts,” and applies the completed contract method of accounting. In compliance with the completed contract method under SOP 81-1, revenue is recognized when proof of customer acceptance has been received. In the case of non-software elements, the Company applies EITF No. 00-21 where revenues related to arrangements with multiple elements are allocated to each element based on the element’s relative fair value. Revenue allocated to separate elements is recognized for each element in accordance with the accounting policies described below. EITF No. 03-5 is applied in determining whether non-software elements are included with the software in applying SOP 97-2.
If the Company cannot account for items included in a multiple-element software or non-software arrangement as separate units of accounting, they are combined and accounted for as a single unit of accounting and generally recognized as the undelivered items or services are provided to the customer. The Company specifically uses the residual method, under which revenue is recognized on the delivered elements only when the remaining undelivered element is postcontract customer support (PCS), including equipment maintenance.
The Company recognizes hardware and software revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. At the time of the transaction, the Company determines whether the fee associated with revenue transactions is fixed or determinable and whether or not collection is reasonably assured. The Company determines whether the fee is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after the normal payment terms, which are generally 30 days from invoice date, the Company recognizes revenue as the fees are due. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from customers. If the Company determines that collection of the fee is not reasonably assured, the Company defers the revenue and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. For all sales, the Company generally uses either a binding purchase order or signed sales agreement as evidence of an arrangement.
Non-software equipment
The Company recognizes revenue from sales of non-software related equipment and supplies upon delivery and transfer of title or upon customer acceptance.
Postcontract customer support
Maintenance contracts are primarily one year in duration and the revenue generated is generally recognized ratably over the term of the contract.
Maintenance services not classified as postcontract customer support (PCS)
The Company’s services revenue is primarily billed based on contractual rates and terms, and the Company generally recognizes revenue as these services are performed which, in some cases, is ratably over the contract term. Certain customers advance funds prior to the performance of the services. The Company recognizes revenue related to these advances as services are performed over time or on a “per call” basis. Certain estimates are used in recognizing revenue on a “per call” basis related to breakdown rates, contract types, calls related to specific contract types, and contract periods. The Company uses its best judgment to relate calls to contracts. In addition, as actual breakdown experience rates are compared to estimates, such estimates may change over time and will result in adjustments to the amount of “per call” revenue.
During the quarter ended June 30, 2004, the Company recorded revenue of $4.3 million reflecting an adjustment arising out of a change in accounting estimate related to service revenue. The information used in computing these estimates is partially provided by a customer, and since June 30, 2004, this information has been provided to the Company on a more timely and accurate basis, resulting in greater accuracy of these estimates. The Company anticipates that future adjustments, if necessary, related to these estimates will be immaterial to the results of operations. The current and non-current portions of these advances are shown as Deferred Revenue or Maintenance Contract Deposits on the Consolidated Balance Sheets.
Allowance for Doubtful Accounts. The Company’s allowance for doubtful accounts relates to trade accounts receivable. The allowance for doubtful accounts is an estimate prepared by management based on identification of the collectibility of specific accounts and the overall condition of the receivable portfolios. The Company analyzes trade receivables, and analyzes historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Likewise, should the Company determine that it would be able to realize more of its receivables in the future than previously estimated, an adjustment to the allowance would increase income in the
12
period such determination was made. The allowance for doubtful accounts is reviewed periodically and adjustments are recorded as deemed necessary.
Inventory Valuation. The Company periodically evaluates the carrying amount of inventory based on the identification of excess and obsolete inventory. The Company’s evaluation involves a multi-element approach incorporating inventory turnover and the stratification of inventory by risk category, among other elements. The approach incorporates both recent historical information and management estimates of trends. The Company’s approach is intended to take into consideration potential excess and obsolescence caused by a decreasing installed base, engineering changes and end of manufacture. If any of the elements of the Company’s estimate were to deteriorate, additional reserves may be required. The inventory reserve calculations are reviewed periodically and additional reserves are recorded as deemed necessary.
Goodwill. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Goodwill is not amortized but rather is tested at least annually for impairment. The impairment test is based on fair value compared to the recorded value at a reporting unit level. Reporting units are defined as an operating segment or one level below. Valuation methods used in determining fair value include an analysis of the cash flows that the reporting units can be expected to generate in the future (“Income Approach”) and the fair value of a reporting unit as compared to similar publicly traded companies (“Market Approach”). In preparing these valuations, management utilizes estimates to determine fair value of the reporting units. These estimates include future cash flows, growth rates, capital needs and projected margins, among other factors. The Company performs the annual test for impairment as of December 31, each year. No impairment of goodwill has been deemed necessary for 2005 and 2004.
Estimates utilized in future calculations could differ from estimates used in the current period. Future years’ estimates that are unfavorable compared to current estimates could cause an impairment of goodwill.
Income Taxes. The Company is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating the Company’s actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which would be included within the Company’s consolidated balance sheet. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent that the Company believes recovery is not likely, the Company must establish a valuation allowance. To the extent the Company establishes a valuation allowance in a period, the Company must include an expense within the tax provision in the statement of operations. The Company has recorded a valuation allowance to reduce the carrying amount of recorded deferred tax assets representing future deductions to an amount that is more likely than not to be realizable. In the event the Company were to determine that it would be able to realize additional deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Stock-Based Compensation. The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees. The Company complies with the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. In March 2005, the Securities and Exchange Commission issued SAB No. 107, which provides additional implementation guidance for SFAS 123. Among other things, SAB 107 provides guidance on share-based payment valuations, income statement classification and presentation, capitalization of costs and related income tax accounting.
13
Under the intrinsic-value method, compensation expense is recorded only to the extent that the strike price is less than fair value on the measurement date. All options granted in 2004 and 2005 were issued at or above fair value, and therefore no stock-based compensation was recorded. In addition, at December 30, 2005, when the options were repriced, creating variable plan accounting, no stock-based compensation was recorded in accordance with APB 25, as the repriced options had no intrinsic value on the date of the change. In addition, as of December 31, 2005, the options had no intrinsic value.
The following table illustrates the effect on net income (loss) as if compensation for the Company’s stock option plans had been determined in conformance with SFAS No. 123:
|
| Year Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Net income (loss) applicable to common stock, as reported |
| $ | (7,295 | ) | $ | (21,610 | ) | $ | 13,829 |
|
Total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax |
| (55 | ) | (17 | ) | — |
| |||
Pro Forma net income (loss) |
| $ | (7,350 | ) | $ | (21,627 | ) | $ | 13,829 |
|
The fair value of each stock-option grant under the stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model. During 2005, the Company obtained an independent valuation of the fair value of each stock option grant on the date of grant using the lattice model and the Black-Scholes option-pricing model, both of which yielded approximately the same result. As a result, the Company has revised the compensation expense for all years as determined under SFAS No. 123R in the table above using the Black-Scholes option-pricing model. The current and revised fair value of each stock-option grant was estimated with the following weighted-average assumptions and results:
|
| Years Ended December 31, |
| |||||||
Weighted Average |
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Risk free interest rate |
| 4.7 | % | 4.1 | % | 5.8 | % | |||
Expected life |
| 10 years |
| 10 years |
| 10 years |
| |||
Expected volatility |
| 40.0 | % | 40.0 | % | 40.0 | % | |||
Fair value of options granted |
| $ | 0.42 |
| $ | 0.12 |
| $ | 0.14 |
|
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2005 and December 31, 2004
Consolidated revenue of $344.9 million for the year ended December 31, 2005 decreased by $15.8 million or 4.4% from the comparable prior-year period.
• The Americas revenue decrease of $7.7 million continues to reflect the decline in maintenance revenue due to the Company’s installed products reaching the end of their useful lives and from increasing competition. The Company expects these trends to continue on these end of life products. In addition, hardware and software product revenue declines was primarily related to a weak market for payments solutions due to market trends, including reduced check volume and check truncation.
• The ITSM decrease of $1.0 million resulted from pricing decreases, domestic competitive pressure, and decreased volumes under certain maintenance programs, partially offset by revenue increases resulting from the continued expansion by ITSM of operations into Europe.
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• Decreases in EMEA of $7.2 million are the result of decreased sales in Europe of ECM solutions compared with the prior year’s period and the impact of the strengthening dollar on the conversion of revenue stated in foreign currencies. Factors expected to impact future revenue include corporate-customer spending for large systems-solutions, the continued impacts of check truncation, industry consolidation reducing the volume of customers, on-going competitive pressures, and fluctuations in international currencies.
Consolidated gross profit of $87.5 million increased by $0.1 million or 0.1% from the comparable prior-year period. Decreases in ITSM of $5.3 million and EMEA of $0.1 million were partially offset by increases in Americas of $5.0 million.
• The increase in Americas resulted from an improved gross margin percentage from 28.1% to 33.8% resulting from productivity improvements and cost savings.
• Although the EMEA gross margin percentage increased from 31.3% to 33.1%, this was not enough to offset decreases in gross margin resulting from revenue declines. Continued efforts to provide proven deliverables as well as targeted new offerings, including ECM solutions, archive solutions and hardware enhancements, which, along with ongoing cost-containment efforts, allowed for cost reductions to strengthen the EMEA gross profit percentage.
• ITSM gross profit percentage decreased from 12.1% to 7.9% resulting primarily from decreased revenue, margin reduction caused by competitive pricing pressure and volume losses experienced under certain service contracts. ITSM is the major component in the maintenance and other services category on the Consolidated Statements of Operations, and therefore is the primary contributing factor in the decreased gross profit in that category.
Operating expenses of $73.9 million represented an increase of $2.3 million compared to the comparable prior-year period. Operating expenses, by component, changed primarily as follows: (1) Product development expenses increased $1.0 million compared to the prior year primarily due to the focused realignment of research and development expenditures against future product strategies and marketing plans. (2) Selling, general and administrative expenses increased by $1.4 million or 2.2%. Selling, general and administrative expense included a $1.2 million loss from the sale of a vacated facility in Dallas, Texas in October 2005.
Interest expense for the year ended December 31, 2005 was flat at $19.1 million compared to the prior-year period.
Sundry items resulted in a net loss of $0.8 million during the year ended December 31, 2005 as compared to a net loss of $1.0 million during the comparable prior-year period. This decreased loss is primarily due to foreign exchange transaction losses of $0.8 million during the current year period. This is compared to a $1.3 million loss on the sale of 100% of the Company’s investment in the stock of Servibanca S.A. during the prior year period, which was partially offset by foreign exchange transaction gains of $0.3 million.
An income tax provision of $1.6 million for the year ended December 31, 2005, is compared to a corresponding prior-year income tax provision of $13.6 million. The Company’s effective income tax rate was approximately (28.6%) as compared to (377.7%) for the corresponding prior-year period. During 2004, the Company recorded an additional valuation allowance of $10.3 million on the deferred income tax asset to reduce that asset to a carrying amount that is more likely than not to be realizable. No similar additional allowance was required in 2005.
Comparison of Years Ended December 31, 2004 and December 31, 2003
Consolidated revenue of $360.7 million for the year ended December 31, 2004 decreased by $18.2 million or 4.8% from the comparable prior-year period.
• The Americas revenue decrease of $27.4 million was partially related to the decline in maintenance revenue due to the Company’s installed products reaching the end of their useful lives and from increasing competition. The Company expects these trends to continue on these end of life products. In addition, a decline in revenues related to the sale and installation of hardware and software products was primarily related to a weak market for payments solutions due to market trends, including reduced check volume, check truncation, and the recent passage of Check 21.
• The ITSM decrease of $1.1 million resulted from pricing decreases, domestic competitive pressure, and decreased volumes under certain maintenance programs, partially offset by revenue increases resulting from the expansion by ITSM of operations into Europe.
15
• Increases in EMEA of $12.9 million are the result of the impact of the weakening dollar on the conversion of revenue stated in foreign currencies and the continued growth in the United Kingdom of managed services as well as increased sales in Europe of ECM solutions. Factors expected to impact future revenue include corporate-customer spending for large systems-solutions, the continued impacts of check truncation, industry consolidation reducing the volume of customers, on-going competitive pressures, and fluctuations in international currencies.
Consolidated gross profit of $87.4 million decreased by $9.7 million or 10.0% from the comparable prior-year period. Decreases in ITSM of $7.4 million and Americas of $6.1 million were partially offset by increases in EMEA of $4.8 million.
• The decrease in Americas resulted from decreased revenues as well as a decrease in the Americas gross margin percentage from 27.1% to 28.1%.
• Increases in EMEA gross profit resulted partially from increased revenue, including the impact of currency conversion, as well as a higher gross profit percentage, increasing from 30.5% to 33.1%. Continued efforts to provide proven deliverables as well as targeted new offerings, including ECM solutions, image capture solutions and hardware enhancements, which, along with ongoing cost-containment efforts, contributed to the strengthening of EMEA gross profit.
• ITSM’ gross profit percentage decreased from 17.8% to 12.1% resulting primarily from decreased revenue, margin reduction caused by competition pricing pressure and volume losses experienced under certain service contracts. ITSM is the major component in the maintenance and other services category on the Consolidated Statements of Operations, and therefore is the primary contributing factor in the decreased gross profit in the maintenance and other services category.
Operating expenses of $71.6 million represented a decrease of $1.6 million compared to the comparable prior-year period. Operating expenses, by component, changed as follows: (1) Product development expenses decreased $4.8 million compared to the prior year primarily due to the focused realignment of research and development expenditures against future product strategies and marketing plans. (2) Selling, general, and administrative expenses increased by $3.0 million or 4.9%. The increase partially resulted from additional marketing expenditures aimed at new product strategies, increased IT-related expenditures and severance obligations to former officers of the Company.
Interest expense for the year ended December 31, 2004 decreased to $19.1 million from $19.5 million in the comparable prior-year period.
Sundry items resulted in a net loss of $1.0 million during the year ended December 31, 2004 as compared to net income of $1.4 million during the comparable prior-year period. This decrease is primarily due to the $1.3 million loss on the sale of 100% of the Company’s investment in the stock of Servibanca S.A. during fiscal 2004, compared to a gain of approximately $1.1 million from the Company’s repurchase of Senior Notes during the prior-year period.
An income tax provision of $13.6 million for the year ended December 31, 2004, is compared to a corresponding prior-year income tax benefit of $11.4 million. The Company’s effective income tax rate was approximately (377.7%) as compared to (176.1%) for the corresponding prior-year period. During 2004, the Company recorded an additional valuation allowance of $10.3 million on the deferred income tax asset to reduce that asset to a carrying amount that is more likely than not to be realizable.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s working capital requirements are generally provided by cash and cash equivalents, funds available under the Company’s revolving credit facility, as discussed below, which matures May 30, 2008, and by internally generated funds from operations. Funds availability under the revolving credit facility is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory, real property, machinery and equipment and pledged cash. General economic conditions, decreased revenues from the Company’s maintenance contracts, and the requirement to obtain performance bonds or similar instruments could have a material impact on the Company’s future liquidity. The Company believes that cash flow from operations, as well as available borrowings under its revolving credit facility and other sources of funding, will be sufficient to fund its operations for at least the next 12 months.
The Company’s cash and cash equivalents, including restricted cash, totaled $21.7 million at December 31, 2005, compared to $51.5 million at December 31, 2004. Working capital decreased $17.5 million to a working capital deficit of $6.0 million
16
at December 31, 2005. The change in working capital was primarily due to decreases in deferred revenue and current maintenance contract deposits totaling $9.9 million. During the year ended December 31, 2005, the Company experienced continued declines in maintenance contract deposits due to two primary factors. First, the overall amount of extended maintenance contracts have declined as a result of continued declines in prices of personal computers. As businesses and consumers have paid less per unit for personal computers, the purchase of extended maintenance contracts have declined as businesses and individuals choose to replace rather than repair. Second, the price per contract has declined due to competitive pressure from other service providers and also due to declines in the per unit price of personal computers. In addition, increases in accounts receivable of $12.2 million contributed to the decrease in working capital. These were somewhat offset by a decrease in inventory of $4.7 million and an increase in accounts payable of $5.4 million.
During 2005, the Company relied primarily on cash reserves to fund operations. At December 31, 2005, the Company’s remaining availability under the Revolver, as hereinafter defined, was $25.2 million, of which the Company could draw $14.7 million.
Operating activities utilized $12.8 million of cash in 2005 and $5.7 million of cash in 2004, an increase of $7.1 million. Net income, excluding depreciation, amortization and deferred tax expense, decreased by $2.4 million. The increase in cash utilized by operating activities primarily resulted from a decrease in cash generated by changes in working capital assets and liabilities of $5.1 million. This increase in cash utilized by operating activities mainly consisted of additional increases in accounts receivable of $7.9 million, and additional decreases in deferred revenue and maintenance contract deposits of $5.2 million.
Investing activities used net cash of $14.0 million during 2005 compared to $12.0 million in 2004. The uses of cash for 2005 consisted of purchases of property, plant and equipment of $14.5 million and business and asset acquisitions of $5.4 million, offset by cash received from the sale of fixed assets of $5.1 million. The uses of cash for 2004 consisted of purchases of property, plant and equipment of $6.8 million, offset by cash received from the sale of the Company’s interest in Servibanca S.A. of $3.0 million. In addition, changes in restricted cash balances decreased $14.7 million from the prior year period. Restricted cash balances in 2003 and early 2004 related to cash pledged against revolver letter of credit commitments, which were eliminated in late 2004.
Financing activities used $0.5 million of net cash in 2005 compared to $1.2 million of net cash in 2004. Both uses of cash consisted primarily of reductions to the Company’s debt and capital lease obligations.
At December 31, 2005, the Company’s principal outstanding debt instruments consisted of (i) $0.001 million under the revolving credit facility maturing May 30, 2008 (which is more fully described below) (ii) $94.0 million of 7.5% Senior Notes due 2008, and (iii) $103.8 million Sponsor Notes due 2009. As of December 31, 2005, the Company’s foreign subsidiaries had no outstanding borrowings. The Company or its affiliates may from time to time purchase, redeem or pay deferred interest on some of its outstanding debt or equity securities. The Company would only make these payments in compliance with the covenants of its debt instruments.
The Company continually reviews its various lines of business to assess their contribution to the Company’s business plan and from time to time considers the sale of certain assets in order to raise cash or reduce debt. Accordingly, the Company from time to time has explored and may explore possible asset sales by seeking expressions of interest from potential bidders. However, as of December 31, 2005, the Company has not entered into any binding agreements or agreements in principle to sell any assets and there can be no assurance that any such asset sales will occur or, if they occur, as to the timing or amount of proceeds that such assets sales may generate.
Revolving Credit Facility. The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”). Effective March 31, 2006, the Company and Heller entered into an amendment to the Revolver which extended the maturity date from May 30, 2006 to May 30, 2008. The committed amount is $40 million, with a letter-of-credit sub-limit of $10 million. The Revolver is secured by substantially all the assets of the Company, subject to the limitations on liens contained in the Company’s existing Senior Notes. Funds availability under the Revolver is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory, owned real property, machinery and equipment and pledged cash. At December 31, 2005, the Company had $0.001 million outstanding under the Revolver and no outstanding balance on letters-of-credit, The current borrowing base availability under the Revolver that the Company can draw was $14.7 million at December 31, 2005. A commitment fee of 0.5% per annum on the unused portion of the Revolver is payable quarterly.
The interest rate on borrowings under the Revolver is, at the Company’s option, either (1) 1.25% over prime or (2) 2.75% over LIBOR. Under an amendment effective September 1, 2003, the interest rate margins over prime and LIBOR may be
17
increased by 0.25% increments when the fixed charge coverage ratio falls below (1) 1.5 to 1.0 and (2) 1.25 to 1.0 and (total rate increase of 0.50%) or decreased by 0.25% increments when the fixed charge coverage ratio is greater than (1) 1.75 to 1.0, (2) 2.0 to 1.0, and (3) 2.25 to 1.0 (total rate decrease of 0.75%). At December 31, 2005, the Company’s weighted average rate on the Revolver was 9.0% under the prime option.
Under the Revolver, substantially all of the Company’s domestic cash receipts (including proceeds from accounts receivable and asset sales) must be applied to repay the outstanding loans, which may be re-borrowed subject to availability in accordance with the borrowing base formula. The Revolver contains restrictions on the use of cash for dividend payments or non-scheduled principal payments on certain indebtedness. Restricted cash at December 31, 2005 of $3.2 million represents cash pledged under the terms of the Revolver and cash in escrow from a customer deposit. Restricted cash at December 31, 2004 of $4.1 million represents cash pledged against revolver letter of credit commitments.
The Revolver contains various representations, warranties and covenants, including financial covenants as to maximum capital expenditures, minimum fixed charge coverage ratio and minimum average borrowing availability. Effective December 31, 2004, the Company and Heller amended the loan and security agreement to decrease the minimum fixed charge coverage ratio from 1.1 to 1.0. The Company has experienced recent decreases in its fixed charge coverage ratio which necessitated the amendment to the Revolver. At December 31, 2005, the Company was in compliance with all covenants under the Revolver.
Senior Notes. The Company’s Senior Notes (the “Senior Notes”) accrue interest at a fixed 7.5% rate which is due and payable in semi-annual installments. The Senior Notes contain covenants placing limitations on the Company’s ability to permit subsidiaries to incur certain debts, incur certain loans and liens, and engage in certain sale and leaseback transactions. During the year ended December 31, 2003, the Company repurchased Senior Notes with a face amount of $3.9 million. The Company wrote off a proportionate share of deferred financing fees, resulting in a gain of approximately $1.1 million, which was reported as Sundry net in the accompanying consolidated statements of operations for 2003. At December 31, 2005, the Company had $94.0 million outstanding on the Senior Notes.
Senior Subordinated Unsecured Sponsor Note. The Company’s $160.0 million Sponsor Note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid. The interest payments began September 30, 1999. The Sponsor Note matures on July 22, 2009. As provided under the agreement, however, the Sponsor Note holder, WCAS, elected to defer quarterly interest payments of $4.0 million for each of the June 2000 through September 2001 quarterly periods resulting in an increase in the principal amount of the Sponsor Note totaling $33.8 million. Such election required the Company to incur a deferred financing fee of 30.0% of the amount of each interest payment deferred. The Company accounts for the additional financing fees as a change in the effective interest rate of the debt. WCAS may, at its election, defer each future quarterly payment under similar terms. WCAS has elected not to defer the quarterly payments since September 2001 and currently does not intend to elect deferral of the quarterly payments in the near future.
Financing Arrangements. During 2005, the Company entered into a financing arrangement for $2.1 million that pertained to computer software. At December 31, 2005, the Company had financing arrangement balances outstanding of $1,9 million, of which $0.6 million was classified as current and $1.3 million was classified as long-term. This arrangement accrues interest at a fixed 8.0% rate. This arrangement is due in three annual installments beginning January 2006.
Preferred Stock – Series A. As of December 31, 2005, the carrying amount of the Series A Preferred stock was $18.0 million and the stated value of the Series A Preferred stock, including accumulated but unpaid dividends, was $201.32 per share.
Preferred Stock – Series B. As of December 31, 2005, the carrying amount of the Series B Preferred stock was $13.5 million and the stated value of the Series B Preferred stock, including accumulated but unpaid dividends, was $380.63 per share.
Inflation. Inflation has not had a material effect on the operating results of the Company.
OFF BALANCE SHEET ARRANGEMENTS
The Company currently does not have any off balance sheet arrangements.
18
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
In the normal course of business, the Company enters into various contractual and other commercial commitments that impact, or could impact, the liquidity of operations. The following table outlines the commitments at December 31, 2005:
|
| Total |
| Less than |
| 1-3 |
| 4-5 |
| Over 5 |
| |||||
|
| (In Millions) |
|
|
|
|
|
|
| |||||||
Long-term debt |
| $ | 199.7 |
| $ | 0.6 |
| $ | 95.3 |
| $ | 103.8 |
| $ | — |
|
Interest obligations long-term debt |
|
| 54.4 |
|
| 17.5 |
|
| 30.8 |
|
| 6.1 |
|
| — |
|
Capital leases |
| 1.3 |
| 0.6 |
| 0.7 |
| — |
| — |
| |||||
Purchase obligations |
| — |
| — |
| — |
| — |
| — |
| |||||
Operating leases (non-cancelable) |
| 14.6 |
| 5.6 |
| 6.1 |
| 1.6 |
| 1.3 |
| |||||
Total Contractual |
| $ | 269.4 |
| $ | 24.3 |
| $ | 132.9 |
| $ | 111.5 |
| $ | 1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Unused lines of credit |
| $ | 14.7 |
| $ | 14.7 |
| $ | — |
| $ | — |
| $ | — |
|
Standby letters of credit |
| — |
| — |
| — |
| — |
| — |
| |||||
Total Commercial |
| $ | 14.7 |
| $ | 14.7 |
| $ | — |
| $ | — |
| $ | — |
|
Purchase Obligations — Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include contracts that may be cancelled without penalty. The Company had no purchase obligations at December 31, 2005.
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company is required to adopt SFAS No. 123(R) in fiscal 2006, beginning January 1, 2006. The Company does not anticipate the adoption of SFAS No. 123R to be material to the statement of condition or results of operations of the Company.
In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which will become effective for the Company beginning January 1, 2006. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed production overhead costs to inventory be based on the normal capacity of the production facilities. The Company does not anticipate the adoption of SFAS No. 151 to be material to the statement of condition or results of operations of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is subject to certain market risks arising from transactions in the normal course of its business, and from obligations under its debt instruments. Such risk is principally associated with interest rate and foreign exchange fluctuations, as explained below.
Interest Rate Risk
The Company utilizes long-term fixed rate and short-term variable rate borrowings to finance the working capital and capital requirements of the business. At December 31, 2005 and 2004, the Company had outstanding Senior Notes, due in
19
2008, of $94.0 million, with a fixed interest rate of 7.5%. At December 31, 2005 and 2004, the Company also had the Sponsor Note, due 2009, with a balance of $103.8 million. The Sponsor Note bears interest at a fixed rate of 10.0%.
The interest rate on loans under the Revolver is, at the Company’s option, either (1) 1.25% over prime or (2) 2.75% over LIBOR. Under an amendment effective September 1, 2003, the interest rate margins over prime and LIBOR may be increased by 0.25% increments when the fixed charge coverage ratio falls below (1) 1.5 to 1.0 and (2) 1.25 to 1.0 and (total rate increase of 0.50%) or decreased by 0.25% increments when the fixed charge coverage ratio is greater than (1) 1.75 to 1.0, (2) 2.0 to 1.0, and (3) 2.25 to 1.0 (total rate decrease of 0.75%). At December 31, 2005, the Company’s weighted average rate on the Revolver was 8.75% under the prime option. A balance of $0.001 million was outstanding under the Revolver at December 31, 2005. Although no substantial actual balances were outstanding under the Revolver at December 31, 2005, assuming $1.0 million in borrowings under the Revolver, a one hundred basis point change in the bank’s prime or LIBOR rate would impact net interest expense by $10,000 over a twelve-month period
The estimated fair values of the outstanding Senior Notes and the Sponsor Note, based upon recently completed market trades, comparable borrowing rates and the relative seniority preference of the instruments under certain circumstances, were $66.9 million at December 31, 2005 and 2004 for the Senior Notes, and $61.2 million and $64.4 million at December 31, 2005 and 2004, respectively, for the Sponsor Note. The Company does not expect changes in fair value of the Senior Notes or the Sponsor Note to have a significant effect on the Company’s operations, cash flow or financial position.
Foreign Currency Risk
The Company’s international subsidiaries operate in approximately 11 countries and use the local currencies as the functional currency and the U.S. dollar as the reporting currency. Transactions between the Company and the international subsidiaries are denominated in U.S. dollars. As a result, the Company has certain exposures to foreign currency risk. However, management believes that such exposure does not present a significant risk due to a relatively limited number of transactions and operations denominated in foreign currency. Approximately $128.6 million or 37.3% of the Company’s revenues are denominated in the international currencies. Transaction gains and losses on U.S. dollar denominated transactions are recorded within Sundry, net in the accompanying consolidated statements of operations and were not material.
The Company may use foreign forward currency-exchange rate contracts to minimize the adverse earnings impact from the effect of exchange rate fluctuations. No hedging instruments existed at December 31, 2005.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BANCTEC, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements and Independent Registered Public Accounting Firms’ Reports |
|
|
|
| |
|
|
Consolidated Balance Sheets at December 31, 2005 and December 31, 2004 |
|
|
|
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 |
|
|
|
| |
|
|
| |
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 |
|
|
|
| |
|
|
Supplemental Schedule |
|
|
|
Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003 |
|
All other schedules have been omitted as the required information is inapplicable, not required, or the information is included in the financial statements and notes thereto.
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
BancTec, Inc.
Irving, TX
We have audited the accompanying consolidated balance sheet of BancTec, Inc. and subsidiaries (the “Company”) as of December 31, 2005, and the related consolidated statements of operations, stockholders’ deficit, comprehensive (loss) income, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BancTec, Inc. and subsidiaries at December 31, 2005, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
| /s/ Deloitte & Touche LLP |
|
Dallas, Texas
April 17, 2006
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BancTec, Inc.
We have audited the accompanying consolidated balance sheet of BancTec, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ deficit and cash flows for each of the years in the two-year period ended December 31, 2004. In connection with our audit of the consolidated financial statements, we have also audited the accompanying Schedule II, Valuation and Qualifying Accounts (“financial statement schedule”) as of December 31, 2004 and for each of the years in the two-year period ended December 31, 2004. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BancTec, Inc. and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule as of December 31, 2004 and for each of the years in the two-year period ended December 31, 2004, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
| /s/ KPMG LLP |
|
|
| |
|
| |
Dallas, Texas |
| |
March 31, 2005 |
|
23
BANCTEC, INC.
ASSETS
(In thousands)
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
CURRENT ASSETS: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 18,540 |
| $ | 47,431 |
|
Restricted cash |
| 3,205 |
| 4,056 |
| ||
Accounts receivable, less allowance for doubtful accounts of $1,110 and $931 at December 31, 2005 and 2004, respectively |
| 58,020 |
| 45,772 |
| ||
Inventories, net |
| 19,807 |
| 24,466 |
| ||
Prepaid expenses |
| 5,488 |
| 4,950 |
| ||
Other current assets |
| 1,115 |
| 1,984 |
| ||
Total current assets |
| 106,175 |
| 128,659 |
| ||
|
|
|
|
|
| ||
PROPERTY, PLANT AND EQUIPMENT, AT COST: |
|
|
|
|
| ||
Land |
| 874 |
| 2,860 |
| ||
Field support spare parts |
| 34,853 |
| 38,057 |
| ||
Systems and software |
| 52,263 |
| 49,785 |
| ||
Machinery and equipment |
| 21,094 |
| 23,360 |
| ||
Furniture, fixtures and other |
| 9,573 |
| 12,098 |
| ||
Buildings |
| 20,716 |
| 26,529 |
| ||
Construction in process |
| 5,483 |
| — |
| ||
|
| 144,856 |
| 152,689 |
| ||
Less accumulated depreciation and amortization |
| (114,932 | ) | (118,435 | ) | ||
Property, plant and equipment, net |
| 29,924 |
| 34,254 |
| ||
|
|
|
|
|
| ||
OTHER ASSETS: |
|
|
|
|
| ||
Goodwill |
| 41,973 |
| 41,476 |
| ||
Other intangible assets, less accumulated amortization of $297 at December 31, 2005 |
| 5,018 |
| — |
| ||
Deferred income taxes |
| 10,336 |
| 6,874 |
| ||
Other assets |
| 3,788 |
| 4,802 |
| ||
Total other assets |
| 61,115 |
| 53,152 |
| ||
TOTAL ASSETS |
| $ | 197,214 |
| $ | 216,065 |
|
See notes to consolidated financial statements.
24
BANCTEC, INC.
LIABILITIES AND STOCKHOLDERS’ DEFICIT
(In thousands, except share data)
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
CURRENT LIABILITIES: |
|
|
|
|
| ||
Current obligations under capital leases, financing arrangements and revolver |
| $ | 1,095 |
| $ | 299 |
|
Trade accounts payable |
| 19,870 |
| 14,479 |
| ||
Other accrued expenses and liabilities |
| 31,293 |
| 34,377 |
| ||
Deferred revenue |
| 21,505 |
| 23,778 |
| ||
Maintenance contract deposits |
| 33,453 |
| 41,083 |
| ||
Income taxes payable |
| 4,947 |
| 3,112 |
| ||
Total current liabilities |
| 112,163 |
| 117,128 |
| ||
|
|
|
|
|
| ||
OTHER LIABILITIES: |
|
|
|
|
| ||
Long-term debt and financing arrangements |
| 199,063 |
| 197,823 |
| ||
Non-current maintenance contract deposits |
| 11,466 |
| 20,547 |
| ||
Pension liability |
| 22,719 |
| 18,341 |
| ||
Other liabilities |
| 5,748 |
| 3,889 |
| ||
Total other liabilities |
| 238,996 |
| 240,600 |
| ||
Total liabilities |
| 351,159 |
| 357,728 |
| ||
COMMITMENTS AND CONTINGENCIES (Note L) |
|
|
|
|
| ||
|
|
|
|
|
| ||
SERIES A PREFERRED STOCK - issued and outstanding, 100,667 shares at December 31, 2005 and 2004 |
| 18,040 |
| 18,040 |
| ||
|
|
|
|
|
| ||
STOCKHOLDERS’ DEFICIT: |
|
|
|
|
| ||
Cumulative preferred stock - authorized, 200,000 shares of $0.01 par value at December 31, 2005 and December 31, 2004 |
|
|
|
|
| ||
Series B convertible preferred stock - issued and outstanding, 35,520 shares at December 31, 2005 and 2004 |
| 13,520 |
| 13,520 |
| ||
Common stock - authorized, 21,800,000 shares of $0.01 par value at December 31, 2005 and 2004: |
|
|
|
|
| ||
Common stock - issued and outstanding 17,003,838 shares at December 31, 2005 and 2004 |
| 170 |
| 170 |
| ||
Class A common stock - issued and outstanding 1,181,946 shares at December 31, 2005 and 2004 |
| 12 |
| 12 |
| ||
Subscription stock warrants |
| 3,726 |
| 3,726 |
| ||
Additional paid-in capital |
| 122,655 |
| 122,655 |
| ||
Accumulated deficit |
| (293,542 | ) | (286,247 | ) | ||
Accumulated other comprehensive loss |
| (18,526 | ) | (13,539 | ) | ||
Total stockholders’ deficit |
| (171,985 | ) | (159,703 | ) | ||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT |
| $ | 197,214 |
| $ | 216,065 |
|
See notes to consolidated financial statements.
25
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
REVENUE |
|
|
|
|
|
|
| |||
Equipment and software |
| $ | 126,676 |
| $ | 137,842 |
| $ | 149,654 |
|
Maintenance and other services |
| 218,222 |
| 222,884 |
| 229,237 |
| |||
|
| 344,898 |
| 360,726 |
| 378,891 |
| |||
COST OF SALES |
|
|
|
|
|
|
| |||
Equipment and software |
| 74,986 |
| 90,148 |
| 98,781 |
| |||
Maintenance and other services |
| 182,422 |
| 183,172 |
| 182,998 |
| |||
|
| 257,408 |
| 273,320 |
| 281,779 |
| |||
Gross profit |
| 87,490 |
| 87,406 |
| 97,112 |
| |||
|
|
|
|
|
|
|
| |||
OPERATING EXPENSES |
|
|
|
|
|
|
| |||
Product development |
| 8,823 |
| 7,768 |
| 12,548 |
| |||
Selling, general and administrative |
| 65,112 |
| 63,830 |
| 60,694 |
| |||
|
| 73,935 |
| 71,598 |
| 73,242 |
| |||
Income from operations |
| 13,555 |
| 15,808 |
| 23,870 |
| |||
|
|
|
|
|
|
|
| |||
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
| |||
Interest income |
| 710 |
| 718 |
| 690 |
| |||
Interest expense |
| (19,166 | ) | (19,098 | ) | (19,473 | ) | |||
Sundry, net |
| (771 | ) | (1,034 | ) | 1,369 |
| |||
|
| (19,227 | ) | (19,414 | ) | (17,414 | ) | |||
(LOSS) INCOME BEFORE INCOME TAXES |
| (5,672 | ) | (3,606 | ) | 6,456 |
| |||
INCOME TAX EXPENSE (BENEFIT) |
| 1,623 |
| 13,621 |
| (11,370 | ) | |||
NET (LOSS) INCOME |
| (7,295 | ) | (17,227 | ) | 17,826 |
| |||
PREFERRED STOCK DIVIDENDS AND ACCRETION OF DISCOUNT |
| — |
| (4,383 | ) | (3,997 | ) | |||
NET (LOSS) INCOME APPLICABLE TO COMMON STOCK |
| $ | (7,295 | ) | $ | (21,610 | ) | $ | 13,829 |
|
See notes to consolidated financial statements.
26
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the years ended December 31, 2005, 2004and 2003
(In thousands, except share data)
|
| Series |
|
|
| Class |
|
|
|
|
|
|
| Accumulated |
|
|
| ||||||||
|
| B |
|
|
| A |
|
|
| Additional |
|
|
| Other |
|
|
| ||||||||
|
| Preferred |
| Common |
| Common |
| Subscription |
| Paid in |
| Accumulated |
| Comprehensive |
|
|
| ||||||||
|
| Stock |
| Stock |
| Stock |
| Warrants |
| Capital |
| Deficit |
| Loss |
| Total |
| ||||||||
Balance at January 1, 2003 |
| $ | — |
| $ | 170 |
| $ | 12 |
| $ | 3,726 |
| $ | 131,035 |
| $ | (286,846 | ) | $ | (9,821 | ) | $ | (161,724 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,414 |
| 1,414 |
| ||||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| 17,826 |
| — |
| 17,826 |
| ||||||||
Minimum pension liability, net of tax |
| — |
| — |
| — |
| — |
| — |
| — |
| (6,155 | ) | (6,155 | ) | ||||||||
Series A preferred stock dividends |
| — |
| — |
| — |
| — |
| (1,268 | ) | — |
| — |
| (1,268 | ) | ||||||||
Series B preferred stock dividends |
| — |
| — |
| — |
| — |
| (2,285 | ) | — |
| — |
| (2,285 | ) | ||||||||
Accretion of discount |
| — |
| — |
| — |
| — |
| (444 | ) | — |
| — |
| (444 | ) | ||||||||
Balance at December 31, 2003 |
| — |
| 170 |
| 12 |
| 3,726 |
| 127,038 |
| (269,020 | ) | (14,562 | ) | (152,636 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Series B Preferred Stock |
| 10,609 |
| — |
| — |
| — |
| — |
| — |
| — |
| 10,609 |
| ||||||||
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,577 |
| 1,577 |
| ||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (17,227 | ) | — |
| (17,227 | ) | ||||||||
Minimum pension liability, net of tax of $1,336 |
| — |
| — |
| — |
| — |
| — |
| — |
| (554 | ) | (554 | ) | ||||||||
Series A preferred stock dividends |
| — |
| — |
| — |
| — |
| (1,359 | ) | — |
| — |
| (1,359 | ) | ||||||||
Series B preferred stock dividends |
| 2,911 |
| — |
| — |
| — |
| (2,911 | ) | — |
| — |
| — |
| ||||||||
Accretion of discount |
| — |
| — |
| — |
| — |
| (113 | ) | — |
| — |
| (113 | ) | ||||||||
Balance at December 31, 2004 |
| $ | 13,520 |
| $ | 170 |
| $ | 12 |
| $ | 3,726 |
| $ | 122,655 |
| $ | (286,247 | ) | $ | (13,539 | ) | $ | (159,703 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| (2,088 | ) | (2,088 | ) | ||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (7,295 | ) | — |
| (7,295 | ) | ||||||||
Minimum pension liability, net of tax of $1,243 |
| — |
| — |
| — |
| — |
| — |
| — |
| (2,899 | ) | (2,899 | ) | ||||||||
Balance at December 31, 2005 |
| $ | 13,520 |
| $ | 170 |
| $ | 12 |
| $ | 3,726 |
| $ | 122,655 |
| $ | (293,542 | ) | $ | (18,526 | ) | $ | (171,985 | ) |
See notes to consolidated financial statements.
27
BANTEC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Net (Loss) Income |
| $ | (7,295 | ) | $ | (17,227 | ) | $ | 17,826 |
|
Foreign currency translation adjustments |
| (2,088 | ) | 1,577 |
| 1,414 |
| |||
Increase to minimum pension liability, net of tax |
| (2,899 | ) | (554 | ) | (6,155 | ) | |||
Total comprehensive (loss) income |
| $ | (12,282 | ) | $ | (16,204 | ) | $ | 13,085 |
|
See notes to Consolidated Financial Statements.
28
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
| |||
Net (loss) income |
| $ | (7,295 | ) | $ | (17,227 | ) | $ | 17,826 |
|
Adjustments to reconcile to cash flows (used in) provided by operations: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 15,956 |
| 15,913 |
| 21,096 |
| |||
(Provision) recovery for doubtful accounts |
| 146 |
| (229 | ) | (999 | ) | |||
Deferred income tax expense (benefit) |
| (2,324 | ) | 9,580 |
| (13,796 | ) | |||
Loss on disposition of property, plant and equipment |
| 1,976 |
| 978 |
| 176 |
| |||
Loss on sale of unconsolidated subsidiary |
| — |
| 1,280 |
| — |
| |||
Gain on extinguishment of long-term debt |
| — |
| — |
| (1,129 | ) | |||
Other non-cash items |
| 182 |
| 340 |
| (75 | ) | |||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||
(Increase) decrease in accounts receivable |
| (14,283 | ) | (6,350 | ) | 22,697 |
| |||
(Increase) decrease in inventories |
| 2,268 |
| 85 |
| (509 | ) | |||
Decrease in other assets |
| 295 |
| 807 |
| 2,847 |
| |||
Increase in trade accounts payable |
| 5,729 |
| 1,357 |
| 231 |
| |||
Decrease in deferred revenue & maintenance contracts deposits |
| (18,265 | ) | (13,055 | ) | (1,006 | ) | |||
Increase (decrease) in other accrued expenses and liabilities |
| 2,798 |
| 818 |
| (7,744 | ) | |||
Cash flows (used in) provided by operating activities |
| (12,817 | ) | (5,703 | ) | 39,615 |
| |||
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
| |||
Purchases of property, plant and equipment |
| (14,499 | ) | (6,751 | ) | (6,259 | ) | |||
Proceeds from sale of property, plant and equipment |
| 5,086 |
| 297 |
| — |
| |||
(Increase) decrease in restricted cash |
| 851 |
| 15,522 |
| (19,490 | ) | |||
Purchase of intangibles |
| (1,825 | ) | — |
| — |
| |||
Purchase of business, net of cash acquired |
| (3,610 | ) | — |
| — |
| |||
Proceeds from sale of unconsolidated subsidiary |
| — |
| 2,955 |
| — |
| |||
Cash flows (used in) provided by investing activities |
| (13,997 | ) | 12,023 |
| (25,749 | ) | |||
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
| |||
Payments of current maturities of capital lease and financing obligations |
| (467 | ) | (1,175 | ) | (1,097 | ) | |||
(Payments) proceeds on short-term borrowings, net |
| (1 | ) | 1 |
| — |
| |||
Debt issuance costs |
| (70 | ) | (50 | ) | (95 | ) | |||
Payments on long-term borrowing |
| — |
| — |
| (2,752 | ) | |||
Cash flows used in financing activities |
| (538 | ) | (1,224 | ) | (3,944 | ) | |||
|
|
|
|
|
|
|
| |||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
| (1,539 | ) | 347 |
| 559 |
| |||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| (28,891 | ) | 5,443 |
| 10,481 |
| |||
CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR |
| 47,431 |
| 41,988 |
| 31,507 |
| |||
|
|
|
|
|
|
|
| |||
CASH AND CASH EQUIVALENTS—END OF YEAR |
| $ | 18,540 |
| $ | 47,431 |
| $ | 41,988 |
|
|
|
|
|
|
|
|
| |||
SUPPLEMENTAL DISCLOSURES OF INFORMATION: |
|
|
|
|
|
|
| |||
Cash paid during the period for: |
|
|
|
|
|
|
| |||
Interest |
| $ | 19,170 |
| $ | 17,774 |
| 19,724 |
| |
Taxes |
| $ | 1,596 |
| $ | 2,774 |
| 1,498 |
|
See notes to consolidated financial statements.
29
BANCTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2005, 2004, and 2003
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
BancTec, Inc. (BancTec or the Company), a Delaware corporation, is a worldwide provider of comprehensive enterprise content management, image capture devices, infrastructure support services and payment processing solutions. The Company helps customers create business efficiencies through innovative technology and services by combining advanced web-enabled imaging and workflow technologies with both BancTec-manufactured equipment and third-party equipment. These solutions are subsequently maintained and supported by the Company’s service operations. The Company is also a leading provider of personal computer maintenance services for major computer companies, government and corporate customers. See Note M for further discussion of Company business structure.
Principles of Consolidation
The consolidated financial statements include the accounts of BancTec, Inc. and its wholly-owned subsidiaries. The Company accounts for investments in which it does not exercise control (generally ownership of 50% or less) under the equity method of accounting. For investments accounted for under the equity method, during 2003, the Company recorded $0.07 million of earnings in the consolidated statement of operations and received a dividend payment of $0.35 million. During 2004, the Company sold 100% of its investments accounted for under the equity method. Inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit, including highly liquid investments with original maturities of three months or less. Restricted cash at December 31, 2005 of $3.2 million represents cash in escrow from a customer deposit. Restricted cash at December 31, 2004 of $4.1 million represents cash pledged under the terms of the Revolver (Note F).
Allowance for Doubtful Accounts
The allowance for doubtful accounts is an estimate prepared by management based on evaluation of the collectibility of specific accounts and the overall condition of the receivable portfolios. The Company analyzes customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts. The allowance for doubtful accounts is reviewed periodically and adjustments are recorded as deemed necessary.
Inventories
Inventories are valued at the lower of cost or market and include the cost of raw materials, labor, factory overhead, and purchased subassemblies. Cost is determined using the first-in, first-out and weighted average methods. At least quarterly, the Company evaluates the carrying amount of inventory based on the identification of excess and obsolete inventory. The Company’s evaluation involves a multi-factor approach incorporating the stratification of inventory by time held and the stratification of inventory by risk category, among other factors. The approach incorporates both recent historical information and management estimates of trends. The Company’s approach is intended to take into consideration potential excess and obsolescence caused by a decreasing installed base, engineering changes and end of manufacture. If any of the factors of the Company’s estimate were to deteriorate, additional reserves may be required. The inventory reserve calculations are reviewed periodically and additional reserves are recorded as deemed necessary. Inventory reserves as of December 31, 2005 and 2004 were $12.6 million and $13.6 million, respectively.
30
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost and are depreciated or amortized principally on a straight-line basis over the estimated useful lives of the related assets, as follows:
Field support spare parts |
| 2 to 5 years |
Systems and software |
| 3 to 8 years |
Machinery and equipment |
| 5 to 7 years |
Leasehold improvements |
| Lessor of 5 to 7 years or the life of the lease |
Furniture and fixtures |
| 5 to 7 years |
Buildings |
| 40 years |
Depreciation expense is reflected in both cost of sales and selling, general and administrative expense. Depreciation expense for the years ended December 31, 2005, 2004, and 2003 was $15.7 million, $15.9 million, and $21.1 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net operating cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company’s investments in non-marketable equity securities are monitored for impairment and are written down to fair value with a change to earnings if a decline in fair value is judged to be other than temporary. During the second quarter of 2004, the Company recorded a write down of approximately $1.5 million to reflect the estimated fair value of $2.7 million in its investment in the stock of Servibanca S.A. (43.4% interest), which was accounted for as an equity investment. The sale of this stock, at a net sales price of $2.7 million was completed in August 2004. The impairment charge of $1.5 million is reflected in Sundry, net in the accompanying consolidated statements of operations for the year ended December 31, 2004.
Intangible Assets
The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Goodwill is not amortized but rather is tested at least annually for impairment. The impairment test is based on fair value compared to the recorded value at a reporting unit level. Reporting units are defined as an operating segment or one level below. Valuation methods used in determining fair value include an analysis of the cash flows that the reporting units can be expected to generate in the future (“Income Approach”) and the fair value of a reporting unit as compared to similar publicly traded companies (“Market Approach”). In preparing these valuations, management utilizes estimates to determine fair value of the reporting units. These estimates include future cash flows, growth rates, capital needs and projected margins, among other factors. The Company performs the annual test for impairment as of December 31, each year. No impairment of goodwill has been deemed necessary for 2005, 2004 or 2003.
Estimates utilized in future calculations could differ from estimates used in the current period. Future years’ estimates that are unfavorable compared to current estimates could cause an impairment of goodwill.
Components of the Company’s goodwill and other intangibles include amounts that are foreign currency denominated. These goodwill amounts are subject to translation at each balance sheet date. The Company records the change to its Accumulated Other Comprehensive Loss on the accompanying consolidated balance sheet.
On November 15, 2005, the Company completed the acquisition of 100% of the common stock of SDS Applications Limited which included goodwill of $0.5 million and other intangibles of $3.0, both of which are foreign currency denominated (Note D).
31
Revenue Recognition
The Company derives revenue primarily from two sources: (1) equipment and software sales - systems integration solutions which address complex data and paper-intensive work processes, including advanced web-enabled imaging and workflow technologies with both BancTec-manufactured equipment and third-party equipment, and (2) maintenance and other services - consist primarily of application design, development and maintenance, all aspects of desktop outsourcing, including field engineering, as well as help desk and LAN/WAN network outsourcing.
The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions”, “Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” SAB No. 104, “Revenue Recognition,” Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and EITF No. 03-5, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.”
Software and software elements (including equipment, installation and training)
In the case of software arrangements that require significant production, modification, or customization of software, or the license agreements require the Company to provide implementation services that are determined to be essential to other elements of the arrangement, the Company follows the guidance in SOP 81-1, “Accounting for Performance of Construction–Type and Certain Production–Type Contracts,” and applies the completed contract method of accounting. In compliance with the completed contract method under SOP 81-1, revenue is recognized when proof of customer acceptance has been received. In the case of non-software arrangements, the Company applies EITF No. 00-21 where revenues related to arrangements with multiple elements are allocated to each element based on the element’s relative fair value. Revenue allocated to separate elements is recognized for each element in accordance with the accounting policies described below. EITF No. 03-5 is applied in determining whether non-software elements are included with the software in applying SOP 97-2.
If the Company cannot account for items included in a multiple-element software or non-software arrangement as separate units of accounting, they are combined and accounted for as a single unit of accounting and generally recognized as the undelivered items or services are provided to the customer. The Company specifically uses the residual method, under which revenue is recognized on the delivered elements only when the remaining undelivered element is postcontract customer support (PCS).
The Company recognizes hardware and software revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. At the time of the transaction, the Company determines whether the fee associated with revenue transactions is fixed or determinable and whether or not collection is reasonably assured. The Company determines whether the fee is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after the normal payment terms, which are generally 30 days from invoice date, the Company recognizes revenue as the fees are due. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from customers. If the Company determines that collection of the fee is not reasonably assured, the Company defers the revenue and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. For all sales, the Company generally uses either a binding purchase order or signed sales agreement as evidence of an arrangement.
Non-software equipment
The Company recognizes revenue from sales of non-software related equipment and supplies upon delivery and transfer of title or upon customer acceptance.
Postcontract customer support
Maintenance contracts are primarily one year in duration and the revenue generated is generally recognized ratably over the term of the contract.
Maintenance services not classified as postcontract customer support (PCS)
The Company’s services revenue is primarily billed based on contractual rates and terms, and the Company generally recognizes revenue as these services are performed which, in some cases, is ratably over the contract term. Certain customers advance funds prior to the performance of the services. The Company recognizes revenue related to these advances as services are performed over time or on a “per call” basis. Certain estimates are used in recognizing revenue on a “per call” basis related to breakdown rates, contract types, calls related to specific contract types, and contract periods.
32
The Company uses its best judgment to relate calls to contracts. In addition, as actual breakdown experience rates are compared to estimates, such estimates may change over time and will result in adjustments to the amount of “per call” revenue.
During the quarter ended June 30, 2004, the Company recorded revenue of $4.3 million reflecting an adjustment arising out of a change in accounting estimate related to service revenue. The information used in computing these estimates is partially provided by a customer, and since June 30, 2004, this information has been provided to the Company on a more timely and accurate basis, resulting in greater accuracy of these estimates. The Company anticipates that future adjustments, if necessary, related to these estimates will be immaterial to the results of operations. The current and non-current portions of these advances are shown as Deferred Revenue or Maintenance Contract Deposits on the Consolidated Balance Sheets.
Research and Development
Research and development costs are expensed as incurred. Research and development costs for the year ended December 31, 2005, 2004 and 2003 were $8.8 million, $7.8 million and $12.5 million, respectively.
Income Taxes
The Company and its domestic subsidiaries file a consolidated Federal income tax return. The Company’s foreign subsidiaries file separate income tax returns in the countries in which their operations are based.
Income taxes are accounted for under the asset and liability method of SFAS No. 109, “Accounting for Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The Company records valuation allowances related to its deferred income tax assets when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Foreign Currency Translation
Foreign assets and liabilities are translated using the exchange rate in effect at the balance sheet date, and results of operations are translated using an average rate for the period. Translation adjustments are accumulated and reported as a component of stockholders’ deficit and comprehensive (loss) income. Transaction gains and losses are included in results of operations in “Sundry, net”. Foreign currency transaction (losses) gains for the years ended December 31, 2005, 2004, and 2003 were $ (0.8) million, $0.3 million, and $0.2 million, respectively.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk for these instruments are limited due to the large number of customers comprising the Company’s customer base, and their dispersion across different geographic areas.
The Company sells its products to customers under specified credit terms in the normal course of business. These customers’ businesses can generally be classified as banking, personal computer manufacturers, financial services, insurance, healthcare, government agencies, utilities and telecommunications. During 2005, 2004, and 2003, the Company derived 15.5%, 17.4%, and 15.7%, respectively, of revenues from a single customer, Dell. The loss of this revenue could have a material adverse effect on the Company. The revenue from this single source is entirely in the Information Technology and Service Management (“ITSM”) business segment.
The Company currently receives funds in advance for a significant portion of the Company’s services prior to the performance of the services they relate to and management believes this mitigates the related credit risk. Due to the diversity of the Company’s customers, management does not consider there to be a concentration of risk within any single business segment. However, general economic conditions that cause customers in such industries to reduce or delay their investments in products and solutions such as those offered by the Company could have a material adverse effect on the Company.
The Company’s hardware and systems solutions are assembled using various purchased components such as PC monitors,
33
minicomputers, encoders, communications equipment and other electronic devices. Certain products are purchased from sole- source suppliers. The Company generally has contracts with these suppliers that are renewed periodically. The Company has not experienced, nor does it foresee any significant difficulty in obtaining necessary components or subassemblies; however, if the supply of certain components or subassemblies was interrupted without sufficient notice, the result could be an interruption of product deliveries.
Fair Value of Financial Instruments
The following estimated fair values of financial instruments have been determined by the Company using available market information and valuation methodologies:
Cash and cash equivalents: Carrying amount approximates fair value due to the short-term nature of the instruments.
Short term borrowings: Carrying amount approximates fair value due to the short-term nature of the instruments.
Senior notes: The Company estimated fair value for 2005 based on an average value of recently completed market trades, resulting in a yield-to-maturity of approximately 28.09%. The number of actual trades is limited; therefore the result may vary if a widely-traded market environment existed.
Sponsor Note: The Company estimated fair value at December 31, 2005, using a yield-to-maturity of approximately 33.09%, based on a premium to the Senior notes discussed above.
The estimated fair values of the Company’s financial instruments at December 31 are as follows:
|
| 2005 |
| 2004 |
| ||||||||
|
| (In thousands) |
| ||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 18,540 |
| $ | 18,540 |
| $ | 47,431 |
| $ | 47,431 |
|
Restricted cash |
| 3,205 |
| 3,205 |
| 4,056 |
| 4,056 |
| ||||
Senior Notes |
| 93,975 |
| 66,924 |
| 93,975 |
| 66,924 |
| ||||
Sponsor Note |
| 103,848 |
| 61,170 |
| 103,848 |
| 64,386 |
| ||||
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees. The Company complies with the disclosure requirements of SFAS No. 123, Accounting for Stock Based Compensation. In March 2005, the Securities and Exchange Commission issued SAB No. 107, which provides additional implementation guidance for SFAS 123. Among other things, SAB 107 provides guidance on share-based payment valuations, income statement classification and presentation, capitalization of costs and related income tax accounting.
Effective July 1, 2000, the Company adopted the 2000 Stock Plan (the Plan), which provides for the grant to employees of incentive options, non-qualified stock options, and restricted stock awards.
Incentive Options. During the year ended December 31, 2005 and 2004, the Company granted 640,000 and 1,419,500 incentive options, respectively. Under the Plan, incentive options are granted at a fixed exercise price not less than 100% of the fair market value of the shares of stock on the date of grant (or not less than 110% of the fair market value in certain circumstances). Options granted in 2003, 2004 and 2005 vest over a four-year period at 25% per year.
Non-qualified stock options. During the year ended December 31, 2005 and 2004 the Company granted -0- and 50,000 non-qualified stock options. Under the Plan, non-qualified options are granted at a fixed exercise price equal to, more than, or less than 100% of the fair market value of the shares of stock on the date of grant.
At December 30, 2005, with board of directors approval, all stock options were repriced from a previous strike price of $9.25 to a strike price of $2.25. No other provisions of the stock options were modified.
34
|
| Incentive |
| Non-qualified |
| Weighted |
|
|
|
|
|
|
|
|
|
Options outstanding–January 1, 2004 |
| 524,000 |
| 31,760 |
| 2.25 |
|
Granted |
| 1,419,500 |
| 50,000 |
| 2.25 |
|
Forfeited |
| (135,500 | ) | (50,000 | ) | 2.25 |
|
Exercised |
| — |
| — |
|
|
|
Options outstanding–December 31, 2004 |
| 1,808,000 |
| 31,760 |
| 2.25 |
|
Granted |
| 640,000 |
| — |
| 2.25 |
|
Forfeited |
| (72,500 | ) | — |
| 2.25 |
|
Exercised |
| — |
| — |
|
|
|
Options outstanding–December 31, 2005 |
| 2,375,500 |
| 31,760 |
| 2.25 |
|
Options and awards expire and terminate the earlier of 10 years from the date of grant or three months after the date the employee ceases to be employed by the Company. The weighted average remaining contractual life of the outstanding options is 8.25 years.
At December 31, 2005, options to purchase 2,375,500 shares were outstanding, of which 560,975 were vested. All options outstanding have an exercise price of $2.25. No options have been exercised.
Under the intrinsic-value method, compensation expense is recorded only to the extent that the strike price is less than fair value on the measurement date. All options granted in 2004 and 2005 were issued at or above fair value, and therefore no stock-based compensation was recorded. In addition, at December 30, 2005, when the options were repriced, creating variable plan accounting, no stock-based compensation was recorded in accordance with APB 25, as the repriced options had no intrinsic value on the date of the change. In addition, as of December 31, 2005, the options had no intrinsic value.
The following table illustrates the effect on net income (loss) as if compensation for the Company’s stock option plans had been determined in conformance with SFAS No. 123:
|
| Year Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Net income (loss) applicable to common stock, as reported |
| $ | (7,295 | ) | $ | (21,610 | ) | $ | 13,829 |
|
Total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax |
| (55 | ) | (17 | ) | — |
| |||
Pro Forma net income (loss) |
| $ | (7,350 | ) | $ | (21,627 | ) | $ | 13,829 |
|
The fair value of each stock-option grant under the stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model. During 2005, the Company obtained an independent valuation of the fair value of each stock option grant on the date of grant using the lattice model and the Black-Scholes option-pricing model, both of which yielded approximately the same result. As a result, the Company has revised the compensation expense for all years as determined under SFAS No. 123 in the table above using the Black-Scholes option-pricing model. The current and revised fair value of each stock-option grant was estimated with the following weighted-average assumptions and results:
|
| Years Ended December 31, |
| |||||||
Weighted Average |
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Risk free interest rate |
| 4.7 | % | 4.1 | % | 5.8 | % | |||
Expected life |
| 10 years |
| 10 years |
| 10 years |
| |||
Expected volatility |
| 40.0 | % | 40.0 | % | 40.0 | % | |||
Fair value of options granted |
| $ | 0.42 |
| $ | 0.12 |
| $ | 0.14 |
|
35
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company is required to adopt SFAS No. 123(R) in fiscal 2006, beginning January 1, 2006. The Company does not anticipate the adoption of SFAS No. 123R to be material to the statement of condition or results of operations of the Company.
In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which will become effective for the Company beginning January 1, 2006. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed production overhead costs to inventory be based on the normal capacity of the production facilities. The Company does not anticipate the adoption of SFAS No. 151 to be material to the statement of condition or results of operations of the Company.
Reclassification
Certain amounts have been reclassified from the prior years to conform to the current year presentation. Restricted cash has been classified into a separate line item on the accompanying Consolidated Balance Sheets and Consolidated Statements of Cash Flows. The accompanying Consolidated Statements of Operations reflects reclassifications in 2003 and 2004 to conform to the 2005 presentation related to the allocation by the Company of overhead costs between selling, general and administrative expense and cost of sales.
NOTE B – SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
The Consolidated Statement of Cash Flows included the following non-cash investing and financing transactions:
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Capital lease obligation incurred for lease of computer hardware |
| $ | 165 |
| $ | 287 |
| $ | 2,396 |
|
Inventory put in service as fixed assets |
| 1,532 |
| 105 |
| 1,856 |
| |||
Financing obligation incurred for purchase of computer software |
| 1,860 |
| — |
| — |
| |||
NOTE C - RESTRUCTURING
Restructuring. As a part of the Company’s focus on cost efficiency, management has targeted and accrued for ongoing staff reductions. Severance charges are included in the cost of sales, selling, general and administrative and product development expense line items in the accompanying consolidated Statements of operations.
Changes to the Company’s accrued severance liability, included in Other Accrued Expenses and Liabilities in the accompanying consolidated balance sheets, during the years ended December 31, 2003, 2004 and 2005 are summarized as follows:
36
|
| US Solutions |
| ITSM |
| International |
| Corp/Elims |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at January 1, 2003 |
| $ | 947 |
| $ | — |
| $ | 624 |
| $ | — |
| $ | 1,571 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Severance expense |
| 1,266 |
| 666 |
| 121 |
| 30 |
| 2,083 |
| |||||
Severance paid |
| (1,747 | ) | (666 | ) | (689 | ) | (30 | ) | (3,132 | ) | |||||
Balance at December 31, 2003 |
| 466 |
| — |
| 56 |
| — |
| 522 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Severance expense |
| 1,310 |
| 949 |
| 393 |
| 829 |
| 3,481 |
| |||||
Severance paid |
| (1,130 | ) | (949 | ) | (444 | ) | (177 | ) | (2,700 | ) | |||||
Balance at December 31, 2004 |
| $ | 646 |
| $ | — |
| $ | 5 |
| $ | 652 |
| $ | 1,303 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Severance expense |
| 329 |
| 399 |
| 183 |
| 301 |
| 1,212 |
| |||||
Severance paid |
| (759 | ) | (399 | ) | (121 | ) | (813 | ) | (2,092 | ) | |||||
Balance at December 31, 2005 |
| $ | 216 |
| $ | — |
| $ | 67 |
| $ | 140 |
| $ | 423 |
|
NOTE D - ACQUISITIONS
Purchase Combination
On November 15, 2005, the Company completed the acquisition of 100% of the common stock of SDS Applications Limited for a net purchase price of $3.9 million plus a contingent payment of up to $0.4 million payable over the next two years. This contingent payment is not currently recorded as the liability is not yet probable, SDS Application Limited provides mortgage and trading software to the commercial market.
The allocation of the net purchase price was as follows (in thousands):
|
| Value assigned |
| Life in years |
| |
|
|
|
|
|
| |
Net working capital |
| $ | 297 |
| N/A |
|
Property and equipment |
| 115 |
| 1 to 5 years |
| |
Trade name and trademarks |
| 485 |
| Indefinite |
| |
Software |
| 1,640 |
| 10 years |
| |
Maintenance agreements |
| 408 |
| 15 years |
| |
Non-compete agreements |
| 232 |
| 3 years |
| |
Customer relationships |
| 230 |
| 8 years |
| |
Goodwill |
| 500 |
| Indefinite |
| |
|
| $ | 3,907 |
|
|
|
These intangibles assets are foreign currency denominated. The amounts are subject to translation at each balance sheet date. The Company records the change to its Accumulated Other Comprehensive Loss on the accompanying consolidated balance sheet.
Intangible assets were allocated to the EMEA segment. Definite life intangible assets are being amortized to cost of product revenue over its estimated useful life. The consolidated financial statements include the operating results of SDS Applications Limited from the date of purchase. Pro forma results of operations have not been presented because the effect of this acquisition was not material.
Asset Purchase
On July 29, 2005, the Company completed the acquisition of certain assets of a product manufacturing enterprise for a net
37
purchase price of $2.4 million, consisting of $0.5 million in non-compete agreements and $1.9 million in property and equipment and other intangibles, primarily customer lists.
NOTE E – INVENTORIES, NET
Inventory consists of the following:
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Raw materials |
| $ | 9,503 |
| $ | 10,181 |
|
Work-in-progress |
| 3,305 |
| 5,247 |
| ||
Finished goods |
| 19,550 |
| 22,677 |
| ||
|
| 32,358 |
| 38,105 |
| ||
Less inventory reserves |
| (12,551 | ) | (13,639 | ) | ||
Inventories, net |
| $ | 19,807 |
| $ | 24,466 |
|
NOTE F - DEBT AND OTHER LIABILITIES
Debt and other obligations consist of the following:
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Senior Notes, due 2008 |
| $ | 93,975 |
| $ | 93,975 |
|
Revolving Credit Facility |
| 1 |
| 1 |
| ||
Senior Subordinated Sponsor Note, unsecured, due 2009 |
| 103,848 |
| 103,848 |
| ||
Financing Arrangement |
| 1,860 |
| — |
| ||
|
| 199,684 |
| 197,824 |
| ||
Less: Current portion |
| 621 |
| 1 |
| ||
|
| $ | 199,063 |
| $ | 197,823 |
|
Revolving Credit Facility. The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”). Effective March 31, 2006, the Company and Heller entered into an amendment to the Revolver which extended the maturity date from May 30, 2006 to May 30, 2008. The committed amount is $40 million, with a letter-of-credit sub-limit of $10 million. The Revolver is secured by substantially all the assets of the Company, subject to the limitations on liens contained in the Company’s existing Senior Notes. Funds availability under the Revolver is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory, owned real property, machinery and equipment and pledged cash. At December 31, 2005, the Company had $0.001 million outstanding under the Revolver and no outstanding balance on letters-of-credit. The availability remaining under the Revolver that the Company can draw was $14.7 million at December 31, 2005. A commitment fee of 0.5% per annum on the unused portion of the Revolver is payable quarterly.
The interest rate on borrowings under the Revolver is, at the Company’s option, either (1) 1.25% over prime or (2) 2.75% over LIBOR. Under an amendment effective September 1, 2003, the interest rate margins over prime and LIBOR may be increased by 0.25% increments when the fixed charge coverage ratio falls below (1) 1.5 to 1.0 and (2) 1.25 to 1.0 and (total rate increase of 0.50%) or decreased by 0.25% increments when the fixed charge coverage ratio is greater than (1) 1.75 to 1.0, (2) 2.0 to 1.0, and (3) 2.25 to 1.0 (total rate decrease of 0.75%). At December 31, 2005, the Company’s weighted average rate on the Revolver was 9.0% under the prime option.
38
Under the Revolver, substantially all of the Company’s domestic cash receipts (including proceeds from accounts receivable and asset sales) must be applied to repay the outstanding loans, which may be re-borrowed subject to availability in accordance with the borrowing base formula. The Revolver contains restrictions on the use of cash for dividend payments or non-scheduled principal payments on certain indebtedness. Restricted cash at December 31, 2005 of $3.2 million represents cash in escrow from a customer deposit. Restricted cash at December 31, 2004 of $4.1 million represents cash pledged against revolver letter of credit commitments.
The Revolver contains various representations, warranties and covenants, including financial covenants as to maximum capital expenditures, minimum fixed charge coverage ratio and minimum average borrowing availability. Effective December 31, 2004, the Company and Heller amended the loan and security agreement to decrease the minimum fixed charge coverage ratio from 1.1 to 1.0. The Company has experienced recent decreases in its fixed charge coverage ratio which has necessitated amendments to the Revolver agreement with Heller. At December 31, 2005, the Company was in compliance with all covenants under the Revolver.
Senior Notes. The Company’s Senior Notes (the “Senior Notes”) accrue interest at a fixed 7.5% rate which is due and payable in semi-annual installments. The Senior Notes contain covenants placing limitations on the Company’s ability to permit subsidiaries to incur certain debts, incur certain loans and liens, and engage in certain sale and leaseback transactions. During the year ended December 31, 2003, the Company repurchased Senior Notes with a face amount of $3.9 million. The Company wrote off a proportionate share of deferred financing fees, resulting in a gain of approximately $1.1 million, which was reported as Sundry, net in the accompanying consolidated statements of operations for 2003.
Senior Subordinated Unsecured Sponsor Note. The Company’s $160.0 million Sponsor Note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid. The interest payments began September 30, 1999. The Sponsor Note matures on July 22, 2009. As provided under the agreement, however, the Sponsor Note holder, WCAS, elected to defer quarterly interest payments of $4.0 million for each of the June 2000 through September 2001 quarterly periods resulting in an increase in the Sponsor Note totaling $33.8 million. Such election required a deferred financing fee of 30.0% of each of the interest payments being deferred. The Company accounts for the additional financing fees as a change in the effective interest rate of the debt. WCAS may, at its election, defer each future quarterly payment under similar terms. WCAS has elected not to defer the quarterly payments since September 2001 and currently does not intend to elect deferral of the quarterly payments in the near future.
Financing Arrangements. During 2005, the Company entered into a financing arrangement for $2.1 million that pertained to computer software. At December 31, 2005, the Company had financing arrangement balances outstanding of $1.9 million, of which $0.6 million was classified as current and $1.3 million was classified as long-term. This arrangement accrues interest at a fixed 8.0% rate. This arrangement is due in three annual installments beginning January 2006.
Capital Leases. During 2004, the Company entered into a capital lease for $0.2 million that pertained to computer hardware. During 2005, the Company entered into an additional capital lease for $0.2 million that pertained to computer hardware. Amounts due under capital leases are recorded as liabilities. The Company’s interest in assets acquired under capital leases is recorded as property and equipment on the Consolidated Balance Sheets. Assets under capital lease were $3.9 million and $2.7 million as of December 31, 2005 and 2004, respectively. Amortization of assets recorded under capital leases is included in depreciation expense. The current obligations under capital leases are classified in the Current Liabilities section of the accompanying consolidated balance sheets and the non-current portion of capital leases are included in Other Liabilities. At December 31, 2005, the Company had capital lease balances outstanding of $1.3 million, of which $0.6 million was classified as current and $0.7 million was classified as long-term.
The Company had no outstanding foreign-credit balances as of December 31, 2005.
39
As of December 31, 2005 the future maturities of debt are as follows:
Year |
| (In thousands) |
| |
2006 |
| $ | 621 |
|
2007 |
| 596 |
| |
2008 |
| 94,619 |
| |
2009 |
| 103,848 |
| |
2010 |
| — |
| |
Thereafter |
| — |
| |
|
| $ | 199,684 |
|
The Company paid cash totaling $19.2 million, $17.8 million, and $19.7 million, for interest during the twelve months ended December 31, 2005, 2004, and 2003, respectively. During the years ended December 31, 2005, 2004 and 2003, the Company capitalized no interest costs.
NOTE G – REDEEMABLE PREFERRED STOCK
SERIES A PREFERRED STOCK
In consideration for amending the Company’s credit agreements with its Lenders, in September 2000, the Company issued 100,000 shares of $0.01 par value Series A Preferred Stock to WCAS, its primary owners. In exchange, WCAS contributed an additional $15.0 million in cash to the Company. Dividends on the Series A Preferred accrue quarterly at an annual dividend rate of 7.0% of the then “stated value.” The “stated value” equals $150.00 per share, plus accumulated and unpaid dividends. Dividends are paid when declared by the Company’s Board of Directors. The aggregate liquidation preference/redemption value is $15.0 million, plus accumulated and unpaid dividends of $3,040 million at December 31, 2005. The Company has the right to redeem the Series A Preferred Stock at any time by paying for each share the “stated value” per share as of the redemption date. In addition, upon the occurrence of certain events, as defined, and upon the approval of a majority of the holders of the Series A Preferred Stock, the Company would be required to redeem the shares. Due to the redemption rights at the option of the holder, the Series A Preferred Stock is classified as mezzanine equity. An amendment to the agreement covering the Series A Preferred Stock to remove the mandatory redemption date was approved by the Board of Directors on March 31, 2004. Each share of Series A Preferred Stock includes a warrant to purchase between 2.5 and 7.75 shares of Common Stock at $0.01 per share. Common stock exercisable by the warrant totals 750,000 shares and may be exercised at any time from the date of purchase.
The Company allocated the proceeds from the Series A Preferred Stock issuance based upon the relative fair-value of the preferred stock and warrants which resulted in recording preferred stock of $11.3 million and warrants of $3.7 million. The related discount was being accreted over a period of 8 years through March 31, 2004, when the mandatory redemption provision was removed from the Series A Preferred Stock.
On November 1, 2002, Intermediate Holding contributed $100,000 to the Company in exchange for 667 shares of Series A Preferred Stock of the Company. These shares do not include warrants.
For the year ended December 31, 2004, accretion of the related discount and accrued but unpaid dividends totaled $1.7 million. Effective January 1, 2005, the Series A Preferred Stock agreement was amended to eliminate the dividends payable on the Series A Preferred Stock. As a result, no dividends were accrued during the year ended December 31, 2005. As of December 31, 2005, the carrying amount of the Series A Preferred Stock was $18.0 million and the stated value per share, including accumulated but unpaid dividends, was $201.32.
SERIES B PREFERRED STOCK
In February 2001, the Company issued 35,520 shares of $0.01 par value Series B Preferred Stock to its primary owners, WCAS. In exchange, WCAS contributed an additional $5.3 million in cash to the Company. Dividends on the Series B Preferred Stock accrue quarterly at an annual dividend rate of 25.0% of the then “Stated Value.” The Stated Value equals $150.00 per share, plus accumulated and unpaid dividends. Dividends are paid when declared by the Company’s Board of
40
Directors. The aggregate liquidation preference/redemption value at December 31, 2005 and 2004, is $13.5 million, including accumulated and unpaid dividends. The Company has the right to redeem the Series B Preferred Stock at any time by paying for each share the Stated Value per share as of the redemption date. At December 31, 2003, the Series B Preferred Stock was classified as temporary equity as the preferred security holders comprised fifty percent of the Board of Directors. On March 31, 2004, a seventh member was elected to the Board of Directors who is not a preferred security holder. As a result, the preferred security holders no longer control the Board of Directors and the Series B Preferred Stock was then classified as part of permanent equity. Each share of Series B Preferred Stock is convertible into shares of Common Stock at any time. The number of shares of Common Stock is determined by multiplying the number of shares being converted by $150.00 and dividing the result by $8.325 per share. The conversion rate is subject to various adjustments (for anti-dilution). The Company is required to keep available approximately 640,000 common shares for issuance upon conversion of all outstanding shares of Series B Preferred Stock.
For the year ended December 31, 2004, accrued but unpaid dividends totaled $2.9 million. Effective January 1, 2005, the Series B Preferred Stock agreement was amended to eliminate the dividends payable on the Series B Preferred Stock. As a result, no dividends were accrued during the year ended December 31, 2005. As of December 31, 2005, the stated value per share of the Series B Preferred, including accumulated but unpaid dividends, was $380.63.
NOTE H - OTHER ACCRUED EXPENSES AND LIABILITIES
Other accrued expenses and liabilities consist of the following:
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Salaries, wages and other compensation |
| $ | 11,903 |
| $ | 10,081 |
|
Accrued taxes, other than income taxes |
| 4,376 |
| 4,868 |
| ||
Accrued interest payable |
| 3,200 |
| 3,204 |
| ||
Accrued invoices and costs |
| 1,586 |
| 1,191 |
| ||
Other |
| 10,228 |
| 15,033 |
| ||
|
| $ | 31,293 |
| $ | 34,377 |
|
NOTE I - TAXES
The income tax expense (benefit) on net (loss) income consists of the following:
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
| $ | 184 |
| $ | (42 | ) | $ | (1,014 | ) |
State |
| (406 | ) | 153 |
| 163 |
| |||
Foreign |
| 4,169 |
| 3,930 |
| 3,277 |
| |||
Total current |
| 3,947 |
| 4,041 |
| 2,426 |
| |||
|
|
|
|
|
|
|
| |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| — |
| 8,919 |
| (9,000 | ) | |||
State |
| — |
| 81 |
| — |
| |||
Foreign |
| (2,324 | ) | 580 |
| (4,796 | ) | |||
Total deferred |
| (2,324 | ) | 9,580 |
| (13,796 | ) | |||
|
| $ | 1,623 |
| $ | 13,621 |
| $ | (11,370 | ) |
41
The difference between the income tax provision on net (loss) income computed at the statutory federal income tax rate and the financial statement provision for taxes is summarized as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Provision (benefit) at U.S. statutory rate of 35% for all periods |
| $ | (1,985 | ) | $ | (1,262 | ) | $ | 2,259 |
|
Increase in tax expense resulting from: |
|
|
|
|
|
|
| |||
Impact of foreign and Puerto Rico income tax rate |
| 13 |
| 203 |
| (236 | ) | |||
State income tax, net of federal income tax benefit |
| (333 | ) | 109 |
| (9 | ) | |||
Change in valuation allowance |
| 1,490 |
| 9,695 |
| (12,336 | ) | |||
Permanent differences |
| 2,577 |
| 4,669 |
| 147 |
| |||
Other, net |
| (139 | ) | 207 |
| (1,195 | ) | |||
|
| $ | 1,623 |
| $ | 13,621 |
| $ | (11,370 | ) |
The Company paid cash totaling $1.6 million, $2.8 million, and $1.5 million for income taxes during the years ended December 31, 2005, 2004 and 2003, respectively.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2005 and 2004 are presented below:
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Gross deferred tax assets: |
|
|
|
|
| ||
Net operating losses |
| $ | 56,687 |
| $ | 47,335 |
|
AMT credit carryforwards |
| 101 |
| 101 |
| ||
Inventory reserves |
| 4,671 |
| 4,948 |
| ||
Receivable allowance |
| 292 |
| 205 |
| ||
Intangible assets previously deducted |
| — |
| 905 |
| ||
Deferred revenues |
| 10,183 |
| 15,450 |
| ||
Deferred compensation |
| 3,045 |
| 2,639 |
| ||
Foreign timing differences, net |
| 9,059 |
| 9,088 |
| ||
Depreciation |
| 3,761 |
| — |
| ||
Other |
| 2,975 |
| 5,723 |
| ||
Total gross deferred tax asset |
| 90,774 |
| 86,394 |
| ||
|
|
|
|
|
| ||
Gross deferred tax liability: |
|
|
|
|
| ||
Depreciation |
| — |
| (1,352 | ) | ||
Intangible assets previously deducted |
| (506 | ) | — |
| ||
Total gross deferred tax liability |
| (506 | ) | (1,352 | ) | ||
Deferred tax asset valuation reserve |
| (78,832 | ) | (76,184 | ) | ||
Net deferred tax asset |
| $ | 11,436 |
| $ | 8,858 |
|
A valuation allowance has been provided to reduce the deferred tax assets to an amount management believes is more likely than not to be realized. Expected realization of deferred tax assets for which a valuation allowance has not been recognized is based upon the reversal of existing taxable temporary differences and taxable income expected to be generated in the
42
future. The need for a valuation allowance on deferred tax assets is evaluated on a jurisdiction by jurisdiction bases. As a result, certain of the foreign subsidiaries deferred tax assets are not reserved with a valuation allowance due to their history of profitability.
Components of the valuation allowance are as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (In thousands) |
| |||||||
Valuation allowance at beginning of year |
| $ | 76,184 |
| $ | 63,874 |
| $ | 75,735 |
|
(Decrease) increase in valuation allowance |
| (2,602 | ) | 10,305 |
| (13,796 | ) | |||
Tax deductible loss |
| 5,187 |
| 1,612 |
| 1,457 |
| |||
Other |
| 63 |
| 393 |
| 478 |
| |||
Valuation allowance at end of year |
| $ | 78,832 |
| $ | 76,184 |
| $ | 63,874 |
|
Company’s effective tax rate was (28.6%), (377.7%), and 176.1% for the years ended December 31, 2005, 2004, and 2003, respectively.
The Company’s foreign and domestic net operating loss carryforwards of $149.4 million expire as follows: $5.5 million in the period from 2006 through 2007, $0.2 million in the period from 2014 through 2019, $113.0 million in the period from 2020 through 2027, and $30.7 million with no expiration.
Components of net (loss) income before income tax expense (benefit) are as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
United States |
| $ | (20,400 | ) | $ | (16,441 | ) | $ | (5,788 | ) |
Foreign |
| 14,728 |
| 12,835 |
| 12,244 |
| |||
Net (loss) income |
| $ | (5,672 | ) | $ | (3,606 | ) | $ | 6,456 |
|
Undistributed earnings of foreign subsidiaries included in continuing operations were approximately $17.0 million, $17.7 million, and $25.5 million, at December 31, 2005, 2004 and 2003, respectively. No taxes have been provided on the undistributed earnings as they are considered to be permanently reinvested.
In October 2004, the Jobs Creation Act was enacted. One of the provisions of this act provides a deduction for income from qualified domestic production activities (“qualified production income” or QPI). The deduction, which cannot exceed 50 percent of annual wages paid, is phased in as follows: 3 percent of QPI in 2005-2006, 6 percent in 2007-2009, and 9 percent in 2010 and thereafter. The Jobs Creation Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales with a 20 percent phase-out in 2005, 40 percent in 2006 and 100 percent thereafter. The impact on the Company’s tax rate of the new manufacturing deduction at a fully phased-in rate of 9 percent is not anticipated to have a material impact on the statement of condition or results of operations.
The Jobs Creation Act also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and uncertainty remains as to how to interpret numerous provisions in the Jobs Creation Act. As of December 31, 2005, the Company does not plan to apply the 85 percent dividends received deduction for any repatriated accumulated income.
As a matter of course, the Company is regularly examined by federal, state and foreign tax authorities. Although the results of these examinations are uncertain, based on currently available information, the Company believes that the ultimate outcome will not have a material adverse effect on the Company’s financial statements.
NOTE J - EMPLOYEE BENEFIT PLANS
US 401K Plan
The Company’s Employees’ Savings Plan allows substantially all full-time and part-time U.S. employees to make
43
contributions defined by Section 401(k) of the Internal Revenue Code. Beginning in February 2001, the Company’s 401(k) Plan changed to match 50.0% of the participants’ qualifying total pre-tax contributions, up to a maximum that is tied to the Company’s achievement of certain financial objectives. No amounts were expensed under the plan for the years ended December 31, 2005, 2004 and 2003, as no matching contributions were made in these years.
UK Pension Plan
The Company’s subsidiary in the United Kingdom provides pension benefits to retirees and eligible dependents. Employees eligible for participation include all full-time regular employees who are more than three years from retirement. A retirement pension or a lump-sum payment may be paid dependent upon length of service at the mandatory retirement age. The Company accounts for this plan under SFAS No. 87, “Employers’ Accounting for Pensions.” The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan.
The following table provides a reconciliation of the benefit obligation, plan assets and funded status of the pension fund.
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Change in Benefit Obligation |
|
|
|
|
|
|
| |||
Benefit obligation at beginning of year |
| $ | 35,784 |
| $ | 26,856 |
| $ | 14,032 |
|
Service cost |
| 877 |
| 446 |
| 465 |
| |||
Interest cost |
| 1,870 |
| 1,586 |
| 915 |
| |||
Participant’s contributions |
| 618 |
| 728 |
| 497 |
| |||
Actuarial loss |
| 9,102 |
| 3,975 |
| 8,498 |
| |||
Amendments |
| — |
| — |
| 92 |
| |||
Benefits paid |
| (377 | ) | (108 | ) | (123 | ) | |||
Foreign-exchange rate changes |
| (4,347 | ) | 2,301 |
| 2,480 |
| |||
Benefit Obligation at end of year |
| 43,527 |
| 35,784 |
| 26,856 |
| |||
|
|
|
|
|
|
|
| |||
Change in Plan Assets |
|
|
|
|
|
|
| |||
Estimated fair value of plan assets at beginning of year |
| 17,443 |
| 13,434 |
| 8,678 |
| |||
Actual return on plan assets |
| 3,736 |
| 990 |
| 2,123 |
| |||
Employer contribution |
| 1,482 |
| 1,269 |
| 990 |
| |||
Employee contribution |
| 618 |
| 728 |
| 497 |
| |||
Benefits paid |
| (377 | ) | (108 | ) | (123 | ) | |||
Foreign-exchange rate changes |
| (2,094 | ) | 1,130 |
| 1,269 |
| |||
Estimated fair value of plan assets at end of year |
| 20,808 |
| 17,443 |
| 13,434 |
| |||
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Funded status |
| (22,719 | ) | (18,341 | ) | (13,422 | ) | |||
Unrecognized actuarial loss |
| 17,136 |
| 12,994 |
| 8,541 |
| |||
Accrued benefit cost |
| $ | (5,583 | ) | $ | (5,347 | ) | $ | (4,881 | ) |
Weighted-average assumptions as of December 31 |
|
|
|
|
|
|
| |||
Discount Rate |
| 4.75 | % | 5.55 | % | 5.80 | % | |||
Expected asset return |
| 6.20 | % | 6.20 | % | 7.60 | % | |||
Rate of compensation increase |
| 2.50 | % | 2.60 | % | 2.50 | % | |||
44
The components of the net periodic benefit cost are as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Service Cost |
| $ | 877 |
| $ | 446 |
| $ | 465 |
|
Interest Cost |
| 1,870 |
| 1,586 |
| 915 |
| |||
Expected return on plan assets |
| (1,070 | ) | (1,095 | ) | (655 | ) | |||
Amortization of transition amount |
| — |
| — |
| 280 |
| |||
Amortization of prior service cost |
| — |
| — |
| 92 |
| |||
Recognized actuarial loss |
| 638 |
| 431 |
| 49 |
| |||
Net periodic benefit cost |
| $ | 2,315 |
| $ | 1,368 |
| $ | 1,146 |
|
The net pension liability at December 31, 2005 and 2004 was $22.7 million and $18.3 million, respectively. This liability is classified in Other Liabilities in the accompanying consolidated balance sheets. The increase in minimum liability included in other comprehensive loss for the years ended December 31, 2005, 2004 and 2003 was $4.1 million, $1.9 million, and $6.2 million respectively.
The weighted average asset allocations for the Company’s defined benefit plans at December 31, 2005 and 2004, are as follows:
|
| December 31, |
| ||
|
| 2005 |
| 2004 |
|
|
|
|
|
|
|
Domestic and overseas equities |
| 65.1 | % | 69.4 | % |
UK government bonds |
| 18.0 | % | 15.4 | % |
Corporate bonds |
| 16.9 | % | 15.2 | % |
Cash |
| — |
| — |
|
Total |
| 100.0 | % | 100.0 | % |
The Company’s investment policy related to the defined benefit plans is to continue to increase the percentage of its funds held in government gilts and highly rated bonds as a means to reduce the overall risk of assets held in the funds and to better balance the allocation of fund assets. No specific targeted allocation percentages have been set by category, but are at the direction and discretion of the plan trustees. During 2005, all contributions made to the fund were in these categories.
The Company’s funding methods are based on governmental requirements and differ from those methods used to recognize pension expense. The Company expects to contribute $2.0 million to the pension plan during 2006, based on current plan provisions.
Pension benefit payments expected to be paid to plan participants are as follows:
Year |
| (In Thousands) |
| |
|
|
|
| |
2006 |
| $ | 227 |
|
2007 |
| 249 |
| |
2008 |
| 274 |
| |
2009 |
| 310 |
| |
2010 |
| 377 |
| |
2011-2015 |
| 3,274 |
| |
Total |
| $ | 4,711 |
|
45
Executive Deferred Compensation Plan
The Company has individual arrangements with seven former executives in the U.S. which provide for fixed payments to be made to each individual beginning at age 65 and continuing for 20 years. This is an unfunded plan with payments to be made from operating cash of the Company. The weighted average discount rate used as of December 31, 2005 and 2004 was 5.25% and 7.5%, respectively. Benefit payments of $0.2 million were made during each of the years ended December 31, 2005 and 2004, respectively. The expense for the year ended December 31, 2005 was $0.9 million, a portion of which related to the change in discount rate. The balance of this obligation is $4.2 million and $3.3 million as of December 31, 2005 and 2004, respectively, and is classified in Other Liabilities in the accompanying consolidated balance sheets.
NOTE K - WARRANTY LIABILITY
The Company offers various product warranties for hardware sold to its customers. The specific terms and conditions of the warranties vary depending upon the customer and the product sold. Factors that affect the Company’s warranty liability include number of products sold, historical and anticipated rates of warranty claims and cost per claim. The Company accrues for estimated warranty costs as sales are made and periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary.
Changes to the Company’s warranty liability, which is reported as a component of other accrued expenses and liabilities in the accompanying consolidated balance sheet during the year ended December 31, 2004 and 2005 are summarized as follows:
|
| (In thousands) |
| |
Balance at January 1, 2003 |
| $ | 139 |
|
|
|
|
|
|
Warranties issued |
|
| 199 |
|
Claims paid/settlements |
|
| (159 | ) |
Changes in liability for pre-existing warranties |
|
| — |
|
|
|
|
|
|
Balance at December 31, 2003 |
| $ | 140 |
|
|
|
|
| |
Warranties issued |
| 199 |
| |
Claims paid/settlements |
| (159 | ) | |
Changes in liability for pre-existing warranties |
| — |
| |
Balance at December 31, 2004 |
| $ | 180 |
|
|
|
|
| |
Warranties issued |
| 208 |
| |
Claims paid/settlements |
| (205 | ) | |
Changes in liability for pre-existing warranties |
| — |
| |
Balance at December 31, 2005 |
| $ | 183 |
|
NOTE L - COMMITMENTS AND CONTINGENCIES
Leases. The Company leases certain sales and service office facilities and equipment under non-cancelable operating leases expiring through year 2010. Total Company rent expense for the years ended December 31, 2005, 2004, and 2003 was $6.5 million, $8.4 million, and $7.9 million, respectively.
Future minimum payments under non-cancelable operating leases are as follows:
Year |
| (In thousands) |
| |
|
|
|
| |
2006 |
| $ | 5,645 |
|
2007 |
| 3,710 |
| |
2008 |
| 2,378 |
| |
2009 |
| 1,013 |
| |
2010 |
| 553 |
| |
Thereafter |
| 1,288 |
| |
|
| $ | 14,587 |
|
The Company believes that its facility leases can be either renewed or replaced with alternate facilities at comparable cost.
Litigation. The Company and its subsidiaries are parties to various legal proceedings. Although the ultimate disposition of such proceedings is not presently determinable, in the opinion of the Company, any liability that may ensue would not have
46
a material adverse impact on the financial position or results of operations or cash flows of the Company.
NOTE M - BUSINESS SEGMENT DATA
Operating segments are defined as components of a company about which separate financial information is available that is evaluated regularly by the company’s chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Management has chosen to structure the organization around product lines and geography.
In 2005, the Company reported its operations as three primary segments, Americas, EMEA, and ITSM. The operations of Americas and EMEA include manufacturing and supplies, maintenance of Company-manufactured and related products, integrated systems, BancTec software products sold through Plexus Software (“Plexus”), a division of BancTec, and business processing outsourcing services. The ITSM operations include personal computer repair services and administration of third-party extended-service contracts in the United States, Canada and Europe.
Americas and Europe, Middle East and Asia. Americas and EMEA offer similar systems-integration and business-process solutions and services and market to similar types of customers. The solutions offered primarily involve high-volume transaction processing using advanced technologies that capture, process and archive paper and electronic documents. The Company’s powerful, high-volume integrated systems deliver important benefits to some of the world’s largest credit card companies and major banks. In addition, these segments provide their products and services to other customers, including financial services companies and insurance providers, telecommunications companies, utility companies, governmental agencies, and retail companies. The Company combines its extensive business application knowledge with a full range of software and equipment offerings for complex transaction processing environments. The Company’s integrated systems generally incorporate advanced applications software developed by the Company and by third parties. These solutions may also include hardware developed and manufactured by the Company as well as by third parties. Key applications provided by Americas and EMEA focus around the following process services and solutions: (1) Enterprise Content Management, (2) Image Capture, (3) Payment Processing, and (4) Support and Managed Services.
Information Technology Service Management. ITSM provides quality integrated support services to the evolving Information Technology industry, with focused deployment and ongoing support solutions for the OEM, Enterprise and Fortune marketplaces. ITSM provides coverage in North America and Europe, and customers include OEM providers, defense and aerospace companies, strategic outsourcing organizations, and consumer electronics manufacturers.
For the years ended December 31, 2005, 2004 and 2003, a single customer accounted for 19.7%, 17.4%, and 15.7%, respectively, of the total revenue of the Company.
Whenever possible, the Company uses market prices to determine inter-segment pricing. Other products are transferred at cost or cost plus an agreed upon mark-up.
In 2003 and 2004, the Company reported its operations in three segments, U.S. Solutions (“USS”), which included all operations of Americas with the exception of Canada, International Solutions (“INTL”), which included all operations of EMEA plus Canada, and Computer and Network Services (“CNS”), which included all operations of ITSM. The 2003 and 2004 segment information has been conformed to the 2005 presentation.
47
Table 1—New Segments
|
| Americas |
| Information |
| Europe, |
| Corp/Elims |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
For the year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenue from external customers |
| $ | 114,805 |
| $ | 126,143 |
| $ | 103,950 |
| $ | — |
| $ | 344,898 |
|
Intersegment revenues |
| 6,910 |
| — |
| 5,958 |
| (12,868 | ) | — |
| |||||
Segment gross profits |
| 41,175 |
| 10,041 |
| 36,411 |
| (137 | ) | 87,490 |
| |||||
Segment operating income (loss) |
| 19,921 |
| 4,478 |
| 11,626 |
| (22,470 | ) | 13,555 |
| |||||
Segment identifiable assets |
| 88,275 |
| 28,977 |
| 44,042 |
| 35,920 |
| 197,214 |
| |||||
Capital appropriations |
| 3,869 |
| 3,051 |
| 3,870 |
| 8,366 |
| 19,156 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
For the year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenue from external customers |
| $ | 122,505 |
| $ | 127,061 |
| $ | 111,160 |
| $ | — |
| $ | 360,726 |
|
Intersegment revenues |
| 6,191 |
| — |
| 5,555 |
| (11,746 | ) | — |
| |||||
Segment gross profits |
| 36,190 |
| 15,359 |
| 36,471 |
| (614 | ) | 87,406 |
| |||||
Segment operating income (loss) |
| 11,905 |
| 5,852 |
| 12,014 |
| (13,963 | ) | 15,808 |
| |||||
Segment identifiable assets |
| 83,600 |
| 25,552 |
| 50,553 |
| 56,360 |
| 216,065 |
| |||||
Capital appropriations |
| 2,153 |
| 2,088 |
| 1,725 |
| 1,286 |
| 7,252 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
For the year ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenue from external customers |
| $ | 152,611 |
| $ | 128,209 |
| $ | 98,071 |
| $ | — |
| $ | 378,891 |
|
Intersegment revenues |
| 3,663 |
| — |
| 5,735 |
| (9,398 | ) | — |
| |||||
Segment gross profits |
| 42,339 |
| 22,788 |
| 31,687 |
| 298 |
| 97,112 |
| |||||
Segment operating income (loss) |
| 13,764 |
| 12,858 |
| 9,825 |
| (12,577 | ) | 23,870 |
| |||||
Segment identifiable assets |
| 86,741 |
| 21,116 |
| 53,101 |
| 78,557 |
| 239,515 |
| |||||
Capital appropriations |
| 2,638 |
| 1,607 |
| 3,431 |
| 2,443 |
| 10,119 |
|
NOTE N - GEOGRAPHIC OPERATIONS
The Company operates in the following geographic areas: the United States, the UK, and other international areas consisting primarily of Canada, France, Sweden, Germany, and the Netherlands. Inter-area sales to affiliates are accounted for at established transfer prices.
Sales to unaffiliated customers and affiliates for the years ended December 31, 2005, 2004 and 2003, and long-lived assets, other than deferred taxes, at the end of each of those periods, classified by geographic area, are as follows:
|
| United |
| United |
| Other |
| Eliminations |
| Consolidated |
| |||||
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
| |||||
Sales to unaffiliated customers |
| $ | 215,939 |
| $ | 55,778 |
| $ | 73,181 |
| $ | — |
| $ | 344,898 |
|
Inter-area sales to affiliates |
| 7,132 |
| 3,276 |
| 2,460 |
| (12,868 | ) | — |
| |||||
Long-lived assets other than deferred taxes |
| 92,601 |
| 8,248 |
| 7,828 |
| (27,974 | ) | 80,703 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
| |||||
Sales to unaffiliated customers |
| $ | 234,908 |
| $ | 60,625 |
| $ | 65,193 |
| $ | — |
| $ | 360,726 |
|
Inter-area sales to affiliates |
| 8,326 |
| 3,111 |
| 309 |
| (11,746 | ) | — |
| |||||
Long-lived assets other than deferred taxes |
| 97,409 |
| 3,185 |
| 7,826 |
| (27,888 | ) | 80,532 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
| |||||
Sales to unaffiliated customers |
| $ | 273,474 |
| $ | 51,881 |
| $ | 53,536 |
| $ | — |
| $ | 378,891 |
|
Inter-area sales to affiliates |
| 7,521 |
| 1,281 |
| 596 |
| (9,398 | ) | — |
| |||||
Long-lived assets other than deferred taxes |
| 112,639 |
| 3,882 |
| 3,893 |
| (24,206 | ) | 96,208 |
|
48
NOTE O - SUMMARIZED QUARTERLY DATA (UNAUDITED)
|
| Year Ended December 31, 2005 |
| |||||||||||||
|
| Q1 |
| Q2 |
| Q3 |
| Q4 |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenue |
| $ | 88,635 |
| $ | 84,434 |
| $ | 80,837 |
| $ | 90,992 |
| $ | 344,898 |
|
Gross profit (loss) |
| 24,211 |
| 20,962 |
| 21,004 |
| 21,313 |
| 87,490 |
| |||||
Net income (loss) |
| (1,444 | ) | (4,988 | ) | (3,065 | ) | 2,202 |
| (7,295 | ) | |||||
|
| Year Ended December 31, 2004 |
| |||||||||||||
|
| Q1 |
| Q2 |
| Q3 |
| Q4 |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenue |
| $ | 89,084 |
| $ | 99,819 |
| $ | 83,117 |
| $ | 88,706 |
| $ | 360,726 |
|
Gross profit (loss) |
| 21,103 |
| 26,125 |
| 17,946 |
| 22,232 |
| 87,406 |
| |||||
Net income (loss) |
| (792 | ) | (1,679 | ) | (3,449 | ) | (11,307 | ) | (17,227 | ) | |||||
NOTE P - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss is as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Foreign-currency translation adjustments |
| $ | (6,531 | ) | $ | (4,443 | ) | $ | (6,020 | ) |
Minimum pension liability, net of tax |
| (11,995 | ) | (9,096 | ) | (8,542 | ) | |||
Accumulated Other Comprehensive Loss |
| $ | (18,526 | ) | $ | (13,539 | ) | $ | (14,562 | ) |
For the year ended December 31, 2005, other comprehensive loss consisted of foreign-currency translation adjustments related to the Company’s international operations (a loss of $2.1 million) and an increase to the minimum pension liability, net of tax, related to the Company’s subsidiary in the United Kingdom ($2.9 million).
NOTE Q – RELATED PARTY TRANSACTIONS
Welsh, Carson, Anderson & Stowe (“WCAS”) is the majority shareholder of Headstrong Corp., who in turn owns 100% of Metamor, Inc., a company that provides ERP consulting services. The Company paid Metamor approximately $1.7 million in fiscal year 2005 as consulting fees for ERP software implementation. This agreement is similar to consulting agreements the Company enters into from time to time with other providers of consulting services. The Company believes the terms are no less favorable to BancTec than what are offered by Metamor to other large customers. The Company’s Board of Directors has approved this arrangement.
The Company also holds the Sponsor Note payable to WCAS in the amount of $103,848 which matures on July 22, 2009. This note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid. The Company paid total interest during fiscal year 2005 of $10,385.
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, December 31, 2005, the Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Company’s management, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer believe that the Company’s disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report. In addition, the disclosure controls and procedures are effective to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported within 90 days of December 31, 2005, and such information required to be disclosed is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The Company will continue to evaluate disclosure controls on an ongoing basis.
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Chief Executive Officer and Chief Financial Officer believe that the Company’s disclosure controls and procedures are effective at that reasonable assurance level.
There were no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or the Chief Financial Officer, during the fourth quarter of 2005.
Revolving Credit Facility. Effective March 31, 2006, the Company and Heller Financial, Inc. (“Heller”) entered into an amendment to extend the Termination Date of the revolving credit facility (the “Revolver”) from May 31, 2006 to May 1, 2008 (Ninth Amendment to Loan and Security Agreement included as Exhibit 10.19). Under the amendment, the Revolver has a committed amount of $40 million and a letter-of-credit sub-limit of $10 million. Funds availability is increased under the amended Revolver with the inclusion of a specified percentage of the appraisal value of the Company’s real estate and machinery and equipment to the borrowing-base formula. The commitment fee of 0.5% per annum on the unused portion of the Revolver is reduced to 0.375% per annum, payable monthly.
Under the amendment effective March 31, 2006, the interest rate on loans under the Revolver is, at the Company’s option, either (1) 0.25% per annum over prime or (2) 1.75% per annum over LIBOR. In the event of default, the loans, at the election of the lender, bear interest at a rate per annum equal to 2.00% above the base rate (0.25% plus prime).
Under the amendment effective March 31, 2006, in the event that the Company’s average availability under the Revolver falls below $15 million, the Company must maintain a minimum fixed charge coverage ratio for a twelve calendar month period, calculated on fiscal quarter ending dates. If the average availability under the Revolver were to fall below $15 million, the Company must maintain minimum fixed charge coverage ratios of 0.60 to 1.00 for the fiscal period ending June 30, 2006, 0.80 to 1.00 for the fiscal period ending September 30, 2006, 0.90 to 1.00 for the fiscal period ending December 31, 2006, and building to a fixed charge coverage ratio of 1.10 to 1.00 for the fiscal period ending December 31, 2007 and thereafter.
50
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF BANCTEC, INC.
The following table sets forth the names, ages, and positions of each of the directors and executive officers of the Company as of March 31, 2006.
The Board of Directors elects executive officers annually. No family relationships exist among the directors or executive officers of the Company. Except for traffic offenses or other minor offenses, no director or executive officer has been convicted or named in a criminal proceeding during the past five years.
Name |
| Age |
| Position |
|
|
|
|
|
J. Coley Clark |
| 60 |
| President and Chief Executive Officer |
Jeffrey D. Cushman |
| 44 |
| Senior Vice President and Chief Financial Officer |
Robert A. Minicucci |
| 53 |
| Chairman of the Board and Director |
Gary J. Fernandes |
| 62 |
| Director |
Eric J. Lee |
| 34 |
| Director |
Sanjay Swani |
| 39 |
| Director |
Mr. Clark has been a director of the Company since March 2004 and Chief Executive Officer since September 2004, when he joined BancTec from EDS. Mr. Clark retired from EDS in 2004 as a Senior Vice President and President of EDS Financial Global Industry Solutions. Mr. Clark is also director of Carreker Corp., a provider of software solutions to the financial industry and FundsXpress, a software provider to the financial industry.
Mr. Cushman has been Senior Vice President and Chief Financial Officer since February 18, 2005. Mr. Cushman joined BancTec, Inc. in November 2004 as Vice President of Finance. Mr. Cushman previously did strategic development work for Metromedia Fiber Network, Inc. and before joining Metromedia, Mr. Cushman was the Chief Financial Officer, Senior Vice President, Secretary and Treasurer for GroceryWorks, Inc and Evercom, Inc. Prior to this time, Mr. Cushman was Director of Business Development at Electronic Data Systems Corporation, after holding a number of financial positions, including Group Financial Officer, Controller, and Financial Manager & Supervisor.
Mr. Minicucci has been a director of the Company since July 1999. Mr. Minicucci also serves as a Managing Member of WCAS VIII Associates LLC, the general partner of Welsh, Carson, Anderson & Stowe VIII, L.P. (a private investment company) and as a director of Amdocs Limited (a telecom customer care and billing software and services company). Mr. Minicucci has served as a General Partner of Welsh, Carson, Anderson & Stowe since 1993.
Mr. Fernandes has been a director of the Company since March 2003. Mr. Fernandes retired as Vice Chairman of Electronic Data Systems Corporation (EDS), a global services company, in 1998, after serving on the Board of Directors of EDS since 1981. After retiring from EDS, Mr. Fernandes founded Convergent Partners, a venture-capital fund focusing on buyouts of technology-related companies. He also served as Chairman and CEO of GroceryWorks, Inc, an internet grocery-fulfillment company until 2001. He currently serves on the Boards of Directors of 7-Eleven, Inc., a worldwide operator, franchisor and licensor of convenience stores, webMethods, Inc., a software-integration company listed on NASDAQ, and Anacomp, Inc. Mr. Fernandes is currently the Chairman and President of FLF Real Estate Ventures.
Mr. Lee has been a director of the Company since January 2002. He joined WCAS as an Associate in July 1999 and focuses on investments in the information services and healthcare industries. From July 1995 to June 1999, Mr. Lee was employed by Goldman, Sachs & Company where he worked in the High Technology and Mergers & Acquisitions groups.
Mr. Swani has been a director of the Company since December 2000. Mr. Swani joined Welsh, Carson, Anderson & Stowe in July 1999 and became a General Partner in October 2001. Mr. Swani also served as a principal of Fox Paine & Company (a San Francisco-based buyout firm) from June 1998 to June 1999 and worked in the mergers and acquisitions department of Morgan Stanley & Co. (a global financial services firm) from August 1994 to June 1998. Mr. Swani is also a director of Global Knowledge Networks, Inc. and Valor Telecommunications, LLC.
51
Audit Committee
On March 31, 2006, the Audit Committee consisted of Sanjay Swani, Eric J. Lee, and Gary J. Fernandes. No member of the Audit Committee was an officer of the Company. No member of the Audit Committee was formerly an officer of the Company.
Code of Business Conduct and Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies to all of the Company’s directors, officers and employees, including its principal executive officer, principal financial officer and controller. The Code is posted on the Company’s website at www.banctec.com. The Company intends to disclose any amendments to the Code by posting such amendments on its website. In addition, any waivers of the Code for directors or executive officers of the Company will be disclosed in a report on Form 8-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation earned during the fiscal years ended December 31, 2005, 2004 and 2003, by the Company’s Chief Executive Officer and each of the Company’s other most highly compensated executive officers earning in excess of $100,000 per year (based upon salary and bonus earned during the fiscal year ended December 31, 2005).
|
|
|
|
|
|
|
| Long Term Compensation Awards |
| ||||
|
|
|
|
|
|
|
|
|
| Securities |
|
|
|
|
|
|
| Annual Compensation |
| Restricted |
| underlying |
| All Other |
| ||
|
| Fiscal |
|
|
| Bonus |
| Stock |
| options |
| Compensation |
|
Name and Principal Position(s) |
| Year |
| Salary($) |
| ($) (1) |
| Awards($) |
| (#) (2) |
| ($) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Coley Clark |
| 2005 |
| 451,156 |
| 107,000 |
| 0 |
| 0 |
| 0 |
|
President and Chief |
| 2004 |
| 128,077 |
| 0 |
| 0 |
| 1,050,000 |
| 0 |
|
Executive Officer |
| 2003 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey D. Cushman |
| 2005 |
| 273,378 |
| 156,173 |
| 0 |
| 100,000 |
| 0 |
|
Senior Vice President and |
| 2004 |
| 46,154 |
| 0 |
| 0 |
| 0 |
| 0 |
|
Chief Financial Officer |
| 2003 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig D. Crisman (4) |
| 2005 |
| 0 |
| 0 |
| 0 |
| 0 |
| 573,663 |
|
President and Chief |
| 2004 |
| 369,630 |
| 134,215 |
| 0 |
| 0 |
| 157,289 |
|
Executive Officer |
| 2003 |
| 450,000 |
| 158,063 |
| 0 |
| 0 |
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian R. Stone (5) |
| 2005 |
| 70,916 |
| 0 |
| 0 |
| 0 |
| 179,761 |
|
Senior Vice President and |
| 2004 |
| 336,415 |
| 22,679 |
| 0 |
| 0 |
| 0 |
|
Chief Financial Officer |
| 2003 |
| 325,000 |
| 114,156 |
| 0 |
| 0 |
| 0 |
|
(1) Reflects bonus earned during each fiscal year.
(2) Amount represents options to purchase 1,050,000 shares of the Company’s common stock granted September 14, 2004 and options to purchase 100,000 shares of the Company’s common stock granted January 1, 2005.
(3) Includes cash compensation received for severance payments to Mr. Crisman and Mr. Stone (2004 and 2005).
(4) Mr. Crisman served as President and Chief Executive Officer from May 2001 to September 2004 and Director from
52
September 2004 to April 7, 2005. Mr. Crisman terminated employment effective September 9, 2004.
(5) Mr. Stone served as Senior Vice President and Chief Financial Officer from May 2001 to February 2005. Mr. Stone terminated employment effective February 18, 2005.
Option Grants in 2005
During 2005, Mr. Cushman was granted a total of 100,000 options.
Aggregated Option Exercises in 2005 and Fiscal Year-End Option Values
No options were exercised by any named executive officer in 2005. The following table provides information related to the number and value of options held by the named executive officers at the end of 2005.
|
| Shares |
| Value |
| Number of Unexercised |
| Value of Unexercised In- |
| ||||
Name |
| Acquired on |
| Realized |
| Exercisable |
| Unexercisable |
| Exercisable |
| Unexercisable |
|
J. Coley Clark |
| 0 |
| 0 |
| 262,500 |
| 787,500 |
| 0 |
| 0 |
|
Jeffrey D. Cushman |
| 0 |
| 0 |
| 0 |
| 100,000 |
| 0 |
| 0 |
|
Craig D. Crisman |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
Brian R. Stone |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
Compensation of Directors
The Company has no standard arrangements under which director’s receive compensation, and no directors fees were paid during 2005.
Employment Agreements
The Company does not have any employment agreements with any named officers.
Compensation Committee and Option Committee Interlocks and Insider Participation
From January 1, 2003 through December 31, 2005, the Compensation Committee was composed of Robert A. Minicucci.
From January 1, 2003 through December 31, 2005, the Option Committee was composed of Robert A. Minicucci.
No member of the Compensation Committee or the Option Committee was an officer or employee of the Company. No member of the Compensation Committee or the Option Committee was formerly an officer of the Company.
REPORT OF THE COMPENSATION COMMITTEE
Compensation Policy and Executive Compensation. The executive compensation program is designed to attract, motivate, reward and retain the executive officers needed to achieve the Company’s business objectives, to increase profitability and to provide value to the stockholders. The program has been structured and implemented to provide competitive compensation opportunities and various incentive awards based on company and individual performance. The executive compensation program is composed of three principal components: base salary, short-term incentive awards and long term incentive awards.
Base Salary. The base salary for each executive officer is determined at levels considered appropriate for comparable positions at similar companies.
Short-Term Incentive Awards. To reinforce the attainment of Company goals, the Committee believes that a substantial portion of the annual compensation of each executive officer should be in the form of variable incentive pay. The Company maintains an incentive plan under which the executive officers may earn an award as a percentage of their base compensation, if the Company meets the EBITDA profit objective set by the Compensation Committee at the beginning of the fiscal year.
53
Long-Term Incentive Awards. Under the 2000 Plan, stock options are awarded based on an individual’s level of responsibility within his or her area, such individual’s executive development potential and competitive market norms. Options granted under the 2000 Plan are granted at no greater than the fair market value of the stock on the date of grant.
2005 Total Compensation for the Chief Executive Officer. J. Coley Clark. When Mr. Clark became the company’s Chief Executive Officer in September 2004, the Committee designed a compensation plan which was consistent with that provided to the company’s other executive officers. Although a significant portion of Mr. Clark’s potential future compensation consists of bonus plan payments based on company performance, the Committee did not rely entirely on predetermined formulas or a limited set of criteria when it determined the compensation of the company’s Chief Executive Officer.
The Committee designed a compensation package for Mr. Clark that provided a competitive salary with the potential of significant bonus plan compensation in the event the company performed well under his leadership. For 2005, Mr. Clark’s annual salary level as Chief Executive Officer was $450,000 with bonus compensation earned but not yet paid in 2005 of $107,000.
54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 15, 2006 regarding the ownership of Common Stock, Class A Common Stock, and Preferred Stock of: (1) each person who is known by the Company to be the beneficial owner of more than five percent of the outstanding shares of the named class of Stock; (2) each director of the Company; (3) each executive officer named in the Summary Compensation Table; and (4) all executive officers and directors of the Company as a group. Percentage of ownership is based on 17,003,838 shares of Common Stock and 1,181,946 shares of Class A Common Stock (both issued and outstanding at March 15, 2006), 100,667 shares of Series A Preferred Stock (Preferred A), and 35,520 shares of Series B Preferred Stock (Preferred B) outstanding as of March 15, 2006. The assumed exercise of the Series A Preferred warrants (“Series A Warrants”) and the assumed conversion of the Series B Preferred (“Series B Conversion Rights”) results in 750,000 and 640,000 additional shares, respectively, of Common Stock. Additionally, the assumed exercise of options results in 185,150 additional shares of Common Stock. Included in the Number of Shares Beneficially Owned are shares attributable to stock options, stock warrants, and conversion rights that are exercisable as of, or will be exercisable within 60 days after, March 15, 2006.
Name of Beneficial Owner (1) |
| Class of |
| Number of Shares |
| Percent of |
|
|
|
|
|
|
|
|
|
BancTec Intermediate Holding, Inc. |
| Common |
| 19,575,784 |
| 100.0 | % |
2701 E. Grauwyler |
| Preferred A |
| 100,667 |
| 100.0 | % |
Irving, TX 75061 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
BancTec Upper-Tier Holding, LLC (5) |
| Common |
| 19,575,784 |
| 100.0 | % |
2701 E. Grauwyler |
| Preferred A |
| 100,667 |
| 100.0 | % |
Irving, TX 75061 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
Welsh, Carson, Anderson & Stowe VIII, L.P. (6) |
| Common |
| 19,575,784 |
| 100.0 | % |
320 Park Avenue, Suite 2500 |
| Preferred A |
| 100,667 |
| 100.0 | % |
New York, NY 10022 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
WCAS Capital Partners III, L.P. (7) |
| Common |
| 19,575,784 |
| 100.0 | % |
320 Park Avenue, Suite 2500 |
| Preferred A |
| 100,667 |
| 100.0 | % |
New York, NY 10022 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
WCAS Information Partners, L.P. (8) |
| Common |
| 19,575,784 |
| 100.0 | % |
320 Park Avenue, Suite 2500 |
| Preferred A |
| 100,667 |
| 100.0 | % |
New York, NY 10022 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
Robert A. Minicucci(9) |
| Common |
| 19,575,784 |
| 100.0 | % |
320 Park Avenue, Suite 2500 |
| Preferred A |
| 100,667 |
| 100.0 | % |
New York, NY 10022 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
Eric J. Lee(10) |
| Common |
| 0 |
| * |
|
320 Park Avenue, Suite 2500 |
| Preferred A |
| 0 |
| * |
|
New York, NY 10022 |
| Preferred B |
| 0 |
| * |
|
|
|
|
|
|
|
|
|
Gary J. Fernandes(11) |
| Common |
| 19,575,784 |
| 100.0 | % |
100 Crescent Court, Suite 230 |
| Preferred A |
| 100,667 |
| 100.0 | % |
Dallas, TX 75201 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
Murray Holland(12) |
| Common |
| 19,575,784 |
| 100.0 | % |
100 Crescent Court, Suite 230 |
| Preferred A |
| 100,667 |
| 100.0 | % |
Dallas, TX 75201 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
Sanjay Swani(13) |
| Common |
| 19,575,784 |
| 100.0 | % |
320 Park Avenue, Suite 2500 |
| Preferred A |
| 100,667 |
| 100.0 | % |
New York, NY 10022 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
Craig D. Crisman(14) |
| Common |
| 19,575,784 |
| 100.0 | % |
2701 E. Grauwyler |
| Preferred A |
| 100,667 |
| 100.0 | % |
Irving, TX 75061 |
| Preferred B |
| 35,520 |
| 100.0 | % |
|
|
|
|
|
|
|
|
J. Coley Clark |
| Common |
| 0 |
| * |
|
2701 E. Grauwyler |
| Preferred A |
| 0 |
| * |
|
Irving, TX 75061 |
| Preferred B |
| 0 |
| * |
|
|
|
|
|
|
|
|
|
Jeffrey D. Cushman |
| Common |
| 0 |
| * |
|
2701 E. Grauwyler |
| Preferred A |
| 0 |
| * |
|
Irving, TX 75061 |
| Preferred B |
| 0 |
| * |
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group |
| Common |
| 19,575,784 |
| 100.0 | % |
(6 persons) |
| Preferred A |
| 100,667 |
| 100.0 | % |
|
| Preferred B |
| 35,520 |
| 100.0 | % |
* Less than one percent.
55
(1) BancTec Intermediate Holding, Inc. has sole investment and sole voting power with respect to the shares of Stock shown.
(2) Common Stock includes 17,003,838 shares of Common Stock, 1,181,946 shares of Class A Common Stock, 750,000 shares of Common Stock (Series A Warrants), and 640,000 shares of Common Stock (Series B Conversion Rights).
(3) 100,000 shares of Series A Preferred includes a warrant to purchase between 2.5 and 7.75 shares of Common Stock. Common Stock exercisable by the warrants totals 750,000 shares.
(4) Each share of Series B Preferred Stock includes the right to convert into Common Stock. The number of shares of Common Stock is determined by multiplying the number of shares being converted by $150 and dividing the result by $8.325 per share. The conversion rate is subject to various adjustments.
(5) BancTec Upper-Tier Holding, LLC holds 100% of the outstanding capital stock of BancTec Intermediate Holding, Inc., which in turn holds 100% of all classes of capital stock, including warrants.
(6) Welsh, Carson, Anderson & Stowe VIII, L.P holds the majority interest in BancTec Upper-Tier Holding, LLC.
(7) WCAS Capital Partners III, L.P. holds a minority interest in BancTec Upper-Tier Holding, LLC.
(8) WCAS Information Partners, L.P. holds a minority interest in BancTec Upper-Tier Holding, LLC.
(9) Mr. Minicucci is a managing member of WCAS VIII Associates LLC, the general partner of Welsh, Carson, Anderson & Stowe VIII, L.P. Mr. Minicucci disclaims beneficial ownership of such shares.
(10) Mr. Lee is not a general partner of Welsh, Carson, Anderson & Stowe VIII.
(11) Mr. Fernandes holds a minority interest in BancTec Upper-Tier Holding, LLC. Mr. Fernandes disclaims beneficial ownership of such shares.
(12) Mr. Holland holds a minority interest in BancTec Upper-Tier Holding, LLC. Mr. Holland disclaims beneficial ownership of such shares.
(13) Mr. Swani is a managing member of WCAS VIII Associates LLC, the general partner of Welsh, Carson, Anderson & Stowe VIII, L.P. Mr. Swani disclaims beneficial ownership of such shares.
(14) Mr. Crisman holds a minority interests in BancTec Upper-Tier Holding, LLC. Mr. Crisman disclaims beneficial ownership of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Welsh, Carson, Anderson & Stowe is the majority shareholder of Headstrong Corp., who in turn owns 100% of Metamor, Inc., a company that provides ERP consulting services. The Company paid Metamor approximately $1.7 million in fiscal year 2005 as consulting fees for ERP software implementation. This agreement is similar to consulting agreements the Company enters into from time to time with other providers of consulting services. The Company believes the terms are no less favorable to BancTec than what are offered by Metamor to other large customers. The Company’s Board of Directors has approved this arrangement.
The Company also holds the Sponsor Note payable to WCAS in the amount of $103,848 which matures on July 22, 2009. This note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid. The Company paid total interest during fiscal year 2005 of $10,385.
56
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte & Touche, LLP and their respective affiliates (collectively, the “D&T Entities”) were retained as the company’s independent auditors for the 2005 fiscal year. The following table presents the aggregate fees billed by the D&T Entities, for services provided during 2005:
|
| 2005 (3)(4) |
| |
|
| (in thousands) |
| |
Audit Fees (1) |
| $ | 760 |
|
Audit-Related Fees |
| — |
| |
Tax Fees |
| — |
| |
All Other Fees |
| — |
| |
Total |
| $ | 760 |
|
KPMG LLP, and their respective affiliates (collectively, the “KPMG Entities”) were retained as the company’s independent auditors for the 2004 fiscal year. The following table presents the aggregate fees billed by the KPMG Entities, for services provided during 2005 and 2004:
|
| 2005 (3)(4) |
| 2004 (3)(4) |
| ||
|
| (in thousands) |
| ||||
Audit Fees (1) |
| $ | 349 |
| $ | 832 |
|
Audit-Related Fees |
| — |
| — |
| ||
Tax Fees (2) |
| 23 |
| 517 |
| ||
All Other Fees |
| — |
| — |
| ||
Total |
| $ | 372 |
| $ | 1,349 |
|
(1) |
| Audit fees consisted of audit work performed in the preparation of the financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, such as statutory audits and reviews of interim financial information. |
|
|
|
(2) |
| Tax fees consist principally of assistance related to tax compliance and reporting. |
|
|
|
(3) |
| All audit and audit-related fees were approved by the Audit Committee. |
|
|
|
(4) |
| The Audit Committee approves in advance all audit services, audit-related services and tax-related services provided by the Company’s independent public accountants. Pursuant to the pre-approval policy adopted by the Board of Directors in 2003, the Audit Committee also approves all other services provided by the independent public accountants in advance on a case-by-case basis. All engagements of the independent public accountants in 2004 and 2005 were pre-approved pursuant to the policy. |
57
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements: See Index to Financial Statements and Schedules.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated November 7, 2005 regarding the termination of KPMG, LLP as the Company’s independent auditor.
The Company filed a Current Report on Form 8-K dated December 20, 2005 regarding the appointment of Deloitte & Touche, LLP as the Company’s independent auditor.
(c) Exhibits:
3.1 — Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
3.2 — By-Laws, incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.
4.1 — Certificate of Designations, Preferences and Rights of Series A Preferred Stock, incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000.
4.2 — Securities Purchase Agreement dated as of September 22, 2000, incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000.
4.3 — Certificate of Designations, Preferences and Rights of Series A and B Preferred Stock, incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
4.4 — Securities Purchase Agreement dated as of February 27, 2001, incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
4.5 — Indenture dated May 22, 1998 by and between the Company and The First National Bank of Chicago, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-4 dated August 28, 1998.
4.6 — Exchange and Registration Rights Agreement dated May 22, 1998 by and among the Company, Chase Securities, Inc., Goldman, Sachs & Co. and NationsBanc Montgomery Securities LLC, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-4 dated August 28, 1998.
4.7 — Senior Subordinated Note dated July 22, 1999, among Colonial Acquisition Corp., a predecessor in interest to the Company, WCAS CP III and the several Purchasers named in Schedules I and II thereto, incorporated by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
10.1 — Loan Documents dated July 22, 1999, among the Company, Chase Bank of Texas, as Agent, and Welsh, Carson, Anderson & Stowe, as amended, incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.
10.2 — First Amendment and Waiver dated January 21, 2000 to Loan Documents, incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.
10.3 — Second Amendment and Waiver dated May 15, 2000 to Loan Documents, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000.
10.4 — Third Amendment and Waiver dated September 15, 2000 to Loan Documents, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000.
10.5 — Stock Subscription Warrant, incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form
58
10-Q for the period ended September 30, 2000.
10.6 — BancTec, Inc. 2000 Stock Plan, incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000.
10.7 — Loan and Security Agreement, dated as of May 30, 2001, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2001.
10.8 — First Amendment to Loan and Security Agreement, dated as of November 8, 2001, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001.
10.9 — Second Amendment to Loan and Security Agreement, dated as of February 5, 2002, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
10.10 — Third Amendment to Loan and Security Agreement, dated as of July 30, 2002, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
10.11 — Fourth Amendment to Loan and Security Agreement, dated as of November 27, 2002, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed as of November 27, 2002.
10.12 — Loan and Security Agreement—Waiver, Consent and Amendment Relating to BancTec Restructuring, dated as of November 1, 2002, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed as of November 27, 2002.
10.13 — Stock Purchase Agreement, dated as of November 27, 2002, between BancTec, Inc. and JAFCO MBO Co., Ltd., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed as of November 27, 2002.
10.14 – Fifth Amendment to Loan and Security Agreement, dated as of May 7, 2003, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003.
10.15 – Sixth Amendment to Loan and Security Agreement, dated as of September 1, 2003, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2003.
10.16 — Certificate of Designations, Preferences and Rights of Series A and B Preferred Stock, dated March 31, 2004, incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
10.17 – Loan and Security Agreement—Waiver and Consent, dated as of August 9, 2004, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
10.18 – Loan and Security Agreement – December 31, 2004 Amendment to Paragraph B of Financial Covenants Rider to Loan and Security Agreement, dated as of December 31, 2004, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
10.19 – Ninth Amendment to Loan and Security Agreement, dated as of March 31, 2006, between Heller Financial, Inc. and BancTec, Inc.
21.1 — Subsidiaries of Registrant
31.1 — Certificate of Chief Executive Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act.
59
31.2 — Certificate of Chief Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act.
32.1 – Certificate of Chief Executive Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under the Sarbanes-Oxley Act.
32.2 – Certificate of Chief Financial Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under the Sarbanes-Oxley Act.
60
BANCTEC, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2005, 2004 and 2003
(000’s)
Column A |
| Column B |
| Column C |
| Column D |
| Column E |
| ||||
Allowance for Doubtful Accounts |
| Balance at |
| Additions |
| Deductions |
| Balance at |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Year ended December 31, 2005 |
| $ | 931 |
| $ | 146 |
| $ | 33 | (a) | $ | 1,110 |
|
Year ended December 31, 2004 |
| 1,126 |
| (229 | ) | 34 | (a) | 931 |
| ||||
Year ended December 31, 2003 |
| 2,216 |
| (999 | ) | (91 | )(a) | 1,126 |
| ||||
(a) (Write-off) recoveries of uncollectible accounts.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| By | /s/ | J. Coley Clark |
|
|
| J. Coley Clark | ||
|
| President and Chief Executive Officer |
Dated: April 17, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:
Signature |
| Title |
| Date |
|
|
|
|
|
/s/ J. Coley Clark |
| President and Chief Executive |
| April 17, 2006 |
J. Coley Clark |
| Officer (Principal Executive |
|
|
|
| Officer); and Director |
|
|
|
|
|
|
|
/s/ Jeffrey D. Cushman |
| Senior Vice President, Chief |
| April 17, 2006 |
Jeffrey D. Cushman |
| Financial Officer, and Treasurer |
|
|
|
| (Principal Accounting Officer); |
|
|
|
| and Director |
|
|
|
|
|
|
|
/s/ Robert A. Minicucci |
| Chairman of the Board and |
| April 17, 2006 |
Robert A. Minicucci |
| Director |
|
|
|
|
|
|
|
/s/ Eric J. Lee |
| Director |
| April 17, 2006 |
Eric J. Lee |
|
|
|
|
|
|
|
|
|
/s/ Gary J. Fernandes |
| Director |
| April 17, 2006 |
Gary J. Fernandes |
|
|
|
|
|
|
|
|
|
/s/ Sanjay Swani |
| Director |
| April 17, 2006 |
Sanjay Swani |
|
|
|
|
62