UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
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 |
Incorporation or Organization) | Identification No.) |
|
|
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: x
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: x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: x No: 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 x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No: x
As of December 31, 2006, 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, 2007 |
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, 2006
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.
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 a wide range of solutions for automating complex, high-volume and data-intensive business processes for clients in the financial services, manufacturing, healthcare, government, services and utilities industries. BancTec’s offerings include business solutions, business process outsourcing, technology products and infrastructure services.
Founded in 1972, the Company is headquartered in Irving, Texas and serves customers in more than 50 countries, with international revenue in 2006 representing approximately 40% of total revenues.
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 limited partnerships with total capital of more than $16 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.
OPERATING 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 2006, 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 and third-party manufactured equipment, integrated systems, BancTec software products sold through Plexus Software (“Plexus”), a division of BancTec, and business process outsourcing services. The ITSM operations include personal computer repair services and administration of third-party extended-service contracts. ITSM provides warranty services, fulfillment services and related maintenance support to manufacturers of desktop and enterprise IT products in North America and Europe.
Americas and EMEA. These two operating segments are responsible for business in North, Central and South America (“Americas”) and Europe, Middle East and Africa (“EMEA”). These two groups offer a similar portfolio of business process outsourcing, business solutions, technology products and infrastructure services to similar types of clients. The portfolio offerings focus primarily on payment and remittance processing, document and content processing and IT service management. These 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, service providers and consumer goods manufacturers.
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 original equipment manufacturers (“OEM”), outsourcing services providers, systems integrators and technology manufacturers. These services result in cost savings, improved client satisfaction and increased revenues for BancTec’s clients. ITSM provides warranty services, fulfillment services and related maintenance support to manufacturers of desktop and enterprise IT products in North America and Europe.
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Note N – Business Segment Data and Note O – Geographic Operations, contained in Notes to the Consolidated Financial Statements, include detailed financial information concerning the Company’s segments and geographic areas. The 2004 segment information has been conformed to the 2005 and 2006 presentation.
MARKETS SERVED
The Company’s portfolio of offerings 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 the Americas and EMEA business units focus on the document and content processing and payment and remittance processing markets.
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, document imaging and archiving, credit card and loan exceptions processing, 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, 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 the foundation for a comprehensive outsourcing solution.
The Company also offers document and content processing hardware technology. 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 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, 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 Company’s 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 software 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.
SERVICES PORTFOLIO
The Company employs a services portfolio approach to maximize the market penetration and revenue potential from our targeted geographies, horizontal markets and vertical industries. This services portfolio consists of business process outsourcing, business solutions, infrastructure services and products.
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Business Process Outsourcing. Business Process Outsourcing (BPO) is defined as having the understanding of industry, market and business processes intimately enough to apply tools, methods, products and services to allow our clients to delegate a part of their business for us to manage and deliver through measurable performance metrics. 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 BPO services in the United States in 2005. With outsourcing centers throughout the U.S. and Europe, BancTec offers BPO services for both document and content processing as well as payment and remittance processing.
Business Solutions. Business Solutions are defined as the application of tools, methods and processes in conjunction with products and services to deliver business value to meet a client’s business need. Utilizing a number of software technologies developed by BancTec and third party providers, as well as BancTec’s project implementation processes, the Company provides end-to-end Business Solutions to meet client needs. These solutions are typically implemented at client locations and operated by client staff.
Infrastructure Services. Infrastructure Services are defined as the management, support and maintenance of BancTec products and third party products within the IT infrastructure to deliver business and technical value to meet our clients’ business requirements. The Company provides clients with system support for hardware and software products and 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.
Products. Products are defined as BancTec hardware, software and consumables, as well as, third party hardware and software to meet a client’s technology needs. The Company incorporates these Products as an integral part of our Business Solutions. We utilize these products in delivering our Business Process Outsourcing solutions and we offer these products to market through indirect sales.
GEOGRAPHIC 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 O – 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 106 people for such activities as of December 31, 2006.
The following table sets forth the Company’s product development expenses:
| For the years ended December 31, |
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| 2006 |
| 2005 |
| 2004 |
| |||
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| (dollars in thousands) |
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Product Development Expenses |
| $ | 7,275 |
| $ | 8,823 |
| $ | 7,768 |
|
Percent of Total Revenue |
| 1.9 | % | 2.6 | % | 2.2 | % | |||
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Current expenditures are concentrated on developing new applications for the Company’s product lines and improving and expanding existing products. Additional product development funding is provided by customers for customer-specific development activities, which is not included in the expense outlined above, but is instead part of cost of sales in the accompanying Consolidated Statement of Operations. 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 solutions (both licensed and outsourced) and high-level reusable components that form the basis of vertical solutions for specific markets.
The Document and Content Solution set includes; A/P Master, a complete solution for accounts payable automation, Document and Image Archive, a hosted capture and archive service, Remit Cycle 360, a comprehensive transaction exchange cycle for the healthcare market that includes providers, payers and banks and eFIRST Origin, a web based mortgage and loan origination solution.
The three core modules in the eFIRST™ suite of solutions are; generic document capture system (eFIRST Capture), business process automation (eFIRST Process) and archiving (eFIRST Archive). 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, business rules, data views, user environments and access permission models that integrate with existing systems and people to automate business processes.
eFIRST Archive addresses the secure, structured storage and future retrieval of data.
Image Capture. In 2007, 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, 2006, 2005 and 2004, Dell, accounted for 19.5%, 15.5%, and 17.4%, respectively, of the total revenue of the Company. The Company’s ten largest customers accounted for 48.6%, 45.0%, and 44.3%, of the Company’s revenues for the years ended December 31, 2006, 2005, and 2004 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.
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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, image electronics, 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.
EMPLOYEES
At December 31, 2006, the Company employed approximately 2670 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
Demand for the Company’s services could be adversely impacted by economic and political uncertainty. A general economic downturn may adversely impact customers’ demand for information technology outsourcing, business processing outsourcing and systems integration services. The Company’s sales are concentrated to businesses in industries involving
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high volume transaction processing, including banking, financial services, insurance, health care and high technology, and to governmental agencies. Business or economic conditions, such as consolidation with the industry, 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.
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 the transition 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.
Competition
The business processing outsourcing and the information technology outsourcing industries are highly competitive. Certain of the Company’s competitors have greater financial resources and may develop solutions or services which may make the Company’s service offerings obsolete. These situations may impact the Company’s ability to win new contracts or develop and expand service offerings. In addition, competition places downward pressure on operating margins, particularly for technology outsourcing contract extensions or renewals. As a result, the Company may not be able to maintain current operating margins for technology outsourcing contracts extended or renewed in the future.
Contract Profitability
The pricing and other terms of customer contracts require the Company to make estimates and assumptions at the time these contracts are entered into that could differ from actual results. These estimates reflect the Company’s best judgments regarding the nature of the contract and the expected costs to provide the contracted services. In addition, some contracts require significant investments in the early stages, which are expected to be recovered over the life of the contract through billings for services. Increased or unexpected costs or unanticipated delays in the implementation of the services or decreases in the actual work volumes generated under the contracts could make these contracts less profitable or unprofitable.
Customer concentration
The Company’s success depends upon retention of significant customers. For the year ended December 31, 2006, the top ten customer accounted for 48.6% of total revenue. Customers may be lost due to merger or acquisition, business failure, contract expiration, conversion to a competitor, or conversion to an in-house system. The Company cannot guarantee that they will be able to retain long-term relationships or secure renewals of current contracts in the future. Significant decreases in the volumes under contracts with these significant customers or the loss of any significant customer could leave the Company with a higher level of fixed costs than is necessary to service remaining customers.
Key personnel
The Company’s ability to grow and provide customers with competitive solutions and services is partially dependent on the ability to attract and retain highly motivated people with the skills to serve customers. In addition, the Company’s operations depend on the continued efforts of the executive officers and on senior management. If the Company fails to attract, train and retain key management and technically skilled people, the financial condition and results of operations could be materially and adversely affected.
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
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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.
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.
A facility located in Dallas, Texas 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.
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As of December 31, 2006, 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.
The Company is a party to various legal proceedings. None of those current proceedings is currently 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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ITEM 5. 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, 2006, 2005 and 2004, and the related notes thereto.
|
| Years Ended |
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|
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, |
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|
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| 2002 (A) |
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| (In thousands) |
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Revenue |
| $ | 379,479 |
| $ | 344,898 |
| $ | 360,726 |
| $ | 378,891 |
| $ | 379,433 |
|
Gross profit |
| 97,238 |
| 87,490 |
| 87,406 |
| 97,112 |
| 96,205 |
| |||||
Operating expenses |
| 73,321 |
| 73,935 |
| 71,598 |
| 73,242 |
| 70,968 |
| |||||
Interest expense |
| 20,326 |
| 19,166 |
| 19,098 |
| 19,473 |
| 33,080 |
| |||||
Income (loss) from continuing operations before income taxes |
| 3,943 |
| (5,672 | ) | (3,606 | ) | 6,456 |
| 700 |
| |||||
Income tax expense (benefit) |
| 4,785 |
| 1,623 |
| 13,621 |
| (11,370 | ) | 344 |
| |||||
Net income (loss) |
| (842 | ) | (7,295 | ) | (17,227 | ) | 17,826 |
| 59,126 |
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Total assets |
| 212,597 |
| 197,214 |
| 216,065 |
| 239,515 |
| 231,395 |
| |||||
Working capital (deficit) |
| (19,518 | ) | (5,988 | ) | 11,531 |
| 12,337 |
| (8,877 | ) | |||||
Long-term debt, less current maturities |
| 201,841 |
| 199,063 |
| 197,823 |
| 197,823 |
| 201,723 |
| |||||
Series A preferred stock |
| 18,040 |
| 18,040 |
| 18,040 |
| 16,568 |
| 14,856 |
| |||||
Series B preferred stock |
| 13,520 |
| 13,520 |
| 13,520 |
| 10,609 |
| 8,324 |
| |||||
Stockholders’ deficit |
| (169,625 | ) | (171,985 | ) | (159,703 | ) | (152,636 | ) | (161,724 | ) | |||||
(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 to reflect the continuing operations of the Company.
ITEM 7. 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.
Highlights
The Company experienced several shifts in its business during the year ended December 31, 2006. During the year, the Company began offering business process outsourcing services in the United States, building on the experience gained in business process outsourcing market in Europe over the last several years. In addition, the Company experienced continued expansion of the ITSM business in European markets. The US hardware maintenance business, which has been in decline over the last several years, experienced growth in 2006 due to the addition of significant contracts for the maintenance of third party electromechanical equipment. Other factors continue to impact the Company, including 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.
The Company continues to introduce new product offerings in its document and content management solutions as well as expand its managed services business in North America. In addition, the Company continues to seek reductions in operating costs.
During the year ended December 31, 2006, the Company experienced declines in maintenance contract deposits related to the personal computer repair business, which significantly impacted cash from operation. These declines can be attributed 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.
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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 and other intangible assets
· 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,” 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.
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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. The current and non-current portions of these advances are shown as Deferred Revenue or Maintenance Contract Deposits on the Condensed Consolidated Balance Sheets.
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.
Business process outsourcing
The Company provides business process outsourcing services under contracts under a unit-price or fixed-price basis, which may extend up to 10 or more years. If a contract involves the provision of a single element, revenue is generally recognized when the Company performs the services or processes transactions in accordance with contractual performance standards. Revenues from unit-priced contracts are recognized as transactions are processed based on objective measures of output. Revenues from fixed-price contracts are recognized on a straight-line basis, unless revenues are earned and obligations are fulfilled in a different pattern. In some of these arrangements, the Company hires customer employees and becomes responsible for certain customer obligations. The Company continuously reviews and reassesses the estimates of contract profitability. Circumstances that potentially affect profitability over the life of the contract include decreases in volumes of transactions or other inputs/outputs on which the Company is paid, failure to deliver agreed benefits, variances from planned internal/external costs to deliver the services, and other factors affecting revenues and costs.
Costs related to delivering outsourcing services are expensed as incurred with the exception of certain transition costs related to the set-up of processes, personnel and systems, which are deferred during the Transition and expensed evenly over the period outsourcing services are provided. The deferred costs are specific internal costs or incremental external costs directly related to transition or set-up activities necessary to enable the outsourced services. Deferred amounts are recoverable in the event of early termination of the contract and are monitored regularly for impairment. Impairment losses are recorded when projected undiscounted operating cash flows of the related contract are not sufficient to recover the carrying amount of contract assets. (See discussion of critical accounting policy for goodwill and other intangible assets.)
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 period such determination was made. The allowance for doubtful accounts is reviewed periodically and adjustments are recorded as deemed necessary. During the quarter ended September 30, 2006, the Company updated the percentages used to calculate the allowance for doubtful accounts to reflect improved recent history of collections and customer credits. This change in estimate was applied prospectively during the quarter and resulted in an immaterial impact to the Company’s financial statements.
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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 and Other 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. 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. The Company performs the annual test for impairment as of December 31, each year. No impairment of goodwill has been deemed necessary for 2006 and 2005.
Components of the Company’s goodwill and other intangibles include amounts that are foreign currency denominated. These 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. Goodwill previously classified as unallocated has been allocated to the reporting units as required by SFAS No. 142. The following is a summary of goodwill balances as of December 31, 2006 by reporting unit.
| US |
| SDS |
| BancTec |
| Total |
| |||||
Balance at January 1, 2006 |
| $ | 41,236 |
| $ | 497 |
| $ | 240 |
| $ | 41,973 |
|
Goodwill impairment |
| — |
| — |
| — |
| — |
| ||||
Additions in Fiscal 2006 |
| — |
| 79 |
| — |
| 79 |
| ||||
Changes due to foreign currency translation |
| — |
| 69 |
| — |
| 69 |
| ||||
Balance at December 31, 2006 |
| $ | 41,236 |
| $ | 645 |
| $ | 240 |
| $ | 42,121 |
|
Certain costs associated with contract acquisition and related direct and incremental costs are capitalized in accordance with SOP 81-1 and Technical Bulletin 90-1. Contract acquisition costs include direct incremental costs associated with contract negotiation, such as legal fees, and costs incurred to transform customer processes and technology in direct support of implementing the contract terms and conditions. These costs are amortized on a pro-rata basis over the term of the contract.
In the event indications exist that an outsourcing contract cost balance related to a particular contract may be impaired, undiscounted estimated cash flows of the contract are projected over its remaining term, and compared to the unamortized outsourcing contract cost balance. If the projected cash flows are not adequate to recover the unamortized cost balance, the balance would be adjusted to equal the contract’s fair value in the period such a determination is made. The primary indicator used to determine when impairment testing should be performed is when a contract is materially underperforming, or is expected to materially under-perform in the future, as compared to the bide model that was developed as part of the original proposal process and subsequent annual budgets. No impairment of contract acquisition costs has been recorded for the year ended December 31, 2006.
See Note F for a summary of other intangible assets.
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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. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”.
The Company elected to adopt the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-K have not been restated to reflect the fair value method of expensing share-based compensation. Under this application, the Company is required to record compensation cost for all share-based payments granted after the date of adoption based on the grant date fair value estimated in accordance with the provisions of SFAS 123R and for the unvested portion of all share-based payments previously granted that remain outstanding which were based on the grant date fair value estimated in accordance with the original provisions of SFAS 123.
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 years ended December 31, 2006 and 2005, the Company granted 462,500 and 640,000 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 2004, 2005 and 2006 vest over a four-year period at 25% per year.
Non-qualified stock options. No non-qualified stock options were granted during the years ended December 31, 2006 and 2005. When granted 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.
The following table illustrates the effect on net loss as if compensation for the Company’s stock option plans had been determined in conformance with SFAS No. 123 for the years ended December 31, 2005 and 2004:
| Years Ended December 31, |
| |||||
|
| 2005 |
| 2004 |
| ||
Net loss applicable to common stock, as reported |
| $ | (7,295 | ) | $ | (21,610 | ) |
Total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax |
| (55 | ) | (17 | ) | ||
Pro Forma net loss |
| $ | (7,350 | ) | $ | (21,627 | ) |
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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 following table presents share-based compensation expenses for continuing operations included in the Company’s consolidated statements of operations:
| Year Ended December |
| ||
Share-based compensation expense recorded |
| $ | 249 |
|
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 |
| 2006 |
| 2005 |
| 2004 |
| |||
Risk free interest rate |
| 4.67 | % | 4.70 | % | 4.10 | % | |||
Expected life |
| 10 years |
| 10 years |
| 10 years |
| |||
Expected volatility |
| 40.0 | % | 40.0 | % | 40.0 | % | |||
Fair value of options granted |
| $ | 0.44 |
| $ | 0.42 |
| $ | 0.12 |
|
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2006 and December 31, 2005
Consolidated revenue of $379.5 million for the year ended December 31, 2006 increased by $34.6 million or 10.0% from the comparable prior-year period.
· The Americas revenue increase of $24.1 million was partially due to $15.2 million of revenue from the start of business process outsourcing services in the United States in 2006. The majority of the business process outsourcing revenue related to a significant seven year contract involving three processing centers which process transactions for multiple customers. In addition, these processing centers contain excess capacity which provides the Company the opportunity to process volumes from additional contracts without significant expansion of fixed overhead. The increase in revenue was also related to $5.6 million of equipment sales into South America. In addition, hardware maintenance revenue increased $6.6 million due to the addition of contracts related to the maintenance of third-party equipment. These increases were partially offset by a decline in revenues related to the sale and installation of packaged solutions, as the demand for payments solutions continues to decline due to market trends, including reduced check volume, check truncation, and the passage of Check 21. The Check Clearing for the 21st Century Act (“Check 21”) facilitates check truncation by authorizing substitute checks, thus negatively impacting the demand for check and payment solutions.
· The ITSM decrease of $3.0 million resulted from decreased revenue in the United States of $14.2 due to pricing decreases, domestic competitive pressure, and decreased volume under certain maintenance programs, somewhat offset by increased revenue of $11.2 million from the expansion by ITSM of operations in Europe.
· Revenue increases in EMEA of $13.5 million are the result strong sales in Europe of document and content processing solutions, increasing $7.4 and the continued growth in the United Kingdom of business processing outsourcing, which contributed an additional $4.1 million of revenue, as well as the impact of a weakening dollar on the conversion of revenue stated in foreign currencies.
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Consolidated gross profit of $97.2 million increased by $9.7 million or 11.10% from the comparable prior-year period.
· Gross profit decreased in Americas by $1.9 million or 4.6%. Although revenue in Americas increased, the overall gross profit decreased due to the gross profit percentage decreasing from 33.8% to 27.4%. The start-up nature of the Company’s business process outsourcing business contributed to the reduction in the America’s gross profit percentage relative to the amount of revenue generated. In addition, the hardware maintenance contracts added in the current year carried a lower gross profit percentage due to higher inventory and labor costs associated with maintaining third-party equipment.
· Increases in EMEA gross profit of $7.5 million or 20.6% resulted primarily from increased revenue. A higher gross profit percentage also contributed to the improved gross profit, increasing from 33.1% to 34.3%, resulting from cost efficiencies.
· ITSM’s gross profit increased $4.2 million or 42.0%. Although revenue decreased, the gross margin percentage increased from 7.9% to 11.5%, primarily due to cost reductions in the domestic operations. ITSM is the major component in the maintenance and other services category on the Consolidated Statements of Operations, and therefore is a significant contributing factor in the increased gross profit in the maintenance and other services category.
Operating expenses of $73.3 million represented a decrease of $0.6 million compared to the comparable prior-year period. Operating expenses, by component, changed primarily as follows: (1) Product development expenses decreased $1.5 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 $0.9 million or 1.4%, primarily due to increased sales expenses and increased amortization of intangible assets.
Interest expense for the year ended December 31, 2006 of $20.3 million represented an increase of $1.1 million compared to the prior-year period. This increase resulted from the increased level of amounts borrowed under the Revolver.
Sundry items resulted in a net gain of $0.1 million during the year ended December 31, 2006 as compared to a net loss of $0.8 million during the comparable prior-year period. This decrease is primarily due to lower foreign exchange transaction gains incurred in the current year.
An income tax provision of $4.8 million for the year ended December 31, 2006, is compared to a corresponding prior-year income tax provision of $1.6 million. The Company’s effective income tax rate was approximately 121.4 % as compared to (28.6%) for the corresponding prior-year period. The Company recorded an additional valuation allowance of $5.1 million on deferred income tax assets generated in 2006 to reduce that asset to a carrying amount that is more likely than not to be realizable. As a result, the Company’s effective income tax rate is greatly elevated relative to the prior year. If no additional valuation allowance had been required, the Company’s effective income tax rate would have been 20.9%.
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.
· 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.
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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.
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 from available borrowings under its revolving credit facility, other sources of funding, existing cash balances and a commitment from WCAS to purchase up to $15 million in Series B Preferred stock for cash, 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 $12.2 million at December 31, 2006, compared to $21.7 million at December 31, 2005. The working capital deficit increased $13.5 million to a working capital deficit of $19.5 million at December 31, 2006. The change in working capital was primarily due to the decrease in cash as well as an increase of $31.4 million in the Revolver and other current obligations. These were somewhat offset by decreases in deferred revenue and current maintenance contract deposits totaling $12.4 million. During the year ended December 31, 2006, 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
18
price of personal computers. In addition, increases in accounts receivable of $7.7 million and inventory of $4.0 million contributed to the decrease in working capital.
During 2006, the Company relied on cash reserves and borrowings from the Revolver to fund operations. At December 31, 2006, the Company’s remaining availability under the Revolver, as hereinafter defined, was $4.3 million, of which the Company could draw $4.3 million.
Operating activities utilized $16.9 million of cash in 2006 and $12.8 million of cash in 2005, an increase of $4.1 million. Cash from operations before changes in working capital generated $19.9 million of cash for the year ended December 31, 2006, an increase of $11.3 million over the prior year. This was offset by the utilization of cash resulting from decreases in working capital assets and liabilities of $36.8 million for the current year, an increase of $15.3 million over the prior year. This increase in cash utilized by working capital activities mainly consisted of additional decreases in accounts payable and accrued expenses of $15.3 million and additional decreases in deferred revenue and maintenance contract deposits of $2.4 million, somewhat offset by increases in accounts receivable of $8.9 million. In addition, cash used in operating activities was impacted by $2.6 million of interest paid in-kind on the Sponsor Note in the current year. The decision to defer interest on the Sponsor Note accrued through December 31, 2006, was made in January 2007. However, this transaction qualifies as a Type I subsequent event and is therefore reflected in the consolidated financial statements as a 2006 transaction.
Investing activities used net cash of $23.2 million during 2006 compared to $14.0 million in 2005. The uses of cash for 2006 consisted of purchases of property, plant and equipment of $19.1 million and spending on intangible assets of $4.7 million. 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. In addition, changes in restricted cash balances decreased $0.7 million from the prior year period.
Financing activities provided $30.1 million of net cash in 2006 compared to the use of $0.5 million of net cash in 2005. In 2006, cash was provided by net borrowings under the Revolver less payments on capital leases and other financing arrangements. Uses of cash in 2005 consisted primarily of reductions to the Company’s debt and capital lease obligations.
At December 31, 2006, the Company’s principal outstanding debt instruments consisted of (i) $31.5 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) $107.2 million Sponsor Notes due 2009. As of December 31, 2006, 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, 2006, 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. On October 6, 2006, the Company and Heller entered into an amendment to the Revolver which provides for a $5 million Term Loan to the Company and reduces the availability under the Revolving Credit facility from $40 million to $35 million. In, addition, on March 22, 2007, the Company and Heller entered into an amendment to the Revolver which provides for an additional $10.0 million Term Loan to the Company, thus reducing the availability under the Revolver from $35.0 million to $25.0 million. The total potential availability under the Loan and Security agreement, however, remains at $40 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, 2006, the Company had $31.5 million outstanding under the Revolver and $0.4 million outstanding on letters-of-credit. The current borrowing base availability under the Revolver that the Company can draw was $4.3 million at December 31, 2006. A commitment fee of 0.375% per annum on the unused portion of the Revolver is payable quarterly.
19
The interest rate on borrowings under the Revolver is, at the Company’s option, either (1) 0.25% over prime or (2) 1.75% over LIBOR. At December 31, 2006, the Company’s weighted average rate on the Revolver was 7.58%.
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, 2006 of $2.5 million represents cash in escrow from a customer deposit.
The Revolver contains various representations, warranties and covenants, including financial covenants as to minimum fixed charge coverage ratio and minimum average borrowing availability. Effective March 31, 2006, the Company and Heller amended the loan and security agreement to state that a covenant to maintain a specific fixed charge coverage ratio would apply only if the average daily availability for the three month period ending on the last day of the most recent calendar quarter is less than $15.0 million. The fixed charge coverage ratio test was triggered for the three months ended December 31, 2006. At December 31, 2006, the minimum fixed charge coverage ratio required under the Revolver was 0.9, compared to the actual fixed charge coverage ratio of 1.64. At December 31, 2006, 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. At December 31, 2006 and 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, the Sponsor Note holder, WCAS, elected to defer the quarterly payment for the quarter ended December 31, 2006 of $2.6 million plus the deferred financing fee of $0.8 million, which increased the principal amount of the Sponsor Note by $3.4 million. WCAS had previously 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 elections 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. At December 31, 2006 and 2005, the Company had $107.2 million and $103.8 outstanding on the Sponsor Note, respectively.
Financing Arrangements. During 2005, the Company entered into a financing arrangement for $1.8 million that pertained to computer software. At December 31, 2006, the Company had financing arrangement balances outstanding of $1.2 million, of which $0.6 million was classified as current and $0.6 million was classified as long-term. The balance outstanding under financing arrangements at December 31, 2005 was $1.8 million. This arrangement accrues interest at a fixed 8.0% rate. This arrangement is due in three annual installments which began January 2006.
Equity Line of Credit. Effective December 31, 2006, the Company and its majority shareholder, WCAS, entered into an arrangement whereby WCAS provided a commitment to purchase up to an additional $15.0 million of Series B Preferred stock for cash. No accounting recognition has been given to this right of BancTec to put its Series B Preferred stock, upon occurrence of certain events, to WCAS, primarily due to the parent/subsidiary nature of the arrangement. As of December 31, 2006, no stock had been purchased under this commitment.
Preferred Stock – Series A. As of December 31, 2006, 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, 2006, 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.
20
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.
21
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, 2006:
|
| Total |
| Less than |
| 1-3 |
| 4-5 |
| Over 5 |
| |||||
|
| (In Millions) |
| |||||||||||||
Long-term debt |
| $ | 202.4 |
| $ | 0.6 |
| $ | 201.8 |
| $ | — |
| $ | — |
|
Revolving credit facility |
| 31.5 |
| 31.5 |
| — |
| — |
| — |
| |||||
Interest obligations on long-term debt |
| 37.0 |
| 17.9 |
| 19.1 |
| — |
| — |
| |||||
Capital leases |
| 2.1 |
| 0.8 |
| 0.9 |
| 0.4 |
| — |
| |||||
Operating leases (non-cancelable) |
| 18.4 |
| 6.4 |
| 6.2 |
| 2.6 |
| 3.2 |
| |||||
Total Contractual |
| 291.4 |
| 57.2 |
| 228.0 |
| 2.9 |
| 3.2 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Unused lines of credit |
| $ | 4.3 |
| $ | 4.3 |
| $ | — |
| $ | — |
| $ | — |
|
Standby letters of credit |
| 0.4 |
| 0.4 |
| — |
| — |
| — |
| |||||
Total Commercial |
| $ | 4.7 |
| $ | 4.7 |
| $ | — |
| $ | — |
| $ | — |
|
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, 2006.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN 48 on the consolidated financial statements, but believes there will be no material impact when adopted.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective as of the beginning of fiscal year 2008. The Company is currently evaluating the impact of adopting SFAS 157 on the consolidated financial statements.
In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Post-Retirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS 158”), which requires that the Company recognize the over-funded or under-funded status of the Company’s defined benefit post-retirement plans as an asset or liability in the Company’s 2007 year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur. The funded status is measured by the difference between plan assets at fair value and the projected benefit obligation in its statement of financial position. The Company is currently evaluating the impact of adopting SFAS 158 on the consolidated financial statements, but believes there will be no material impact when adopted. SFAS 158 also requires the Company to measure the funded status of its defined benefit plans as of the year-end balance sheet date no later than 2008. The Company already measures the funded status of its defined benefit plans as of the year-end balance sheet date.
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.
22
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, 2006 and 2005, the Company had outstanding Senior Notes, due in 2008, of $94.0 million, with a fixed interest rate of 7.5%. At December 31, 2006 and 2005, the Company also had the Sponsor Note, due 2009, with a balance of $107.2 million and $103.8 million, respectively. 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) 0.25% over prime or (2) 1.75% over LIBOR. At December 31, 2006, the Company’s weighted average rate on the Revolver was 7.58%. A balance of $31.5 million was outstanding under the Revolver at December 31, 2006. At this level, a one hundred basis point change in the bank’s prime or LIBOR rate would impact net interest expense by $315,000 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 $87.2 million and $66.9 million at December 31, 2006 and 2005, respectively, for the Senior Notes, and $89.1 million and $61.2 million at December 31, 2006 and 2005, 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 $153.6 million or 40.4% 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 in 2006, 2005 or 2004.
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, 2006.
23
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 Statements of Comprehensive Income (Loss) for the |
|
|
|
|
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.
24
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 sheets of BancTec, Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ deficit, comprehensive income (loss), and cash flows for the years 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 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 audits provide 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, 2006 and 2005, and the results of their operations and their cash flows for the years 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.
Dallas, Texas
April 2, 2007
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of BancTec, Inc.
We have audited the accompanying consolidated statements of operations, stockholders’ deficit and comprehensive income, and cash flow of BancTec, Inc. and subsidiaries for the year ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flow of BancTec, Inc. and subsidiaries for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
|
| |
/s/ KPMG LLP |
| |
|
| |
|
| |
Dallas, Texas |
| |
March 31, 2005 |
| |
26
BANCTEC, INC.
ASSETS
(In thousands)
|
| December 31, |
| ||||
|
| 2006 |
| 2005 |
| ||
CURRENT ASSETS: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 9,615 |
| $ | 18,540 |
|
Restricted cash |
| 2,542 |
| 3,205 |
| ||
Accounts receivable, less allowance for doubtful accounts of $838 and $1,110 at December 31, 2006 and 2005, respectively |
| 65,674 |
| 58,020 |
| ||
Inventories, net |
| 23,792 |
| 19,807 |
| ||
Prepaid expenses |
| 7,284 |
| 5,488 |
| ||
Other current assets |
| 329 |
| 1,115 |
| ||
Total current assets |
| 109,236 |
| 106,175 |
| ||
|
|
|
|
|
| ||
PROPERTY, PLANT AND EQUIPMENT, AT COST: |
|
|
|
|
| ||
Land |
| 874 |
| 874 |
| ||
Field support spare parts |
| 33,017 |
| 34,853 |
| ||
Systems and software |
| 54,520 |
| 52,263 |
| ||
Machinery and equipment |
| 22,376 |
| 21,094 |
| ||
Furniture, fixtures and other |
| 10,597 |
| 9,573 |
| ||
Buildings |
| 20,769 |
| 20,716 |
| ||
Construction in process |
| 17,680 |
| 5,483 |
| ||
|
| 159,833 |
| 144,856 |
| ||
Less accumulated depreciation and amortization |
| (119,639 | ) | (114,932 | ) | ||
Property, plant and equipment, net |
| 40,194 |
| 29,924 |
| ||
|
|
|
|
|
| ||
OTHER ASSETS: |
|
|
|
|
| ||
Goodwill |
| 42,121 |
| 41,973 |
| ||
Other intangible assets, less accumulated amortization of $1,160 and $297 at December 31, 2006 and 2005, respectively |
| 4,711 |
| 5,018 |
| ||
Outsourcing contract costs, less accumulated amortization of $526 at December 31, 2006 |
| 3,963 |
| — |
| ||
Deferred income taxes |
| 8,886 |
| 10,336 |
| ||
Other assets |
| 3,486 |
| 3,788 |
| ||
Total other assets |
| 63,167 |
| 61,115 |
| ||
TOTAL ASSETS |
| $ | 212,597 |
| $ | 197,214 |
|
See notes to consolidated financial statements.
27
BANCTEC, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ DEFICIT
(In thousands, except share data)
|
| December 31, |
| ||||
|
| 2006 |
| 2005 |
| ||
CURRENT LIABILITIES: |
|
|
|
|
| ||
Current obligations under capital leases, financing arrangements and revolver |
| $ | 32,843 |
| $ | 1,095 |
|
Trade accounts payable |
| 19,727 |
| 19,870 |
| ||
Other accrued expenses and liabilities |
| 29,252 |
| 31,293 |
| ||
Deferred revenue |
| 19,199 |
| 21,505 |
| ||
Maintenance contract deposits |
| 23,367 |
| 33,453 |
| ||
Income taxes payable |
| 4,366 |
| 4,947 |
| ||
Total current liabilities |
| 128,754 |
| 112,163 |
| ||
|
|
|
|
|
| ||
OTHER LIABILITIES: |
|
|
|
|
| ||
Long-term debt and financing arrangements |
| 201,841 |
| 199,063 |
| ||
Non-current maintenance contract deposits |
| 3,577 |
| 11,466 |
| ||
Pension liability |
| 23,355 |
| 22,719 |
| ||
Other liabilities |
| 6,655 |
| 5,748 |
| ||
Total other liabilities |
| 235,428 |
| 238,996 |
| ||
Total liabilities |
| 364,182 |
| 351,159 |
| ||
COMMITMENTS AND CONTINGENCIES (Note M) |
|
|
|
|
| ||
|
|
|
|
|
| ||
SERIES A PREFERRED STOCK - issued and outstanding, 100,667 shares at December 31, 2006 and 2005 |
| 18,040 |
| 18,040 |
| ||
|
|
|
|
|
| ||
STOCKHOLDERS’ DEFICIT: |
|
|
|
|
| ||
Cumulative preferred stock - authorized, 200,000 shares of $0.01 par value at December 31, 2006 and December 31, 2005 |
|
|
|
|
| ||
Series B convertible preferred stock - issued and outstanding, 35,520 shares at December 31, 2006 and 2005 |
| 13,520 |
| 13,520 |
| ||
Common stock - authorized, 21,800,000 shares of $0.01 par value at December 31, 2006 and 2005: |
|
|
|
|
| ||
Common stock - issued and outstanding 17,003,838 shares at December 31, 2006 and 2005 |
| 170 |
| 170 |
| ||
Class A common stock - issued and outstanding 1,181,946 shares at December 31, 2006 and 2005 |
| 12 |
| 12 |
| ||
Subscription stock warrants |
| 3,726 |
| 3,726 |
| ||
Additional paid-in capital |
| 122,904 |
| 122,655 |
| ||
Accumulated deficit |
| (294,384 | ) | (293,542 | ) | ||
Accumulated other comprehensive loss |
| (15,573 | ) | (18,526 | ) | ||
Total stockholders’ deficit |
| (169,625 | ) | (171,985 | ) | ||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT |
| $ | 212,597 |
| $ | 197,214 |
|
See notes to consolidated financial statements.
28
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
|
| Year Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
REVENUE |
|
|
|
|
|
|
| |||
Equipment and software |
| $ | 136,136 |
| $ | 126,676 |
| $ | 137,842 |
|
Maintenance and other services |
| 243,343 |
| 218,222 |
| 222,884 |
| |||
|
| 379,479 |
| 344,898 |
| 360,726 |
| |||
COST OF SALES |
|
|
|
|
|
|
| |||
Equipment and software |
| 78,726 |
| 74,986 |
| 90,148 |
| |||
Maintenance and other services |
| 203,515 |
| 182,422 |
| 183,172 |
| |||
|
| 282,241 |
| 257,408 |
| 273,320 |
| |||
Gross profit |
| 97,238 |
| 87,490 |
| 87,406 |
| |||
|
|
|
|
|
|
|
| |||
OPERATING EXPENSES |
|
|
|
|
|
|
| |||
Product development |
| 7,275 |
| 8,823 |
| 7,768 |
| |||
Selling, general and administrative |
| 66,046 |
| 65,112 |
| 63,830 |
| |||
|
| 73,321 |
| 73,935 |
| 71,598 |
| |||
Income from operations |
| 23,917 |
| 13,555 |
| 15,808 |
| |||
|
|
|
|
|
|
|
| |||
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
| |||
Interest income |
| 236 |
| 710 |
| 718 |
| |||
Interest expense |
| (20,326 | ) | (19,166 | ) | (19,098 | ) | |||
Sundry, net |
| 116 |
| (771 | ) | (1,034 | ) | |||
|
| (19,974 | ) | (19,227 | ) | (19,414 | ) | |||
INCOME (LOSS) BEFORE INCOME TAXES |
| 3,943 |
| (5,672 | ) | (3,606 | ) | |||
INCOME TAX EXPENSE |
| 4,785 |
| 1,623 |
| 13,621 |
| |||
NET LOSS |
| (842 | ) | (7,295 | ) | (17,227 | ) | |||
PREFERRED STOCK DIVIDENDS AND ACCRETION OF DISCOUNT |
| — |
| — |
| (4,383 | ) | |||
NET LOSS APPLICABLE TO COMMON STOCK |
| $ | (842 | ) | $ | (7,295 | ) | $ | (21,610 | ) |
See notes to consolidated financial statements.
29
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(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 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 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,452 |
| 2,452 |
| ||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (842 | ) | — |
| (842 | ) | ||||||||
Minimum pension liability, net of tax of $445 |
| — |
| — |
| — |
| — |
| — |
| — |
| 501 |
| 501 |
| ||||||||
Stock-based compensation expense |
| — |
| — |
| — |
| — |
| 249 |
| — |
| — |
| 249 |
| ||||||||
Balance at December 31, 2006 |
| $ | 13,520 |
| $ | 170 |
| $ | 12 |
| $ | 3,726 |
| $ | 122,904 |
| $ | (294,384 | ) | $ | (15,573 | ) | $ | (169,625 | ) |
See notes to consolidated financial statements.
30
BANTEC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
|
| Years Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Net loss |
| $ | (842 | ) | $ | (7,295 | ) | $ | (17,227 | ) |
Foreign currency translation adjustments |
| 2,452 |
| (2,088 | ) | 1,577 |
| |||
Decrease (Increase) to minimum pension liability, net of tax |
| 501 |
| (2,899 | ) | (554 | ) | |||
Total comprehensive income (loss) |
| $ | 2,111 |
| $ | (12,282 | ) | $ | (16,204 | ) |
See notes to consolidated financial statements.
31
BANCTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Year Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
| |||
Net loss |
| $ | (842 | ) | $ | (7,295 | ) | $ | (17,227 | ) |
Adjustments to reconcile to cash flows (used in) provided by operations: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 14,130 |
| 15,956 |
| 15,913 |
| |||
Recovery (provision) for doubtful accounts |
| 981 |
| 146 |
| (229 | ) | |||
Deferred income tax expense (benefit) |
| 2,456 |
| (2,324 | ) | 9,580 |
| |||
Loss on disposition of property, plant and equipment |
| 447 |
| 1,976 |
| 978 |
| |||
Loss on sale of unconsolidated subsidiary |
| — |
| — |
| 1,280 |
| |||
Interest paid in-kind |
| 2,596 |
| — |
| — |
| |||
Other non-cash items |
| 154 |
| 182 |
| 340 |
| |||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||
Increase in accounts receivable |
| (5,431 | ) | (14,283 | ) | (6,350 | ) | |||
(Increase) decrease in inventories |
| (3,741 | ) | 2,268 |
| 85 |
| |||
(Increase) decrease in other assets |
| (203 | ) | 295 |
| 807 |
| |||
(Decrease) increase in trade accounts payable |
| (2,196 | ) | 5,729 |
| 1,357 |
| |||
Decrease in deferred revenue & maintenance contracts deposits |
| (20,692 | ) | (18,265 | ) | (13,055 | ) | |||
(Decrease) increase in other accrued expenses and liabilities |
| (4,536 | ) | 2,798 |
| 818 |
| |||
Cash flows used in operating activities |
| (16,877 | ) | (12,817 | ) | (5,703 | ) | |||
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
| |||
Purchases of property, plant and equipment |
| (19,145 | ) | (14,499 | ) | (6,751 | ) | |||
Proceeds from sale of property, plant and equipment |
| — |
| 5,086 |
| 297 |
| |||
Decrease in restricted cash |
| 663 |
| 851 |
| 15,522 |
| |||
Purchase of intangibles |
| (4,727 | ) | (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 |
| (23,209 | ) | (13,997 | ) | 12,023 |
| |||
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
| |||
Payments of current maturities of capital lease and financing obligations |
| (1,237 | ) | (467 | ) | (1,175 | ) | |||
Proceeds (payments) on short-term borrowings, net |
| 31,532 |
| (1 | ) | 1 |
| |||
Debt issuance costs |
| (200 | ) | (70 | ) | (50 | ) | |||
Cash flows provided by (used in) financing activities |
| 30,095 |
| (538 | ) | (1,224 | ) | |||
|
|
|
|
|
|
|
| |||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
| 1,066 |
| (1,539 | ) | 347 |
| |||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| (8,925 | ) | (28,891 | ) | 5,443 |
| |||
CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR |
| 18,540 |
| 47,431 |
| 41,988 |
| |||
|
|
|
|
|
|
|
| |||
CASH AND CASH EQUIVALENTS—END OF YEAR |
| $ | 9,615 |
| $ | 18,540 |
| $ | 47,431 |
|
|
|
|
|
|
|
|
| |||
SUPPLEMENTAL DISCLOSURES OF INFORMATION: |
|
|
|
|
|
|
| |||
Cash paid during the period for: |
|
|
|
|
|
|
| |||
Interest |
| $ | 18,940 |
| $ | 19,170 |
| $ | 17,774 |
|
Taxes |
| $ | 3,499 |
| $ | 1,596 |
| $ | 2,774 |
|
See notes to consolidated financial statements.
32
BANCTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 N 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. 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, 2006 and 2005 of $2.5 million and $3.2 million, respectively, represents cash in escrow from a customer deposit.
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. During the quarter ended September 30, 2006, the Company updated the percentages used to calculate the allowance for doubtful accounts to reflect improved recent history of collections and customer credits. This change in estimate was applied prospectively during the quarter and resulted in an immaterial impact to the Company’s financial statements.
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.
From July 1, 2006 forward, parts purchased to support the repair operations of the ITSM business segment have been classified as inventory rather than field support spare parts (“spare parts”), which are categorized as fixed assets in the accompanying consolidated balance sheets. The Company made the decision to reduce the number of items that were repaired by the Company. Instead these parts are being handled through the parts vendors using an advanced exchange program whereby the part is ordered and used for the repair with the old part sent back to the parts vendor. The Company then receives a credit from the vendor for a percentage of the part cost when the old part is received by them. As a result
33
fewer parts fit the definition of a field support spare part. Parts on hand at June 30, 2006, will continue to be classified as field support spare parts until utilized, at which point they will be retired.
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, 2006 and 2005 were $14.7 million and $12.6 million, respectively.
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 | Lesser 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, 2006, 2005, and 2004 was $12.7 million, $15.7 million, and $15.9 million, respectively.
Property, plant and equipment still under construction are classified on the accompanying Consolidated Balance Sheets as Construction in Process. The increase in Construction in Process during the year ended December 31, 2006 of $12.2 million is primarily a result of the capitalization of costs related to the implementation of new ERP software to be used by the Company. This new software is expected to be placed in service for internal use in the second quarter of 2007.
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.
Goodwill and Other 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
34
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. 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. The Company performs the annual test for impairment as of December 31, each year. No impairment of goodwill has been deemed necessary for 2006 and 2005.
Components of the Company’s goodwill and other intangibles include amounts that are foreign currency denominated. These 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).
Goodwill previously classified as unallocated has been allocated to the reporting units as required by SFAS No. 142. The following is a summary of goodwill balances as of December 31, 2006 by reporting unit.
| US |
| SDS |
| BancTec |
| Total |
| |||||
Balance at January 1, 2006 |
| $ | 41,236 |
| $ | 497 |
| $ | 240 |
| $ | 41,973 |
|
Goodwill impairment |
| — |
| — |
| — |
| — |
| ||||
Additions in Fiscal 2006 |
| — |
| 79 |
| — |
| 79 |
| ||||
Changes due to foreign currency translation |
| — |
| 69 |
| — |
| 69 |
| ||||
Balance at December 31, 2006 |
| $ | 41,236 |
| $ | 645 |
| $ | 240 |
| $ | 42,121 |
|
Certain costs associated with contract acquisition and related direct and incremental costs are capitalized in accordance with SOP 81-1 and Technical Bulletin 90-1. Contract acquisition costs include direct incremental costs associated with contract negotiation, such as legal fees, and costs incurred to transform customer processes and technology in direct support of implementing the contract terms and conditions. These costs are amortized on a pro-rata basis over the term of the contract.
In the event indications exist that an outsourcing contract cost balance related to a particular contract may be impaired, undiscounted estimated cash flows of the contract are projected over its remaining term, and compared to the unamortized outsourcing contract cost balance. If the projected cash flows are not adequate to recover the unamortized cost balance, the balance would be adjusted to equal the contract’s fair value in the period such a determination is made. The primary indicator used to determine when impairment testing should be performed is when a contract is materially underperforming, or is expected to materially under-perform in the future, as compared to the bid model that was developed as part of the original proposal process and subsequent annual budgets. No impairment of contract acquisition costs has been recorded for the year ended December 31, 2006.
See Note F for a summary of other intangible assets.
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
35
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. 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.
36
Business process outsourcing
The Company provides business process outsourcing services under contracts under a unit-price or fixed-price basis, which may extend up to 10 or more years. If a contract involves the provision of a single element, revenue is generally recognized when the Company performs the services or processes transactions in accordance with contractual performance standards. Revenues from unit-priced contracts are recognized as transactions are processed based on objective measures of output. Revenues from fixed-price contracts are recognized on a straight-line basis, unless revenues are earned and obligations are fulfilled in a different pattern. In some of these arrangements, the Company hires customer employees and becomes responsible for certain customer obligations. The Company continuously reviews and reassesses the estimates of contract profitability. Circumstances that potentially affect profitability over the life of the contract include decreases in volumes of transactions or other inputs/outputs on which the Company is paid, failure to deliver agreed benefits, variances from planned internal/external costs to deliver the services, and other factors affecting revenues and costs.
Costs related to delivering outsourcing services are expensed as incurred with the exception of certain transition costs related to the set-up of processes, personnel and systems, which are deferred during the Transition and expensed evenly over the period outsourcing services are provided. The deferred costs are specific internal costs or incremental external costs directly related to transition or set-up activities necessary to enable the outsourced services. Deferred amounts are recoverable in the event of early termination of the contract and are monitored regularly for impairment. Impairment losses are recorded when projected undiscounted operating cash flows of the related contract are not sufficient to recover the carrying amount of contract assets. (See discussion of critical accounting policy for goodwill and other intangible assets.)
Research and Development
Research and development costs are expensed as incurred. Research and development costs for the year ended December 31, 2006, 2005 and 2004 were $7.3 million, $8.8 million and $7.8 million, respectively.
Income Taxes
The Company and its domestic subsidiaries file a consolidated U.S. 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 income (loss). Transaction gains and losses are included in results of operations in “Sundry, net”. Foreign currency transaction (losses) gains for the years ended December 31, 2006, 2005, and 2004 were $(0.2) million, $(0.8) million, and $0.3 million, respectively. The Company does not currently hedge any of its net foreign currency exposure
Accrued Vacation
Prior to June 30, 2006, vacation was earned and accrued as the employee worked. A maximum of one week of unused vacation could be carried over to the subsequent year and any earned but unused vacation would be paid to the employee upon termination. Beginning June 30, 2006, the vacation policy was changed for U.S. employees to specify that vacation is provided as a company benefit, and is not earned and does not accrue. As a result, unused vacation is not payable upon termination, unless specifically provided for by state law. In addition, no unused vacation is eligible to be carried over to subsequent calendar years.�� As a result of this change in policy, the Company adjusted its vacation accrual to be equal to the unused vacation for employees in those states which require vacation be paid upon termination. Accrued vacation was $2.1 million and $3.2 million at December 31, 2006 and 2005, respectively. This change was applied prospectively during the quarter ended June 30, 2006 and resulted in an immaterial impact to the Company’s financial statements.
37
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 2006, 2005, and 2004, the Company derived 19.5%, 15.5%, and 17.4%, 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, 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 2006 based on an average value of recently completed market trades, resulting in a yield-to-maturity of approximately 13.08%. 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, 2006, using a yield-to-maturity of approximately 18.08%, 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:
|
| 2006 |
| 2005 |
| ||||||||
|
| (In thousands) |
| ||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
Cash and cash equivalents |
| $ | 9,615 |
| $ | 9,615 |
| $ | 18,540 |
| $ | 18,540 |
|
Restricted cash |
| 2,542 |
| 2,542 |
| 3,205 |
| 3,205 |
| ||||
Senior Notes |
| 93,975 |
| 87,162 |
| 93,975 |
| 66,924 |
| ||||
Sponsor Note |
| 107,223 |
| 89,102 |
| 103,848 |
| 61,170 |
| ||||
38
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”.
The Company elected to adopt the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-K have not been restated to reflect the fair value method of expensing share-based compensation. Under this application, the Company is required to record compensation cost for all share-based payments granted after the date of adoption based on the grant date fair value estimated in accordance with the provisions of SFAS 123R and for the unvested portion of all share-based payments previously granted that remain outstanding which were based on the grant date fair value estimated in accordance with the original provisions of SFAS 123.
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 years ended December 31, 2006 and 2005, the Company granted 462,500 and 640,000 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 2004, 2005 and 2006 vest over a four-year period at 25% per year.
Non-qualified stock options. No non-qualified stock options were granted during the years ended December 31, 2006 and 2005. When granted 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.
|
| Incentive |
| Non-qualified |
| Weighted |
|
Options outstanding–December 31, 2004 |
| 1,775,240 |
| 31,760 |
| 2.25 |
|
Granted |
| 640,000 |
| — |
| 2.25 |
|
Forfeited |
| (71,500 | ) | — |
| 2.25 |
|
Exercised |
| — |
| — |
| — |
|
Options outstanding–December 31, 2005 |
| 2,343,740 |
| 31,760 |
| 2.25 |
|
Granted |
| 462,500 |
| — |
| 2.25 |
|
Forfeited |
| (127,000 | ) | — |
| 2.25 |
|
Exercised |
| — |
| — |
| — |
|
Options outstanding–December 31, 2006 |
| 2,679,240 |
| 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 7.64 years and 8.25 years at December 31, 2006 and 2005, respectively.
At December 31, 2006, options to purchase 2,711,000 shares were outstanding, of which 1,027,150 were vested. All options outstanding have an exercise price of $2.25. No options have been exercised in 2006 or 2005.
39
The following table presents the vested status of all options outstanding at December 31, 2006 and 2005:
| December 31, 2006 |
| December 31, 2005 |
| |||
Total options outstanding |
| 2,711,000 |
| 2,375,500 |
| ||
Vested options |
| 1,027,150 |
| 560,975 |
| ||
Non-vested options |
| 1,683,850 |
| 1,814,525 |
| ||
Compensation related to non-vested options |
| $ | 571 |
| $ | 637 |
|
Weighted average period over which remaining compensation is to be recognized |
| 1.98 years |
| 2.60 years |
| ||
The number of options which vested in 2006 was 491,750 options, and these options have an average grant date fair value of between $0.42 and $0.44 per share.
The Company had previously adopted the provisions of Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” through disclosure only. 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.
The following table illustrates the effect on net loss as if compensation for the Company’s stock option plans had been determined in conformance with SFAS No. 123 for the years ended December 31, 2005 and 2004:
| Years Ended December 31, |
| |||||
|
| 2005 |
| 2004 |
| ||
Net loss applicable to common stock, as reported |
| $ | (7,295 | ) | $ | (21,610 | ) |
Total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax |
| (55 | ) | (17 | ) | ||
Pro Forma net loss |
| $ | (7,350 | ) | $ | (21,627 | ) |
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 following table presents share-based compensation expenses for continuing operations included in the Company’s consolidated statements of operations for the year ended December 31, 2006:
| Year Ended December |
| ||
Share-based compensation expense recorded as selling, general and administrative, net of tax benefit of $0 |
| $ | 249 |
|
40
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 |
| 2006 |
| 2005 |
| 2004 |
| |||
Risk free interest rate |
| 4.67 | % | 4.7 | % | 4.1 | % | |||
Expected life |
| 10 years |
| 10 years |
| 10 years |
| |||
Expected volatility |
| 40.0 | % | 40.0 | % | 40.0 | % | |||
Fair value of options granted |
| $ | 0.44 |
| $ | 0.42 |
| $ | 0.12 |
|
NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN 48 on the consolidated financial statements, but believes there will be no material impact when adopted.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective as of the beginning of fiscal year 2008. The Company is currently evaluating the impact of adopting SFAS 157 on the consolidated financial statements.
In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Post-Retirement Plans – an Amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS 158”), which requires that the Company recognize the over-funded or under-funded status of the Company’s defined benefit post-retirement plans as an asset or liability in the Company’s 2007 year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur. The funded status is measured by the difference between plan assets at fair value and the projected benefit obligation in its statement of financial position. The Company is currently evaluating the impact of adopting SFAS 158 on the consolidated financial statements, but believes there will be no material impact when adopted. SFAS 158 also requires the Company to measure the funded status of its defined benefit plans as of the year-end balance sheet date no later than 2008. The Company already measures the funded status of its defined benefit plans as of the year-end balance sheet date.
Reclassification
Certain amounts have been reclassified from the prior years to conform to the current year presentation. The accompanying Consolidated Statements of Operations reflects reclassifications in 2004 to conform to the 2005 and 2006 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, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Capital lease obligation incurred for lease of computer hardware |
| $ | 1,301 |
| $ | 1,179 |
| $ | 287 |
|
Inventory put in service as fixed assets |
| 458 |
| 1,532 |
| 105 |
| |||
Financing obligation incurred for purchase of computer software |
| — |
| 1,860 |
| — |
| |||
Purchases of fixed assets included in accounts payable at year end |
| 1,614 |
| — |
| — |
| |||
41
NOTE C - RESTRUCTURING
Restructuring. As a part of the Company’s focus on cost efficiency, management makes ongoing staff reductions as needed. 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. Consistent with the provision of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, severance liabilities are accrued when the amount of liability is determined and has been communicated to the employee.
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, 2004, 2005 and 2006 are summarized as follows:
|
| US |
| ITSM |
| International |
| Corp/Elims |
| Total |
| |||||
Balance at January 1, 2004 |
| $ | 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 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Severance expense |
| 557 |
| 890 |
| 127 |
| 111 |
| 1,685 |
| |||||
Severance paid |
| (590 | ) | (890 | ) | (183 | ) | (251 | ) | (1,914 | ) | |||||
Balance at December 31, 2006 |
| $ | 183 |
| $ | — |
| $ | 11 |
| $ | — |
| $ | 194 |
|
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. This contingent payment has not been and is not currently recorded at December 31, 2006, 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.
42
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 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, |
| |||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Raw materials |
| $ | 10,128 |
| $ | 9,503 |
|
Work-in-progress |
| 4,656 |
| 3,305 |
| ||
Finished goods |
| 23,724 |
| 19,550 |
| ||
|
| 38,508 |
| 32,358 |
| ||
Less inventory reserves |
| (14,716 | ) | (12,551 | ) | ||
Inventories, net |
| $ | 23,792 |
| $ | 19,807 |
|
NOTE F – INTANGIBLE ASSETS
A summary of amortizable intangible assets as of December 31, 2006 and 2005 is as follows:
| December 31, 2006 |
| ||||||||
|
| Gross Carrying |
| Accumulated |
| Net |
| |||
Outsourcing contract costs |
| $ | 4,489 |
| $ | 526 |
| $ | 3,963 |
|
Customer and other intangible assets |
| 5,871 |
| 1,160 |
| 4,711 |
| |||
Total amortizable intangible assets |
| $ | 10,360 |
| $ | 1,686 |
| $ | 8,674 |
|
| December 31, 2005 |
| ||||||||
|
| Gross Carrying |
| Gross Carrying |
| Gross |
| |||
Outsourcing contract costs |
| $ | — |
| $ | — |
| $ | — |
|
Customer and other intangible assets |
| 5,315 |
| 297 |
| 5,018 |
| |||
Total amortizable intangible assets |
| $ | 5,315 |
| $ | 297 |
| $ | 5,018 |
|
Outsourcing contract costs consist of certain costs associated with contract acquisition and related direct and incremental costs and are capitalized in accordance with SOP 81-1 and Technical Bulletin 90-1. Contract acquisition costs include direct incremental costs associated with contract negotiation, such as legal fees, and costs incurred to transform customer processes and technology in direct support of implementing the contract terms and conditions, such as labor and travel costs.
43
These costs are amortized on a pro-rata basis over the term of the contract. See Note A under Goodwill and Other Intangible Assets for additional discussion of the accounting policies for outsourcing contract costs.
Amortization related to intangible assets was $1.7 million and $0.3 million for the years ended December 31, 2006 and 2005, respectively.
NOTE G - DEBT AND OTHER LIABILITIES
Debt and other obligations consist of the following:
| December 31, |
| |||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Senior Notes, due 2008 |
| $ | 93,975 |
| $ | 93,975 |
|
Revolving Credit Facility |
| 31,533 |
| 1 |
| ||
Senior Subordinated Sponsor Note, unsecured, due 2009 |
| 107,223 |
| 103,848 |
| ||
Financing Arrangement |
| 1,286 |
| 1,860 |
| ||
|
| 234,017 |
| 199,684 |
| ||
Less: Current portion |
| 32,176 |
| 621 |
| ||
|
| $ | 201,841 |
| $ | 199,063 |
|
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. On October 6, 2006, the Company and Heller entered into an amendment to the Revolver which provides for a $5.0 million Term Loan to the Company and reduces the availability under the Revolver from $40 million to $35 million. In, addition, on March 22, 2007, the Company and Heller entered into an amendment to the Revolver which provides for an additional $10.0 million Term Loan to the Company, thus reducing the availability under the Revolver from $35.0 million to $25.0 million. The total potential availability under the Loan and Security agreement, however, remains at $40 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, 2006, the Company had $31.5 million outstanding under the Revolver and $0.4 million outstanding on letters-of-credit. The availability remaining under the Revolver that the Company can draw was $4.3 million at December 31, 2006. A commitment fee of 0.375% per annum on the unused portion of the Revolver is payable quarterly. The balance outstanding under the Revolver is classified in current obligations in the accompanying Consolidated Balance Sheets.
The interest rate on borrowings under the Revolver is, at the Company’s option, either (1) 0.25% over prime or (2) 1.75% over LIBOR. At December 31, 2006, the Company’s weighted average rate on the Revolver was 7.58%.
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, 2006 and 2005 of $2.5 million and $3.2 million represents cash in escrow from a customer deposit.
The Revolver contains various representations, warranties and covenants, including financial covenants as to minimum fixed charge coverage ratio and minimum average borrowing availability. Effective March 31, 2006, the Company and Heller amended the loan and security agreement to state that a covenant to maintain a specific fixed charge coverage ratio would apply only if the average daily availability for the three month period ending on the last day of the most recent calendar quarter is less than $15.0 million. The fixed charge coverage ratio test was triggered for the three months ended
44
December 31, 2006. At December 31, 2006, the minimum fixed charge coverage ratio required under the Revolver was 0.9, compared to the actual fixed charge coverage ratio of 1.64. At December 31, 2006, 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. At December 31, 2006 and 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, the Sponsor Note holder, WCAS, elected to defer the quarterly payment for the quarter ended December 31, 2006 of $2.6 million plus the deferred financing fee of $0.8 million, which increased the principal amount of the Sponsor Note by $3.4 million. WCAS had previously 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 elections 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. At December 31, 2006 and 2005, the Company had $107.2 million and $103.8 outstanding on the Sponsor Note, respectively.
Financing Arrangements. During 2005, the Company entered into a financing arrangement for $1.8 million that pertained to computer software. At December 31, 2006, the Company had financing arrangement balances outstanding of $1.2 million, of which $0.6 million was classified as current and $0.6 million was classified as long-term. The balance outstanding under financing arrangements at December 31, 2005 was $1.8 million. This arrangement accrues interest at a fixed 8.0% rate. This arrangement is due in three annual installments which began January 2006.
Equity Line of Credit. Effective December 31, 2006, the Company and its majority shareholder, WCAS, entered into an arrangement whereby WCAS provided a commitment to purchase up to an additional $15.0 million of Series B Preferred stock for cash. No accounting recognition has been given to this right of BancTec to put its Series B Preferred stock, upon occurrence of certain events, to WCAS, primarily due to the parent/subsidiary nature of the arrangement. As of December 31, 2006, no stock had been purchased under this commitment.
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. During 2006, the Company entered into a capital lease for $1.3 million that pertained to imaging equipment to be used in the Company’s BPO operations. 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 $2.8 million and $1.6 million as of December 31, 2006 and 2005, 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, 2006, the Company had capital lease balances outstanding of $1.8 million, of which $0.7 million was classified as current and $1.1 million was classified as long-term. At December 31, 2005, the Company had capital lease balances outstanding of $1.3 million.
The Company had no outstanding foreign-credit balances as of December 31, 2006.
45
As of December 31, 2006 the future maturities of debt are as follows:
Year |
| (In thousands) |
| |
2007 |
| $ | 32,129 |
|
2008 |
| 94,618 |
| |
2009 |
| 107,223 |
| |
2010 |
| — |
| |
2011 |
| — |
| |
Thereafter |
| — |
| |
|
| $ | 233,970 |
|
The Company paid cash totaling $18.9 million, $19.2 million, and $17.8 million, for interest during the twelve months ended December 31, 2006, 2005, and 2004, respectively. During the years ended December 31, 2006, 2005 and 2004, the Company capitalized no interest costs.
NOTE H – REDEEMABLE PREFERRED STOCK
SERIES A PREFERRED STOCK
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 for $15.0 million in cash. The aggregate liquidation preference/redemption value is $15.0 million, plus accumulated and unpaid dividends of $3,040 million at December 31, 2006. 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. 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.
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 and 2006. As of December 31, 2006, 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 for $5.3 million in cash. The aggregate liquidation preference/redemption value at December 31, 2006 and 2005 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. 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 and 2006. As of December 31, 2006, the stated value per share of the Series B Preferred, including accumulated but unpaid dividends, was $380.63.
46
NOTE I - OTHER ACCRUED EXPENSES AND LIABILITIES
Other accrued expenses and liabilities consist of the following:
| December 31, |
| |||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Salaries, wages and other compensation |
| $ | 12,089 |
| $ | 11,903 |
|
Accrued taxes, other than income taxes |
| 5,299 |
| 4,376 |
| ||
Accrued interest payable |
| 860 |
| 3,200 |
| ||
Accrued invoices and costs |
| 2,025 |
| 1,586 |
| ||
Other |
| 8,979 |
| 10,228 |
| ||
|
| $ | 29,252 |
| $ | 31,293 |
|
NOTE J - TAXES
The income tax expense (benefit) on net (loss) income consists of the following:
|
| Years Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
| $ | (968 | ) | $ | 184 |
| $ | (42 | ) |
State |
| (10 | ) | (406 | ) | 153 |
| |||
Foreign |
| 3,308 |
| 4,169 |
| 3,930 |
| |||
Total current |
| 2,330 |
| 3,947 |
| 4,041 |
| |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| — |
| — |
| 8,919 |
| |||
State |
| — |
| — |
| 81 |
| |||
Foreign |
| 2,455 |
| (2,324 | ) | 580 |
| |||
Total deferred |
| 2,455 |
| (2,324 | ) | 9,580 |
| |||
|
| $ | 4,785 |
| $ | 1,623 |
| $ | 13,621 |
|
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, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Provision (benefit) at U.S. statutory rate of 35% for all periods |
| $ | 1,380 |
| $ | (1,985 | ) | $ | (1,262 | ) |
Increase in tax expense resulting from: |
|
|
|
|
|
|
| |||
Impact of foreign and Puerto Rico income tax rate |
| (685 | ) | 13 |
| 203 |
| |||
State income tax, net of federal income tax benefit |
| (491 | ) | (333 | ) | 109 |
| |||
Change in valuation allowance |
| 4,487 |
| 1,490 |
| 9,695 |
| |||
Permanent differences |
| 1,165 |
| 2,577 |
| 4,669 |
| |||
Other, net |
| (1,071 | ) | (139 | ) | 207 |
| |||
|
| $ | 4,785 |
| $ | 1,623 |
| $ | 13,621 |
|
47
The Company paid cash totaling $3.5 million, $1.6 million, and $2.8 million for income taxes during the years ended December 31, 2006, 2005 and 2004, respectively.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2006 and 2005 are presented below:
| December 31, |
| |||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Gross deferred tax assets: |
|
|
|
|
| ||
Net operating losses |
| $ | 59,663 |
| $ | 56,687 |
|
AMT credit carryforwards |
| 101 |
| 101 |
| ||
Inventory reserves |
| 6,211 |
| 4,671 |
| ||
Receivable allowance |
| 173 |
| 292 |
| ||
Intangible assets previously deducted |
| 638 |
| — |
| ||
Deferred revenues |
| 7,027 |
| 10,183 |
| ||
Deferred compensation |
| 3,349 |
| 3,045 |
| ||
Foreign timing differences, net |
| 8,792 |
| 9,059 |
| ||
Depreciation |
| 3,683 |
| 3,761 |
| ||
Other |
| 2,582 |
| 2,975 |
| ||
Total gross deferred tax asset |
| 92,219 |
| 90,774 |
| ||
Gross deferred tax liability: |
|
|
|
|
| ||
Intangible assets previously deducted |
| — |
| (506 | ) | ||
Total gross deferred tax liability |
| — |
| (506 | ) | ||
Deferred tax asset valuation reserve |
| (83,022 | ) | (78,832 | ) | ||
Net deferred tax asset |
| $ | 9,197 |
| $ | 11,436 |
|
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 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, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
| (In thousands) |
| |||||||
Valuation allowance at beginning of year |
| $ | 78,832 |
| $ | 76,184 |
| $ | 63,874 |
|
(Decrease) increase in valuation allowance |
| (596 | ) | (2,602 | ) | 10,305 |
| |||
Tax deductible loss |
| 5,144 |
| 5,187 |
| 1,612 |
| |||
Other |
| (358 | ) | 63 |
| 393 |
| |||
Valuation allowance at end of year |
| $ | 83,022 |
| $ | 78,832 |
| $ | 76,184 |
|
Company’s effective tax rate was 121.4%, (28.6%), (377.7%) for the years ended December 31, 2006, 2005, and 2004, respectively.
48
The Company’s foreign and domestic net operating loss carryforwards of $165.0 million expire as follows: $5.5 million in 2007, $0.2 million in the period from 2014 through 2019, $134.9 million in the period from 2020 through 2027, and $24.4 million with no expiration.
Components of net (loss) income before income tax expense (benefit) are as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
United States |
| $ | (16,121 | ) | $ | (20,400 | ) | $ | (16,441 | ) |
Foreign |
| 20,064 |
| 14,728 |
| 12,835 |
| |||
Net(loss) income |
| $ | 3,943 |
| $ | (5,672 | ) | $ | (3,606 | ) |
Undistributed earnings of foreign subsidiaries included in continuing operations were approximately $25.6 million, $17.0 million, and $17.7 million, at December 31, 2006, 2005 and 2004, 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, 2006, 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 K - EMPLOYEE BENEFIT PLANS
US 401(K) Plan
The Company’s Employees’ Savings Plan allows substantially all full-time and part-time U.S. employees to make contributions defined by Section 401(k) of the Internal Revenue Code. Beginning January 1, 2006 the Company’s 401(k) Plan changed to match 10% of the first 5% of the participants’ qualifying total pre-tax contributions. No amounts were expensed under the plan for the years ended December 31, 2005 and 2004, as no matching contributions were made in these years. For the year ended December 31, 2006, the Company recorded expense of $0.2 million for matching contributions.
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.
49
The following table provides a reconciliation of the benefit obligation, plan assets and funded status of the pension fund.
|
| Years Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Change in Benefit Obligation |
|
|
|
|
|
|
| |||
Benefit obligation at beginning of year |
| $ | 43,527 |
| $ | 35,784 |
| $ | 26,856 |
|
Service cost |
| 956 |
| 877 |
| 446 |
| |||
Interest cost |
| 2,202 |
| 1,870 |
| 1,586 |
| |||
Participant’s contributions |
| 813 |
| 618 |
| 728 |
| |||
Actuarial loss |
| (1,789 | ) | 9,102 |
| 3,975 |
| |||
Amendments |
| — |
| — |
| — |
| |||
Benefits paid |
| (290 | ) | (377 | ) | (108 | ) | |||
Foreign-exchange rate changes |
| 6,125 |
| (4,347 | ) | 2,301 |
| |||
Benefit Obligation at end of year |
| 51,544 |
| 43,527 |
| 35,784 |
| |||
|
|
|
|
|
|
|
| |||
Change in Plan Assets |
|
|
|
|
|
|
| |||
Estimated fair value of plan assets at beginning of year |
| 20,808 |
| 17,443 |
| 13,434 |
| |||
Actual return on plan assets |
| 1,583 |
| 3,736 |
| 990 |
| |||
Employer contribution |
| 2,145 |
| 1,482 |
| 1,269 |
| |||
Employee contribution |
| 813 |
| 618 |
| 728 |
| |||
Benefits paid |
| (290 | ) | (377 | ) | (108 | ) | |||
Foreign-exchange rate changes |
| 3,134 |
| (2,094 | ) | 1,130 |
| |||
Estimated fair value of plan assets at end of year |
| 28,193 |
| 20,808 |
| 17,443 |
| |||
|
|
|
|
|
|
|
| |||
Funded status |
| (23,351 | ) | (22,719 | ) | (18,341 | ) | |||
Unrecognized actuarial loss |
| 16,188 |
| 17,136 |
| 12,994 |
| |||
Net amount recognized |
| $ | (7,163 | ) | $ | (5,583 | ) | $ | (5,347 | ) |
The accumulated benefit obligation was equal to the projected benefit obligation for years ended December 31, 2006, 2005 and 2004.
The components of the net periodic benefit cost are as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Service Cost |
| $ | 956 |
| $ | 877 |
| $ | 446 |
|
Interest Cost |
| 2,202 |
| 1,870 |
| 1,586 |
| |||
Expected return on plan assets |
| (1,306 | ) | (1,070 | ) | (1,095 | ) | |||
Amortization of transition amount |
| — |
| — |
| — |
| |||
Amortization of prior service cost |
| — |
| — |
| — |
| |||
Recognized actuarial loss |
| 1,055 |
| 638 |
| 431 |
| |||
Net periodic benefit cost |
| $ | 2,907 |
| $ | 2,315 |
| $ | 1,368 |
|
50
|
| Years Ended December 31, |
| ||||
|
| 2006 |
| 2005 |
| 2004 |
|
Weighted-average assumptions used to determine benefit obligations at December 31 |
|
|
|
|
|
|
|
Discount Rate |
| 5.20 | % | 4.75 | % | 5.55 | % |
Rate of compensation increase |
| 2.50 | % | 2.50 | % | 2.60 | % |
|
| Years Ended December 31, |
| ||||
|
| 2006 |
| 2005 |
| 2004 |
|
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 |
|
|
|
|
|
|
|
Discount Rate |
| 4.75 | % | 5.55 | % | 5.80 | % |
Expected asset return |
| 5.56 | % | 6.20 | % | 7.60 | % |
Rate of compensation increase |
| 2.50 | % | 2.60 | % | 2.50 | % |
The net pension liability at December 31, 2006 and 2005 was $23.4 million and $22.7 million, respectively. This liability is classified in Other Liabilities in the accompanying Consolidated Balance Sheets. The (decrease) increase in minimum liability included in other comprehensive loss for the years ended December 31, 2006, 2005 and 2004 was $(1.5) million, $4.1 million, and $1.9 million respectively.
The weighted average asset allocations for the Company’s defined benefit plans at December 31, 2006 and 2005, are as follows:
| December 31, |
| |||
|
| 2006 |
| 2005 |
|
Domestic and overseas equities |
| 81.1 | % | 65.1 | % |
UK government and corporate bonds |
| 18.8 | % | 33.8 | % |
Cash |
| 0.1 | % | 1.1 | % |
Total |
| 100.0 | % | 100.0 | % |
The Company’s investment policy related to the defined benefit plans is to continue to maintain investments in government gilts and highly rated bonds as a means to reduce the overall risk of assets held in the funds. No specific targeted allocation percentages have been set by category, but are at the direction and discretion of the plan trustees. During 2006, 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 $2.3 million to the pension plan during 2007, based on current plan provisions.
51
Pension benefit payments expected to be paid to plan participants are as follows:
Year |
| (In Thousands) |
| |
2007 |
| $ | 284 |
|
2008 |
| 313 |
| |
2009 |
| 357 |
| |
2010 |
| 481 |
| |
2011 |
| 488 |
| |
2012-2016 |
| 4,592 |
| |
Total |
| $ | 6,462 |
|
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, 2006 and 2005 was 5.8% and 5.25%, respectively. Benefit payments of $0.2 million and $0.2 million were made during each of the years ended December 31, 2006 and 2005, respectively. The expense for the years ended December 31, 2006 and 2005 was $0.02 million and $0.9 million, respectively, a portion of which related to the change in discount rate. The balance of this obligation is $4.0 million and $4.2 million as of December 31, 2006 and 2005, respectively, and is classified in Other Liabilities in the accompanying consolidated balance sheets. Benefit payments expected to be paid to plan participants in 2007 are $0.3 million.
NOTE L - 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, 2005 and 2006 are summarized as follows:
| (In thousands) |
| ||
Balance at January 1, 2005 |
| $ | 180 |
|
|
|
|
| |
Warranties issued |
| 208 |
| |
Claims paid/settlements |
| (205 | ) | |
Changes in liability for pre-existing warranties |
| — |
| |
Balance at December 31, 2005 |
| $ | 183 |
|
|
|
|
| |
Warranties issued |
| 97 |
| |
Claims paid/settlements |
| (210 | ) | |
Changes in liability for pre-existing warranties |
| — |
| |
Balance at December 31, 2006 |
| $ | 70 |
|
NOTE M - COMMITMENTS AND CONTINGENCIES
Leases. The Company leases certain sales and service office facilities and equipment under non-cancelable operating leases expiring through year 2017. Total Company rent expense for the years ended December 31, 2006, 2005, and 2004 was $7.8
52
million, $6.5 million, and $8.4 million, respectively.
Future minimum payments under non-cancelable operating leases are as follows:
Year |
| (In thousands) |
| |
2007 |
| $ | 6,376 |
|
2008 |
| 4,292 |
| |
2009 |
| 1,927 |
| |
2010 |
| 1,403 |
| |
2011 |
| 1,191 |
| |
Thereafter |
| 3,217 |
| |
|
| $ | 18,406 |
|
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 a material adverse impact on the financial position or results of operations or cash flows of the Company.
NOTE N - 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 2006, 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) Document and Content Processing Solutions, (2) Payment Processing Solutions, (3) Business Process Outsourcing Services, and (4) Infrastructure 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, 2006, 2005 and 2004, a single customer accounted for 19.5%, 15.5%, and 17.4%, 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.
53
In 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 2004 segment information has been conformed to the 2005 and 2006 presentation.
Table 1— Segments
|
| Americas |
| Information |
| Europe, |
| Corp/Elims |
| Total |
| |||||
For the year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenue from external customers |
| $ | 138,928 |
| $ | 123,090 |
| $ | 117,461 |
| $ | — |
| $ | 379,479 |
|
Intersegment revenues |
| 4,511 |
| 176 |
| 10,254 |
| (14,941 | ) | — |
| |||||
Segment gross profits |
| 39,342 |
| 14,182 |
| 43,855 |
| (141 | ) | 97,238 |
| |||||
Segment operating income (loss) |
| 19,950 |
| 7,704 |
| 16,489 |
| (20,226 | ) | 23,917 |
| |||||
Segment identifiable assets |
| 91,324 |
| 27,419 |
| 55,794 |
| 38,060 |
| 212,597 |
| |||||
Capital appropriations |
| 5,797 |
| 2,440 |
| 1,522 |
| 12,759 |
| 22,518 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
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 |
| |||||
NOTE O - 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, 2006, 2005 and 2004, 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 |
| Elimina- |
| Consoli- |
| |||||
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
| |||||
Sales to unaffiliated customers |
| $ | 225,885 |
| $ | 73,403 |
| $ | 80,191 |
| $ | — |
| $ | 379,479 |
|
Inter-area sales to affiliates |
| 4,499 |
| 3,514 |
| 6,928 |
| (14,941 | ) | — |
| |||||
Long-lived assets other than deferred taxes |
| 104,428 |
| 9,690 |
| 5,271 |
| (24,914 | ) | 94,475 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
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 |
| |||||
54
NOTE P - SUMMARIZED QUARTERLY DATA (UNAUDITED)
|
| Year Ended December 31, 2006 |
| |||||||||||||
|
| Q1 |
| Q2 |
| Q3 |
| Q4 |
| Total |
| |||||
Revenue |
| $ | 89,678 |
| $ | 95,126 |
| $ | 94,923 |
| $ | 99,752 |
| $ | 379,479 |
|
Gross profit (loss) |
| 18,879 |
| 25,026 |
| 24,706 |
| 28,627 |
| 97,238 |
| |||||
Net income (loss) |
| (5,509 | ) | (1,224 | ) | 707 |
| 5,184 |
| (842 | ) | |||||
|
| 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 | ) | |||||
NOTE Q - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss is as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Foreign-currency translation adjustments |
| $ | (4,079 | ) | $ | (6,531 | ) | $ | (4,443 | ) |
Minimum pension liability, net of tax |
| (11,494 | ) | (11,995 | ) | (9,096 | ) | |||
Accumulated Other Comprehensive Loss |
| $ | (15,573 | ) | $ | (18,526 | ) | $ | (13,539 | ) |
For the year ended December 31, 2006, other comprehensive loss consisted of foreign-currency translation adjustments related to the Company’s international operations (a gain of $2.5 million) and a decrease to the minimum pension liability, net of tax, related to the Company’s subsidiary in the United Kingdom ($0.5 million). The gain related to foreign-currency translation adjustments resulted from significant movement in exchange rates, particularly the U.S. Dollar versus the Euro and the U.S. Dollar versus the Pound Sterling. The change in minimum pension liability was primarily due to adjustment of the discount rate used to measure the minimum pension liability, consistent with the provisions of SFAS No. 87.
NOTE R – 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 $8.5 million in fiscal year 2006 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 $107.2 million 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 2006 of $10.4 million.
Effective December 31, 2006, the Company and its majority shareholder, WCAS, entered into an arrangement whereby WCAS provided a commitment to purchase up to an additional $15.0 million of Series B Preferred stock for cash. No accounting recognition has been given to this right of BancTec to put its Series B Preferred stock, upon occurrence of
55
certain events, to WCAS, primarily due to the parent/subsidiary nature of the arrangement. As of December 31, 2006, no stock had been purchased under this commitment.
NOTE S – SUBSEQUENT EVENTS
On March 22, 2007, the Company and Heller entered into an amendment to the Revolver which provides for an additional $10.0 million Term Loan to the Company, thus reducing the availability under the Revolver from $35.0 million to $25.0 million. The total potential availability under the Loan and Security agreement, however, remains at $40 million. Subsequent to December 31, 2006, the Company made net payments of $0.5 million on the Revolver, bringing the total outstanding balance under the Revolver at March 26, 2007 to $31.0 million.
On February 26, 2007, the Company sold $8.0 million of Series B Preferred stock for cash to WCAS under the Equity Line of Credit arrangement. This stock accrues dividends at the rate of 25% per annum.
56
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, 2006, 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, 2006, 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 2006.
On March 22, 2007, the Company and Heller entered into an amendment to the Revolver which provides for an additional $10.0 million Term Loan to the Company, thus reducing the availability under the Revolver from $35.0 million to $25.0 million. The total potential availability under the Loan and Security agreement, however, remains at $40 million.
57
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
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, 2007.
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 |
| 61 |
| President and Chief Executive Officer |
Jeffrey D. Cushman |
| 45 |
| Senior Vice President and Chief Financial Officer |
Robert A. Minicucci |
| 54 |
| Chairman of the Board and Director |
Gary J. Fernandes |
| 63 |
| Director |
Eric J. Lee |
| 35 |
| Director |
Sanjay Swani |
| 40 |
| Director |
Michael D. Peplow |
| 47 |
| Senior Vice President, Europe, Middle East & Asia |
Michael D. Fallin |
| 54 |
| Senior Vice President and President, Americas |
Brendan P. Keegan |
| 37 |
| Senior Vice President and President, ITSM |
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.
58
Mr. Peplow has been Senior Vice President of Europe, Middle East and Asia (EMEA) since 2004. Mr. Peplow joined BancTec in June 1997 as Business Development Manager. Mr. Peplow has also served as Sales and Marketing Director and Managing Director of BancTec Ltd. in the United Kingdom. Prior to joining BancTec, Mr. Peplow served in a number of programming, strategic support, and consultancy roles with organizations such as ICL and London Bridge Software.
Mr. Fallin has been Senior Vice President and President of Americas since April 2005, when he joined BancTec after 29 years with EDS. Mr. Fallin was Vice President of the Industrial Manufacturing Division at Electronic Data Systems and prior to that held various positions at EDS including Division Manager, Financial Industry Group and Vice President in the U.S. Southwest Region responsible for clients in energy, telecommunications, manufacturing and financial industries.
Mr. Keegan has been Senior Vice President and President of Information Technology Service Management since March 2006. Mr. Keegan joined BancTec in June 2005 as Senior Vice President, Strategy & Business Development where he was responsible for heading up the development of BancTec’s business strategy and market re-positioning. Prior to joining BancTec, Mr. Keegan served as Senior Vice President & President, Emerging Markets for Seven Worldwide, President and CEO of Revenue Edge Ventures, Inc. and President and CEO of Bravanta, Inc. Mr. Keegan has served on numerous boards and is currently serving in the community as a director for Special Friends not-for-profit Charity.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors is responsible for overseeing management’s financial reporting practices and internal controls, and for audit functions. On March 31, 2007, the Audit Committee consisted of Sanjay Swani, Eric J. Lee, and Gary J. Fernandes. No member of the Audit Committee was an officer or former officer of the Company. None of the audit committee members are independent directors.
In connection with the consolidated financial statements for the fiscal year ended December 31, 2006, the Audit Committee has:
· Reviewed and discussed the audited financial statements with management and with representatives of Deloitte & Touche, LLP, the Company’s Independent Registered Public Accounting Firm;
· Discussed with the Independent Registered Public Accounting Firm the matters required to be discussed by Statement On Auditing Standards No. 61, as amended (Communications with Audit Committees); and
· Received from the Independent Registered Public Accounting Firm the written disclosures regarding Deloitte & Touche, LLP’s independence as required by Independence Board Standard No. 1 (Independence Discussions with Audit Committees), and discussed with representatives of Deloitte & Touche, LLP their independence, including the compatibility of non-audit services with the auditors’ independence.
Based on these actions, the Audit Committee has recommended to the Board of Directors that the audited consolidated financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the SEC.
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
COMPENSATION COMMITTEE REPORT
The Compensation and Options Committees of the Board of Directors evaluates compensation for executive officers. Management has the primary responsibility for the Company’s financial statements and reporting process, including the
59
disclosure of executive compensation. As a result the Compensation and Options Committees have reviewed and discussed this section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 entitled “Compensation Discussion and Analysis” with management. The Committee is satisfied that the Compensation Discussion and Analysis fairly and completely represent the philosophy, intent and actions of the Committees with regard to executive compensation. Based of this review and discussion, the Committee has recommended to the Board that the section entitled “Compensation Discussion and Analysis,” as it appears on pages 60 to 64, be included in this Form 10-K.
The Compensation Committee and Option Committees were 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.
COMPENSATION DISCUSSION AND ANALYSIS
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. Future monetary growth is dependent upon the Company’s performance as well as the individual executive’s performance against pre-established objectives and the achievement of goals. The executive compensation program is composed of three principal components:
· Annual base salary
· �� Annual incentive bonus, the amount of which is dependent on the Company’s financial performance
· Long-term incentive awards, currently provided in the form of stock options.
Our executive compensation program is intended to:
· Reward performance which drives successful Company results,
· Reinforce a team focus and therefore reward both individual success and the success of the organization,
· Accommodate the financial resources available to the Company based on the goal of maximizing return to shareholders.
Annual Base Salary. The base salary for each executive officer is determined at levels considered appropriate for comparable positions at similar companies.
Annual Incentive Bonus. 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 (earnings before interest, taxes, depreciation and amortization) set by the Compensation Committee at the beginning of the fiscal year. The achievement of the objective will determine the payout under the plan, after the threshold is met. The payout to each executive is calculated by multiplying a targeted payout for that executive, which is expressed as a percentage of the executive officer’s base salary, by the level of achievement of the EBITDA objective. The target payout for each executive ranges from 15% to 100% of base salary, depending on the executive’s position.
The Compensation Committee and Board of Directors review performance against the objectives set forth in the plan annually and approve awards consistent with the plan. Based on 2006 actual financial results compared to the pre-established objectives, the plan threshold of EBITDA was met, and therefore, bonus awards were made to the CEO and other executives under the plan for 2006 performance.
Long-Term Incentive Awards. Stock options awards have a longer term focus than the annual incentive plan. These awards are designed to drive shareholder value through alignment of executive pay with corporate strategic goals and to support alignment between executive actions and the Company’s long-term strategic plan. Under this program, 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 Stock Option Plan are granted at no greater than the fair market value of the stock on the date of grant.
60
Employment and Retirement Benefits. In order to attract and retain employees and provide support in the event of illness or injury, the Company offers all employees, including the executives, medical and dental coverage, disability insurance, and life insurance. All executives are entitled to participate in these plans.
The Company does not have a defined benefit plan for executives or employees in the United States, but instead encourages saving for retirement through the 401(k) Retirement Saving Plan, to which the Company makes matching contributions. Employees may contribute up to 25% of their annual salary, including bonuses, into the plan (subject to IRS limits, and the Company will match 10% of the first 5% the employee contributes. All employee contributions and any matching Company contributions are fully vested upon contribution.
Severance Benefits. In general, the Company does not maintain employment agreement with the executive officers. In 2006, we paid Craig D. Crisman, our former CEO, severance payments of $132,900.
2006 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.
SUMMARY COMPENSATION TABLE
The table below summarizes the compensation paid to the persons serving as our Chief Executive Officer and Chief Financial Officer and each of the other three most highly compensated executive officers from 2006.
Name and Principal |
| Year |
| Salary |
| Bonus |
| Option |
| Non-equity |
| Change in |
| All Other |
| Total |
| |||||||
J. Coley Clark |
| 2006 |
| $ | 450,000 |
| $ | — |
| $ | — |
| $ | 545,000 |
| $ | — |
| $ | — |
| $ | 995,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Jeffrey D. Cushman |
| 2006 |
| 303,846 |
| — |
| 37,400 |
| 353,846 |
| — |
| 1,500 |
| 696,592 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Michael D. Peplow(2) |
| 2006 |
| 258,947 |
| — |
| 33,000 |
| 281,368 |
| 19,965 |
| 25,445 |
| 618,725 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Michael D. Fallin |
| 2006 |
| 299,039 |
| 50,000 |
| — |
| 324,039 |
| — |
| 1,500 |
| 674,578 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Brendan P. Keegan |
| 2006 |
| 300,000 |
| — |
| 11,000 |
| 350,000 |
| — |
| 59,757 |
| 720,757 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Craig D. Crisman (6) |
| 2006 |
| — |
| — |
| — |
| — |
| — |
| 132,900 |
| 132,900 |
| |||||||
61
(1) The amounts in the table reflect the compensation expense calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS 123(R)), for stock awards granted to the named executive officers in 2001 to 2006. In December 2004, the Financial Accounting Standard Board issued SFAS 123(R), which requires the Company to recognize compensation expense for stock options and other stock-related awards granted to the employees and directors based on the estimated fair value under SFAS 123 (R) of the equity instrument at the time of grant. The compensation expense is required to be recognized over the vesting period. The requirements of SFAS 123(R) became effective beginning in the first quarter of 2006. The assumptions used to determine the valuation of the awards are discussed in Note A to the consolidated financial statements.
(2) The amounts paid to Mr. Peplow were paid in Pounds Sterling and were converted to U.S. Dollars using the weekly average Sterling to Dollars rate for 2006.
(3) Amounts shown represent the amounts earned under the Company’s annual management incentive plan for 2006. The amounts to be paid under the management incentive plan for 2006 were based on achievement of a target level of EBITDA.
(4) Represents the increase in the actuarial present value of pension benefits between fiscal year-end 2005 and 2006. See the “Pension Benefits” table below for further discussion regarding the Company’s UK pension plans.
(5) Includes Company contributions under certain benefit plans and other arrangements for the five named executive officers. The Company’s 401(k) Savings Plan is a tax-qualified plan subject to government imposed annual limitations on contributions. Non-U.S. employees (such as Mr. Peplow) maintain the retirement benefits from their home country. The amounts related to retirement plan benefits and other non-retirement plan benefits listed in the column entitled “All Other Compensation” in the “Summary Compensation Table” above are as follows:
Name |
| Savings Plan |
| Automobile |
| Commuting |
| Total |
| ||||
J. Coley Clark |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Jeffrey D. Cushman |
| 1,500 |
| — |
| — |
| 1,500 |
| ||||
Michael D. Peplow |
| — |
| 25,445 |
| — |
| 25,445 |
| ||||
Michael D. Fallin |
| 1,500 |
| — |
| — |
| 1,500 |
| ||||
Brendan P. Keegan |
| — |
| — |
| 59,757 |
| 59,757 |
| ||||
The Summary Compensation Table provided above has been prepared in accordance with SEC rules to show all of the compensation received or to be received by the named executive officers for their services on behalf of the Company during 2006. The Company’s compensation program is intentionally designed to link executive and shareholder interests through equity-based compensation arrangements and to recognize individual contributions toward the achievement of corporate goals and objectives.
(6) Includes the severance paid to Craig D. Crisman, the former CEO, during 2006 under the severance agreement reached in September 2004.
(7) The $50,000 bonus paid to Mr. Fallin in 2006 is a result of the execution of a business process outsourcing contract completed in 2005.
62
GRANTS OF PLAN-BASED AWARDS IN 2006
The following table shows awards that were granted during 2006 under non-equity and equity plans, including the 2006 Executive Incentive Plan and the 2000 Stock Option Plan, to the executives named in the Summary Compensation Table.
|
| Grant |
| Estimated Future Payouts Under |
| All Other |
| Exercise or |
| Grant Date |
| ||||||||
Name |
| Date |
| Threshold ($) |
| Target ($) |
| Maximum ($) |
| (#) |
| ($/Sh) |
| ($) |
| ||||
J. Coley Clark |
|
|
| $ | 45,000 |
| $ | 450,000 |
| N/A |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Jeffrey D. Cushman |
| 1-1-2006 11-16-2006 |
| $ | 30,385 |
| $ | 303,846 |
| N/A |
| 60,000 25,000 |
| $ | 2.25 |
| $ | 26,400 |
|
| |||||||||||||||||||
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Michael D. Peplow |
| 1-1-2006 11-16-2006 |
| $ | 25,637 |
| $ | 256,368 |
| N/A |
| 50,000 25,000 |
| $ | 2.25 |
| $ | 22,000 |
|
| |||||||||||||||||||
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Michael D. Fallin |
|
|
| $ | 29,904 |
| $ | 299,039 |
| N/A |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Brendan P. Keegan |
| 11-16-2006 |
| $ | 30,000 |
| $ | 300,000 |
| N/A |
| 25,000 |
| $ | 2.25 |
| $ | 11,000 |
|
| |||||||||||||||||||
(1) Represents potential payouts under the Executive Incentive Plan for 2006. Actual payouts were at approximately 108% to 121% of the target amount as reflected in the Summary Compensation Table.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (1)
| Option Awards |
| ||||||||||
Name |
| Number of |
| Number of |
| Equity in- |
| Option |
| Option |
| |
J. Coley Clark |
| 525,000 |
| 525,000 |
| — |
| $ | 2.25 |
| 9-14-2014 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Jeffrey D. Cushman |
| 25,000 |
| 75,000 |
| — |
| $ | 2.25 |
| 1-1-2015 |
|
| 0 |
| 60,000 |
| — |
| $ | 2.25 |
| 1-1-2016 |
| |
| 0 |
| 25,000 |
| — |
| $ | 2.25 |
| 11-16-2016 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |
Michael D. Peplow |
| 15,000 |
| 0 |
| 10,000 |
| $ | 2.25 |
| 3-31-2010 |
|
| 17,500 |
| 17,500 |
| 0 |
| $ | 2.25 |
| 3-31-2014 |
| |
| 5,000 |
| 15,000 |
| 0 |
| $ | 2.25 |
| 4-30-2015 |
| |
| 0 |
| 50,000 |
| 0 |
| $ | 2.25 |
| 1-1-2016 |
| |
| 0 |
| 25,000 |
| 0 |
| $ | 2.25 |
| 11-16-2016 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |
Michael D. Fallin |
| 50,000 |
| 150,000 |
| 0 |
| $ | 2.25 |
| 4-30-2015 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Brendan P. Keegan |
| 37,500 |
| 112,500 |
| 0 |
| $ | 2.25 |
| 6-6-2015 |
|
| 0 |
| 25,000 |
| 0 |
| $ | 2.25 |
| 11-16-2016 |
| |
(1) Options shown in this table were granted between 2000 and 2006.
(2) All options granted after 2002 vest annually over 4 years. For options granted between 2000 and 2002, one-half of the options vest annually over 4 years and the remainder vest based on the performance of the Company. Vesting of 20.0% of the performance-based incentive options occurred in 2000. The remaining 80% of the performance-based options remain unvested.
63
No stock options were exercised in 2006.
PENSION BENEFITS
Name |
| Plan Name |
| Number of |
| Present |
| Payments |
| ||
J. Coley Clark |
| N/A |
| — |
| $ | — |
| $ | — |
|
Jeffrey D. Cushman |
| N/A |
| — |
| — |
| — |
| ||
Michael D. Peplow |
| BancTec Limited Retirement |
| 9 |
| $ | 236,629 |
| — |
| |
Michael D. Fallin |
| N/A |
| — |
| — |
| — |
| ||
Brendan P. Keegan |
| N/A |
| — |
| — |
| — |
| ||
(1) The present value of these benefits is shown based on the assumptions used in determining the annual pension expense, as shown in Note K to the consolidated financial statements.
Employment Agreements
The Company has no employment contracts or change of control agreements with any of the executives named in the Summary Compensation Table. Mr. Clark has a severance arrangement which guarantees 18 months of payments at his base salary rate upon the occurrence of termination without cause. The other named executives have severance arrangements which guarantee up to 12 months of potential payments at their base salary rate upon the occurrence of termination without cause.
Compensation of Directors
The Company has no standard arrangements under which directors receive compensation and no director’s fees were paid during 2006.
64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of March 15, 2007 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, 2007. 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, 2007.
Name of Beneficial Owner (1) |
| Class of |
| Number of Shares |
| Percent of |
|
BancTec Intermediate Holding, Inc. 2701 E. Grauwyler Irving, TX 75061 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
BancTec Upper-Tier Holding, LLC (5) 2701 E. Grauwyler Irving, TX 75061 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
Welsh, Carson, Anderson & Stowe VIII, L.P. (6) 320 Park Avenue, Suite 2500 New York, NY 10022 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
WCAS Capital Partners III, L.P. (7) 320 Park Avenue, Suite 2500 New York, NY 10022 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
WCAS Information Partners, L.P. (8) 320 Park Avenue, Suite 2500 New York, NY 10022 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
Robert A. Minicucci(9) 320 Park Avenue, Suite 2500 New York, NY 10022 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
Eric J. Lee(10) 320 Park Avenue, Suite 2500 New York, NY 10022 |
| Common Preferred A Preferred B |
| 0 0 0 |
| * * * |
|
|
|
|
|
|
|
|
|
Gary J. Fernandes(11) 100 Crescent Court, Suite 230 Dallas, TX 75201 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
Murray Holland(12) 100 Crescent Court, Suite 230 Dallas, TX 75201 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
Sanjay Swani(13) 320 Park Avenue, Suite 2500 New York, NY 10022 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
Craig D. Crisman(14) 2701 E. Grauwyler Irving, TX 75061 |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
|
|
|
|
|
|
|
|
J. Coley Clark 2701 E. Grauwyler Irving, TX 75061 |
| Common Preferred A Preferred B |
| 0 0 0 |
| * * * |
|
|
|
|
|
|
|
|
|
Jeffrey D. Cushman 2701 E. Grauwyler Irving, TX 75061 |
| Common Preferred A Preferred B |
| 0 0 0 |
| * * * |
|
65
Name of Beneficial Owner (1) |
| Class of |
| Number of Shares |
| Percent of |
|
Michael D. Peplow 2701 E. Grauwyler Irving, TX 75061 |
| Common Preferred A Preferred B |
| 0 0 0 |
| * * * |
|
|
|
|
|
|
|
|
|
Michael D. Fallin 2701 E. Grauwyler Irving, TX 75061 |
| Common Preferred A Preferred B |
| 0 0 0 |
| * * * |
|
|
|
|
|
|
|
|
|
Brendan P. Keegan 2701 E. Grauwyler Irving, TX 75061 |
| Common Preferred A Preferred B |
| 0 0 0 |
| * * * |
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group (6 persons) |
| Common Preferred A Preferred B |
| 19,575,784 100,667 35,520 |
| 100.0 100.0 100.0 | % % % |
* | Less than one percent. |
(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 $8.5 million in fiscal year 2006 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 $107.2 million 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 2006 of $10.4 million.
66
Effective December 31, 2006, the Company and its majority shareholder, WCAS, entered into an arrangement whereby WCAS provided a commitment to purchase up to an additional $15.0 million of Series B Preferred stock for cash. No accounting recognition has been given to this right of BancTec to put its Series B Preferred stock to WCAS, primarily due to the parent/subsidiary nature of the arrangement. As of December 31, 2006, no stock had been purchased under this commitment.
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 2006 fiscal year. The following table presents the aggregate fees billed by the D&T Entities, for services provided during 2006 and 2005:
| 2006 (3)(4) |
| 2005 (3)(4) |
| |||
|
| (in thousands) |
| ||||
Audit Fees (1) |
| $ | 1,103 |
| $ | 760 |
|
Audit-Related Fees |
| — |
| — |
| ||
Tax Fees (2) |
| 8 |
| — |
| ||
All Other Fees |
| — |
| — |
| ||
Total |
| $ | 1,111 |
| $ | 760 |
|
(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 2005 and 2006 were pre-approved pursuant to the policy. |
67
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:
None
(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 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.
68
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., incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
10.20 — Tenth Amendment to Loan and Security Agreement, dated as of October 6, 2006, between Heller Financial, Inc. and BancTec, Inc.
10.21 — Eleventh Amendment to Loan and Security Agreement, dated as of March 22, 2007, between Heller Financial, Inc. and BancTec, Inc.
69
21.1 — Subsidiaries of Registrant
31.1 — Certificate of Chief Executive Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act.
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.
70
BANCTEC, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2006, 2005 and 2004
(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, 2006 |
| $ | 1,110 |
| $ | 981 |
| $ | 1,253 | (a) | $ | 838 |
|
Year ended December 31, 2005 |
| 931 |
| 146 |
| 33 | (a) | 1,110 |
| ||||
Year ended December 31, 2004 |
| 1,126 |
| (229 | ) | 34 | (a) | 931 |
| ||||
(a) (Write-off) recoveries of uncollectible accounts.
71
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 2, 2007
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 2, 2007 |
J. Coley Clark |
| Officer (Principal Executive |
|
|
|
| Officer); and Director |
|
|
|
|
|
|
|
/s/ Jeffrey D. Cushman |
| Senior Vice President, Chief |
| April 2, 2007 |
Jeffrey D. Cushman |
| Financial Officer, and Treasurer |
|
|
|
| (Principal Accounting Officer); |
|
|
|
| and Director |
|
|
|
|
|
|
|
/s/ Robert A. Minicucci |
| Chairman of the Board and |
| April 2, 2007 |
Robert A. Minicucci |
| Director |
|
|
|
|
|
|
|
/s/ Eric J. Lee |
| Director |
| April 2, 2007 |
Eric J. Lee |
|
|
|
|
|
|
|
|
|
/s/ Gary J. Fernandes |
| Director |
| April 2, 2007 |
Gary J. Fernandes |
|
|
|
|
|
|
|
|
|
/s/ Sanjay Swani |
| Director |
| April 2, 2007 |
Sanjay Swani |
|
|
|
|
72