**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

**(Mark One)**

**ý****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

**For the Fiscal Year Ended December 31, 2001**

**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  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |   |
| **2701 East Grauwyler  Irving, Texas**                          |   | **75061** |
| (Address of Principal Executive Offices)                        |   | (Zip Code) |

 

Registrant’stelephone number, including area code: **(972)579-6000**

** **

Securities registered pursuant to Section 12(b) ofthe Act:

 

**None**

** **

Securities registered pursuant to Section 12(g) ofthe Act:

 

**None**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes: o No: ý

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. Not applicable.

 

Indicatethe number of shares outstanding of each of the Registrant’s classes of CommonStock, as of the latest practicable date. 

 

| **Title of Each Class**                |   | **Number of Shares Outstanding  at  July 1, 2002** |
|----------------------------------------|--------|----------------------------------------------------|
| Common  Stock, $0.01 Par Value         |   | 17,003,838                                         |
| Class  A common stock, $0.01 Par Value |   |   1,181,946                                   |

 

Aggregatemarket value of common equity held by non-affiliates:  Not applicable

 

 

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BancTec, Inc.

Annual Report

on

Form 10-K

Year Ended December 31, 2001

 

**FORWARD-LOOKING STATEMENTS**

 

*This Annual Report on Form 10-K, including Factors Affectingthe Company’s Business and Prospects set forth in Management’s Discussion andAnalysis of Financial Condition and Results of Operations in Item 7 andQuantitative and Qualitative Disclosure About Market Risk in Item 7A, containsforward-looking statements as that term is defined in the Private SecuritiesLitigation Reform Act of 1995 (the “PSLRA”) that involve risks anduncertainties, as well as assumptions that, if they never materialize or proveincorrect, could cause the results of BancTec, Inc. and its consolidatedsubsidiaries (the “Company”) to differ materially from those expressed orimplied by such forward-looking statements. All statements other thanstatements of historical fact are statements that could be deemedforward-looking statements, including any projections of earnings, revenues, orother financial items; any statements of the plans, strategies, and objectivesof management for future operations; any statements concerning proposed newproducts, services, or developments; any statements regarding future economicconditions or performance; statements of belief and any statement ofassumptions underlying any of the foregoing. The risks, uncertainties andassumptions referred to above include the ability of the Company to retain andmotivate key employees; the timely development, production and acceptance ofproducts and services and their feature sets; the challenge of managing assetlevels, including inventory; the flow of products into third-party distributionchannels; the difficulty of keeping expense growth at modest levels whileincreasing revenues; and other risks that are described from time to time inthe Company’s Securities and Exchange Commission reports, including but notlimited to the items discussed in Factors Affecting the Company’s Business andProspects set forth in Management’s Discussion and Analysis of FinancialCondition and Results of Operations in Item 7 below in this report, and itemsdescribed in the Company’s other filings with the Securities and ExchangeCommission. The Company assumes no obligation to update these forward-lookingstatements.*

 

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**PART I**

 

**ITEM 1.BUSINESS.**

 

**Overview**

 

BancTec, Inc. (BancTec or the Company), aDelaware corporation, is a worldwide systems integration and services companythat delivers solutions that address complex data and paper-intensive workprocesses. The Company employs comprehensive solutions by combining advancedweb-enabled imaging and workflow technologies with both BancTec-manufacturedequipment and third party equipment. These solutions are subsequentlymaintained and supported by the Company’s service operations. The Company isalso a leading provider of personal computer maintenance services for majorcomputer companies, government and corporate customers. The Company employsworldwide approximately 3,200 people full-time and is headquartered in Irving,Texas.

 

Founded in 1972, the Company operates worldwideserving approximately 1,500 customers in over 20 countries, with internationalrevenue in 2001 representing approximately one-third of total revenues.

 

The Company markets its portfolio of solutions tospecific target markets in which it believes it has extensive business processexpertise and certain competitive advantages and is able to maintain or achievea leadership position.

 

In July 1999, BancTec entered into arecapitalization transaction. Welsh, Carson, Anderson & Stowe (“WCAS”), aprivate investment partnership and Convergent Equity Partners, L.P.(“Convergent”), formed Colonial Acquisition Corp., (“Colonial”) with WCASowning 93.5% and Convergent owning 6.5%. Through the merger of Colonial intoBancTec, WCAS acquired 17,003,838 shares of BancTec’s common stock and Convergentacquired 1,181,946 shares of BancTec’s Class A common stock. In connection withthe recapitalization, each previously outstanding share of BancTec common stockwas converted into the right to receive $18.50 in cash, totaling approximately$360.2 million, and simultaneously canceled. Funding for the distribution tothe former BancTec shareholders was provided by a $145.0 million capitalcontribution from WCAS and Convergent, by the Tranche A Term Loan, the SponsorNotes, and the Revolving Credit Facility discussed in the notes to theConsolidated Financial Statements. In addition to the funds that were paid forthe shares, cash payments were made for employee stock options of $9.3 millionand an employee stock purchase plan of $0.3 million. The options and theemployee stock purchase plan payments were recorded as a reduction tostockholders’ equity.

 

Holders of both common stock and Class A commonstock are entitled to one vote per share. The Class A holder is entitled to oneseat on the Company’s Board of Directors.

 

In addition, WCAS owns Series A preferred stock(“Series A Preferred”) which includes warrants, and Series B preferred stock(“Series B Preferred”) which includes conversion rights.

 

WCAS is strategically focused on the acquisitionof information services, health care and telecommunications companies,traditionally investing for growth. WCAS manages more than $12.0 billion forcorporate and public pension funds, university endowment funds and otherinstitutional investors.

 

**U.S. Solutionsand International Solutions**. U.S. Solutions (“USS”) and International Solutions (“INTL”) offersimilar systems integration and business process solutions and services, andmarket to similar types of customers. The solutions offered primarily involvehigh volume transaction processing using advanced technologies and processes.Key applications include payment and check processing, document imaging andworkflow, as well as related ongoing service and support. The Company’spowerful, high-volume integrated systems deliver important benefits to some ofthe world’s largest credit card companies and major banks. In addition, thesesegments provide their products and services to other customers, includingfinancial services companies and insurance providers, telecommunicationscompanies, utility companies, governmental agencies, and transportation firms.

 

The Company combines its extensive businessapplication knowledge with a full range of software and equipment offerings forcomplex transaction processing environments. The Company’s integrated systemsgenerally incorporate advanced applications software developed by the Companyand by third parties. These solutions may also include hardware developed andmanufactured by the Company as well as by third parties. USS and INTL offer thefollowing process services and solutions:

 

**Document Imaging Solutions**. The Company’s image systems capture, digitizeand process check and other document images, including utility, telephone,retail and credit card bills, mortgage coupons, sales drafts, airline tickets,tax notices and other financial documents. These imaging systems are also usedby banks for high volume check-processing applications such as proof-of-depositand image statement preparation. Other Company offerings provide image-based

 

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solutions for check exceptionhandling, enabling financial institutions that handle large volumes of checksto reprocess more efficiently items that were rejected in normal operatingcycles.

 

The Company’s financial documentimaging products utilize an open systems architecture platform which enablescustomers to add industry standard hardware and software components to improveprocessing capabilities. The Company typically sells these products toend-users.

 

**Document and Check Processing Equipment Products**. The Company manufactures low, medium, andhigh-speed document reader/sorters and related components that read magneticink character recognition and optical character recognition data from financialdocuments and sort the documents according to established patterns. TheCompany’s high-speed, full-page scanners utilize photo-optical technology, grayscale image capture capabilities, character recognition software and highprecision document transports to scan and digitize full-sized businessdocuments such as invoices, statements and business forms. The Company marketsthese products and solutions to end-users, other manufacturers and variousresellers and systems integrators throughout the world.

 

The Company markets a full rangeof consumable supplies that complement the Company’s document processingsystems. The Company also manufactures and markets microfilm cameras, imagecameras, MICR encoders, ink jet components and various peripheral equipment.The Company’s original equipment manufacturer (“OEM”) products are sold with a90-day warranty from the date of shipment.

 

**Installation and Maintenance of the Company’s Products**. The Company installs and provides maintenanceand support services for its own products, including document reader/sortersand scanners. The Company employs customer service engineers located in theUnited States and international locations to service the Company’s installedequipment. The Company’s maintenance contracts usually include both parts andlabor, and the one-year contracts are typically renewed annually for five toseven years.

 

**Archive Solutions**.  BancTec’s multi-tiered archivalsystem is targeted to support industry efforts to reduce and eventuallyeliminate the multiple handling of checks and documents through truncation andelectronic check presentment initiatives. The systems also improveaccessibility to the data and reduce access time. The Company believes thatthis technology also has application for other market segments.

 

**Plexus(R) Products**. The Company offers a complete suite of internet-enabled documentimaging and workflow software solutions under the Plexus(R) brand designed forhigh-volume, complex and distributed environments. These software productsoffer workflow, data management and forms processing capabilities that enableusers to automate, coordinate and streamline business processes. The productsare also incorporated into the Company’s application solutions to enhancefunctionality and provide competitive distinction.

 

**Computer andNetwork Services**. TheCompany is a leading provider of personal computer repair services in theUnited States. The Company provides such services to many companies, includingFortune 1000 companies, and consumers. Computer and Network Services (“CNS”) isstructured around the following three customer areas:

 

**Strategic alliances, including outsource and systemintegration partners**.Strategic alliances focus on establishing and maintaining partnerships withindustry-recognized providers of outsourcing services as well as with systemintegrators offering specific support to their customer base. The partnershipswith these organizations enable CNS to provide services consistent with itscore competencies for desktop/enterprise applications, while enabling thestrategic alliance partners to focus on program management and specificservices.

 

**OEM partner relationships**. The focus of the CNS OEM partner relationshipgroup is on providing fulfillment services and related support to manufacturersof desktop/enterprise products. CNS provides OEMs with access to CNS’ extensivenational field service organization, while enabling the OEMs to focus on theproduction process and customer requirements.

 

**Fortune and retail market accounts**. The Fortune and retail accounts group ischarged with serving those customers that have support needs consistent withtheir core competencies in desktop/enterprise applications while leveragingCNS’ nationwide service organization. Typical customers require nationalservice in order to support their various sites. Agreements with thesecustomers require flexibility to manage support needs ranging fromhigh-priority mission-critical systems to office automation with lower-prioritysupport requirements.

 

**ReportingStructure**

 

In 1999, the Company reported its operations astwo primary businesses, Worldwide Financial Systems (“WFS”) and CNS. Theoperations of WFS included manufacturing and supplies, maintenance of Company-manufactured products, integrated

 

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systems, and Plexus products. The CNS operationsincluded personal computer repair services and administration of third partyextended warranties. Later in 1999, the Company separated WFS into two separately-managedreportable segments based on geographical areas, North American Systems (“NAS”)and International Systems. As a part of the reporting structure realignmentdiscussed below, International Systems has been renamed InternationalSolutions. INTL consists of operations throughout the world excluding NorthAmerica.

 

Effective the first quarter of 2001, thereporting structure was realigned. Under this realigned structure, NAS wasrenamed U.S. Solutions and excluded Canadian operations and Plexus products.The then newly formed Advanced Enterprise Solutions division (“AES”) and Plexusproducts were grouped together into a segment identified as (“Other”). Reporting for INTL included the Canadianoperations.  Canadian operations werenot material to USS nor to INTL operations. Under the realigned structure, thecomposition of CNS remained unchanged.

 

The Company recently realigned its reportingstructure and will begin reporting under the new alignment in the first quarterof 2002. Under this new structure, USS includes AES and U.S. operations ofPlexus products. INTL reporting includes the international operations of Plexusproducts.  The composition of CNSremains unchanged.

 

**GeographicalLocations**

 

There are no significant risks associated withforeign operations other than the fluctuation of international currencies (inEurope and Japan), political environments and economic cycles.

 

**ProductDevelopment**

 

The Company is engaged in ongoing software andhardware product development activities for both new and existing products,employing approximately 200 people for such activities as of July 1, 2002.

 

The following table sets forth the Company’sproduct development expenses: 

 
|                         |   | **For the years ended December 31,** |   |
|------------------------------|--------|--------------------------------------|--------|
|                         |   | **2001**                             |   | **2000** |   | **1999** |   |
|                         |   | **(dollars in thousands)**           |   |
|                         |   |                                 |   |   |   |   |   |
| Product Development Expenses |   | $                                    | 17,744 |   | $ | 20,181 |   | $ | 15,917 |   |
| Percent of Total Revenue     |   | 3.5                                  | %      | 4.1 | % | 3.0 | % |
|                              |        |                                      |        |  |  |  |  |  |  |  |

 

The Company develops strategic partnerships toconduct its business in the most effective and efficient manner possible. Therecan be no assurance that the Company’s development efforts will result insuccessful commercial products. Many risks exist in developing new productconcepts, adapting new technology and introducing new products to the market.

 

Current expenditures are concentrated ondeveloping new applications for the Company’s product lines and improving andexpanding existing products. The Company is currently focusing on payment,check and document processing technology, Electronic Data Management (“EDM”)solutions and significant hardware enhancements.

 

*ElectronicData Management.*BancTec’s EDM business is organized around the creation of a set of high levelreusable components that form the basis of vertical solutions for specificmarkets. Components of this suite are called eFIRST(TM) Forms+, eFIRST Case+and eFIRST Archive+. BancTec’s EDM solutions are differentiated fromcompetitors in that the Company’s solutions are constructed from the complete,pre-integrated eFIRST components. As a result, any integration issues areaddressed at the product level so that the customer- solution level is aseamless event with respect to integration issues. Flexibility and robustnessof the solution enable customers to adapt the scalable system as their businessneeds change. Among the target uses for which eFIRST solutions are well-suitedinclude complex and large-scale invoicing and billings systems, customerrelationship management systems, applications handling such as subscriptions,account openings, governmental, including immigration visa handling, socialsecurity claims and records management, and insurance claims handling. Threecore modules exist in the eFIRST suite of solutions - forms processing, casemanagement, and archiving - which can be integrated within the same environmentand expanded.

 

eFIRST Forms focuses on interaction betweencustomers and suppliers and addresses certain problems of hybrid environments.eFIRST Forms captures data from many types of interaction such as e-mail, web,scanned documents, faxes

 

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and web- forms. From these various types ofsources, eFIRST Forms extracts useful data previously thought unsuitable forsuch purposes as general correspondence, non- standard invoices and deliverynotes. eFIRST Archive addresses the other end of the business transaction - thesecure structured repository. eFIRST Archive enables the creation of structuresfor information which relate to the way business is conducted, facilitating themeaningful grouping of different kinds of stored objects such as scannedimages, mainframe records, and word document files. eFIRST Archive can besearched using specific indices or across all objects’ contents for certainkeywords or phrases which can be specified long after the data has been stored.eFIRST Case focuses on the interaction between the customer channel andrepository - the processes and interfaces which constitute the corecompetencies of businesses and how value is added through the application ofaccumulated knowledge and data to their raw customer inputs, e.g., developingmeaningful electronic pathways, and collating information from many sources.eFIRST Case addresses these issues by providing a technology platform and usertools to construct workflows, data views, user environments and accesspermission models that draw in existing systems and people.

 

*ArchiveSolutions.* The Company’sImageFIRST(R) OpenARCHIVE(TM) solution is a web-enabled high-speed transactionarchival system that provides the tools to manage, store, retrieve, and deliveran unlimited amount of check payment data and images. OpenARCHIVE’s indexingfeature allows management of the aging of images to optimize performance of thestorage tiers in the archive. In addition, query selection templates and fieldsdisplayed for item research are configurable and flexible which simplifyfinding specific data and images. The Image Hosting Application ProgramInterface (“IHAPI”) is a collection of interfaces that provides the capabilityfor third-party applications to access data and images stored in OpenARCHIVE.The IHAPI image enables many banking applications, including exceptions andreturns processing, signature verification, research and adjustments, frauddetection, statements, Internet banking, and cash management.

 

*HardwareEnhancements.* In 2002,the Company plans to continue development and enhancements to what it believesto be the industry’s most complete portfolio of document transport products.Among these products is the Company’s X-Series(TM) Reject Repair System, acomprehensive integrated solution that offers data correction, heat stripapplication, and encoding in a single operation. This X- Series productintegrates multiple steps into a one-step, efficient operation thatautomatically completes a significant daily reject volume with no operatorintervention. In a single step, the X-Series can process rejected checks, applystripping, encode the corrected MICR line, and sort these items back forsubsequent processing, thereby reducing the per item cost and increasingprocessing efficiency. Once the items are stripped and MICR encoded, and frontor back audit trails and programmable endorsements are complete, BancTeccameras can capture a downstream image of all items, providing a more accuraterecord of the completed transaction for research purposes. Other keydevelopment efforts remain focused on character recognition, image improvements(gray scale snippeting, character engine improvements, wavelet compression,improved gray scale and color quality and delivery) and Image Quality Assurancefor real-time reading to improve monitoring and detection of image quality inthe Company’s transport and scanner product lines.  In addition to its reject / repair processing capability, during2002, the Company plans to introduce a price-competitive X-Series to theremittance and POD markets, positioning the transport as a multi-applicationplatform.

 

**Sales andDistribution**

 

The Company primarily relies on its internalsales force. BancTec’s distribution strategy is to employ multiple deliverychannels to achieve the widest possible distribution. The Company’s productsare sold to end-users, distributors, OEMs, value-added resellers and systemsintegrators.

 

International sales are subject to various risks,including fluctuations in exchange rates, import controls and the need forexport licenses.

 

**CustomerDiversification**

 

For the year ended December 31, 2001, onecustomer, Dell, accounted for 12.2% of the total revenue of the Company. Forthe years ended December 31, 2000 and December 31, 1999, respectively, nosingle customer accounted for more than 10.0% of the total revenue of theCompany. The Company’s ten largest customers accounted for 38.1%, 34.2%, and25.0% of the Company’s revenues for the years ended December 31, 2001, 2000,and 1999, respectively.

 

**Competition**

 

In marketing its products and services, theCompany encounters aggressive competition from a wide variety of companies,some of which have substantially greater resources than BancTec. The Companybelieves that functionality, performance, quality, service and price areimportant 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 standardcomponents in its competitive efforts. While the Company believes that itsofferings compete favorably based on each of these elements, the Company couldbe adversely affected if its competitors introduce innovative ortechnologically superior solutions or offer their products at significantlylower prices than the Company. No assurance can be given that the

 

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Company will have the resources, marketing andservice capability, or technological knowledge to continue to competesuccessfully.

 

**Backlog**

 

The Company believes that backlog is not ameaningful indicator in understanding BancTec’s business nor a meaningfulindicator of future business prospects due to the large volume of productsdelivered from shelf inventories and the relative portion of net revenuerelated to the Company’s services businesses. In addition, any backloginformation would exclude CNS contracts, recurring hardware and softwaremaintenance contracts, and contracts for sales of supplies. Further, theCompany’s backlog is subject to fluctuation due to various factors, includingthe size and timing of orders for the Company’s products and exchange ratefluctuations, and accordingly, is not necessarily indicative of the level offuture revenue.

 

**Manufacturing -Suppliers**

 

The Company’s hardware and systems solutions areassembled 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 Companygenerally has contracts with these suppliers that are renewed periodically. TheCompany has not experienced, nor does it foresee, any significant difficulty inobtaining necessary components or subassemblies; however, if the supply ofcertain 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 patentsand holds licenses under numerous patents owned by others. The Company alsoowns a number of registered and common-law trademarks in the U.S. and othercountries relating to the Company’s trade names and product names.

 

The validity of any patents issued or that may beissued to the Company may be challenged by others and the Company couldencounter legal difficulties in enforcing its patent rights againstinfringement. In addition, there can be no assurance that other technologycannot or will not be developed or that patents will not be obtained by othersthat would render the Company’s patents obsolete. Management does not considerthe Company’s patents and licenses to be essential to the ongoing operations ofthe Company.

 

**Employees**

 

At July 1, 2002, the Company employedapproximately 3,200 full-time employees. None of the Company’s employees isrepresented by a labor union. The Company has never experienced a workstoppage.

 

**ITEM 2.PROPERTIES.**

 

The principal executive offices of the Companyare located in its Irving, Texas facility.

 

The Company consolidated additional personnel atits Irving, Texas facility in January 2002, vacating substantially all (90%) ofan owned facility in Dallas, Texas.  TheCompany recorded an impairment charge of $1.5 million during the fourth quarterof 2001 and the facility is currently being offered for sale.

 

As of July 1, 2002, the Company owned or leasednumerous facilities throughout the world to support its operations. The Companybelieves that these facilities are adequate to meet its ongoing needs. The lossof any of the Company’s principal facilities could have an adverse impact onoperations in the short term. The Company has the option to renew its facilityleases or can replace them with alternate facilities at comparable cost. TheIrving manufacturing facility, which the Company owns, is the primary locationfor the Company’s administration, assembly and manufacturing activities.

 

**ITEM 3. LEGALPROCEEDINGS.**

 

The Company is a party to various legalproceedings.  None of the currentproceedings is expected to have an outcome which is material to the financialcondition or operations of the Company.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

None.

 

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**PART II**

 

**ITEM 5. MARKETFOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

 

None.

 

 

**ITEM 6.SELECTED FINANCIAL DATA.**

 
|                                                         |   | **Years Ended**        |    |
|--------------------------------------------------------------|--------|------------------------|---------|
|                                                         |   | **December 31,  2001** |    | **December 31,  2000** |   | **December 31,  1999** |   | **December 31,  1998** |   | **December 31,  1997** |   |
|                                                         |   | **(In thousands)**     |    |
|                                                         |   |                   |    |   |   |   |   |   |   |   |   |
| Revenue                                                      |   | $                      | 505,737 |   | $ | 487,707 |   | $ | 534,590 |   | $ | 556,097 |   | $ | 560,996 |   |
| Income (loss) from continuing operations before income taxes |   | (60,520                | )       | (103,192 | ) | (35,842 | ) | 11,546 |   | 69,353 |   |
| Income (loss) before extraordinary item                      |   | (67,944                | )       | (144,850 | ) | (11,197 | ) | 4,813 |   | 42,614 |   |
| Net income (loss)                                            |   | (45,826                | )       | (144,850 | ) | (11,197 | ) | 4,813 |   | 42,152 |   |
|                                                         |   |                   |    |   |   |   |   |   |   |   |   |
| Total assets                                                 |   | 315,049                |    | 399,752 |   | 473,105 |   | 520,312 |   | 498,343 |   |
| Working capital                                              |   | (8,970                 | )       | 84,718 |   | 130,448 |   | 144,405 |   | 61,335 |   |
| Long-term debt, less current maturities                      |   | 304,798                |    | 388,112 |   | 350,500 |   | 150,352 |   | 11,854 |   |
| Mandatory redeemable preferred stock                         |   | 13,151                 |    | 11,638 |   | 0 |   | 0 |   | 0 |   |
| Stockholders’ equity (deficit)                          |   | (212,517               | )       | (167,342 | ) | (21,738 | ) | 220,081 |   | 260,523 |   |
|                                                              |        |                        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In September 1999, the Company completed the saleof its community banking business to Jack Henry and Associates. For financialstatement purposes, the sale was treated as a discontinued operation. As aresult, the financial data above has been restated for 1999 and prior years toreflect the continuing operations of the Company.

 

**ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

 

THE FOLLOWING DISCUSSION SHOULD BE READ INCONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTESTHAT APPEAR ELSEWHERE IN THIS DOCUMENT.

 

*Thefollowing discussion contains forward–looking statements as that term isdefined in the PSLRA. See "Forward-Looking Statements." The Companycautions investors that there can be no assurance that actual results orbusiness conditions will not differ materially from those projected orsuggested in such forward–looking statements as a result of variousfactors, including those described below under the caption “Factors Affecting theCompany’s Business and Prospects”.*

 

The Company undertakes noobligation to update or revise forward-looking statements to reflect changes inassumptions, the occurrence of unanticipated results or changes to futureoperating results over time.

 

The Company believesseveral factors continued to create a challenging and competitive sales andcost containment environment during the year ended December 31, 2001.  These factors include: general economicconditions and reduced corporate customer technology spending; ongoingcompetitive pressures; an ongoing planned change in revenue mix within theCompany’s U.S. Solutions (“USS”) and International Solutions (“INTL”) segments;and a highly leveraged financial position. Additionally, in the third quarter, the USS segment experiencedadditional unexpected revenue declines, the duration of which the Companycannot predict.  In response to thecontinued difficult business climate, the year-end planning process and thedevelopment of the 2002 operating plan, the Company has undertaken a process ofevaluating the recovery of all its investments in inventory and long-livedassets.  This evaluation has resulted inwrite-downs and impairments of inventory and other long-lived assets inresponse to current business conditions and other decisions reached during theplanning process.

 

Expected economic andbusiness conditions into 2002 indicate a cautious outlook regarding theCompany’s near-term revenue and earnings growth prospects.  Most of the Company’s product offeringsrepresent a significant capital expenditure for its customers.  The general economic conditions haverecently caused a significant weakening in demand for systems solutionsproducts offered by USS. The Company has concentrated its emphasis on costreductions and on existing offerings.

 

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Product developmentefforts are focused on Electronic Data Management (“EDM”) solutions,OpenARCHIVETM and other archive solutions, and hardware enhancements. By incorporatingmore third-party products into the Company’s solutions rather than developingthe products, the Company can more easily target its efforts and expendituresto these core products and solutions.

 

**Critical Accounting Policies**

 

The Securities and ExchangeCommission (“SEC”) recently released Financial Reporting Release No. 60, whichrequires all companies to include a discussion of critical accounting policiesor methods used in the preparation of financial statements. In addition,Financial Reporting Release No. 61 was recently released by the SEC to requireall companies to include a discussion addressing, among other matters,liquidity, off-balance sheet arrangements, contractual obligations andcommercial commitments. The Company’s significant accounting policies andmethods used in the preparation of the Consolidated Financial Statements arediscussed in Note A of the Notes to Consolidated Financial Statements. Thefollowing is a listing of the Company’s critical accounting policies and abrief discussion of each:

 

•                  Revenuerecognition

•                  Allowancefor doubtful accounts

•                  Inventoryvaluation

•                  Intangibleassets and goodwill

•                  Incometaxes

 

**Revenue Recognition**.The Company derives revenue from primarily two sources- 1) product sales-systems integration solutions which address complex data and paper-intensivework processes, including advanced web-enabled imaging and workflowtechnologies with both BancTec-manufacturedequipment and third party equipment,and 2) services- which consist primarily of application design,development and maintenance, all aspects of desktop outsourcing, includingfield engineering, as well as help desk and LAN/WAN network outsourcing.

 

The Company applies the provisions of Statement of Position 97-2,“Software Revenue Recognition” as amended by Statement of Position 98-9“Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions” to all transactions involving the sale of softwareproducts and sales of hardware where the software is not incidental. For thosetransactions that involve acceptance certificates, the Company recognizesrevenue upon receipt of the acceptance certificate, or when it can beobjectively demonstrated that acceptance criteria have been met.  For hardware transactions where software isconsidered incidental, or no software is included, revenue is recognized whenthe product has been delivered and all obligations have been fulfilled.

 

TheCompany recognizes revenue from sales of equipment and supplies upon deliveryand transfer of title or upon customer acceptance.

 

Maintenancecontracts are primarily one year in duration and the revenue generated isrecognized ratably over the term of the contract.

 

The Company recognizes hardware and software revenue when persuasiveevidence of an arrangement exists, delivery has occurred, the sales price isfixed or determinable and collectibility is probable. At the time of thetransaction, the Company determines whether the fee associated with revenuetransactions is fixed or determinable and whether or not collection isreasonably assured. The Company determines whether the fee is fixed ordeterminable based on the payment terms associated with the transaction. If asignificant portion of a fee is due after the normal payment terms, which aregenerally 30 days from invoice date, the Company recognizes revenue as the feesbecome due. The Company assesses collectibility based on a number of factors,including past transaction history with the customer and the credit-worthinessof the customer. The Company does not request collateral from customers. If theCompany determines that collection of the fee is not reasonably assured, theCompany defers the revenue and recognizes revenue at the time collectionbecomes reasonably assured, which is generally upon receipt of cash. For allsales, the Company generally uses either a binding purchase order or signedsales agreement as evidence of an arrangement.

 

The Company’s services revenue is primarily billed based on contractualrates and terms, and the Company generally recognizes revenue as these servicesare performed which, in some cases is ratably over the contract term. Certain customers advance funds prior to theperformance of the services. The Company recognizes revenue related tothese advances as services are performed on a “per call” basis.

 

**Allowancefor Doubtful Accounts**. The Company’s allowance for doubtfulaccounts relate to trade accounts receivable. The allowance for doubtfulaccounts is an estimate prepared by management based on identification of thecollectibility of specific accounts and the overall condition of the receivableportfolios. The Company analyzes trade receivables, and analyzes historical baddebts, customer credits, customer concentrations, customer credit-worthiness, currenteconomic trends

 

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and changes in customerpayment terms, when evaluating the adequacy of the allowance for doubtfulaccounts. If the financial condition of the Company’s customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required. Likewise, should the Company determinethat it would be able to realize more of its receivables in the future thanpreviously estimated, an adjustment to the allowance would increase income inthe period such determination was made. The allowance for doubtful accounts isreviewed periodically and adjustments are recorded as deemed necessary.

 

**Inventory Valuation**.The Company periodically evaluates the carrying amount of inventory based onthe identification of excess and obsolete inventory. The Company’s evaluationinvolves a multi-element approach incorporating inventory turnover and thestratification of inventory by risk category, among other elements.  The approach incorporates both recenthistorical information and management estimates of trends. The Company’sapproach is intended to take into consideration potential excess andobsolescence caused by a decreasing installed base, engineering changes and endof manufacture.  If any of the elementsof the Company’s estimate were to deteriorate, additional write-downs may berequired. The inventory write-down calculations are reviewed periodically andadditional write-downs are recorded as deemed necessary.

 

**Intangible Assets and Goodwill**.The Company assesses the impairment of identifiable intangibles and goodwillwhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. If the Company determines that the carrying value ofidentifiable intangibles and goodwill may not be recoverable based upon theexistence of one or more indicators of impairment, the Company assesses therecoverability of the intangibles by determining whether the amortization ofthe asset balance over its remaining life can be recovered through undiscountedfuture operating cash flow of the acquired operations, to the extent theyremain separately identifiable. Any impairment is measured based on a projecteddiscounted cash flow method using a discount rate reflecting the Company’saverage cost of funds. Net intangible assets and goodwill amounted toapproximately $48.3 million as of December 31, 2001. In 2002, Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets” became effective, and as a result, the Company ceased to amortizegoodwill at January 1, 2002. The Company recorded approximately $3.2 million ofgoodwill and intangible amortization during 2001. In lieu of amortization, SFASNo. 142 requires the Company to perform an initial impairment review ofgoodwill in 2002 and an annual impairment review thereafter. SFAS No. 142 willrequire the Company to test goodwill for impairment at a level referred to as areporting unit. Goodwill is considered impaired and a loss is recognized whenthe carrying value of a reporting unit exceeds its fair value. The Company mayuse a number of valuation methods including quoted market prices, discountedcash flows and revenue multiples to determine fair value. The Company isrequired to complete the initial impairment review by June 30, 2002. Anytransitional impairment loss, which could be significant, will be recognized asthe cumulative effect of a change in accounting principle in the Company’sstatement of operations.

 

**Income Taxes**. TheCompany is required to estimate income taxes in each of the jurisdictions inwhich the Company operates. This process involves estimating the Company’sactual current tax exposure together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which would beincluded within the Company’s consolidated balance sheet. The Company must thenassess the likelihood that the deferred tax assets will be recovered fromfuture taxable income and to the extent that the Company believes recovery isnot likely, the Company must establish a valuation allowance. To the extent theCompany establishes a valuation allowance in a period, the Company must includean expense within the tax provision in the statement of operations. The Companyhas recorded a valuation allowance to reduce the carrying amount of recordeddeferred tax assets representing future deductions. In the event the Companywere to determine that it would be able to realize its deferred tax assets inthe future, an adjustment to the deferred tax asset would increase income inthe period such determination was made.

 

**DISCONTINUEDOPERATIONS**

 

In 1999, BancTec completed the sale ofsubstantially all of the net assets of its community banking business to JackHenry and Associates (“JHA”). The Company received proceeds of $50.0 million incash from the sale and recorded a pre-tax gain of approximately $20.3 million.During 2001 and 2000, an additional pre-tax charge of $0.7 million and $1.7million, respectively, was accrued representing changes in estimate foradditional expenses related to the Company’s obligation to complete certaindevelopment activities, thereby reducing the net pre-tax gain to $17.9 million.For financial statement purposes, the Company treated the sale as adiscontinued operation, and accordingly, financial statement presentation wasmade in accordance with APB Opinion No. 30, Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions.Revenues from the community banking business were $20.7 million in 1999.

 

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**RESULTS OFOPERATIONS**

 

**Comparison ofYears Ended December 31, 2001 and December 31, 2000**

 

Consolidated revenue of $505.7 million for theyear ended December 31, 2001 increased by $18.0 million or 3.7% from the prioryear. The increase occurred primarily in INTL of $34.5 million and CNS of $5.5million, offset partly by a decrease in USS of $24.6 million. Approximately$31.1 million of the INTL increase is non-recurring and resulted from theimpact of longer acceptance periods on highly customized products.  These products, scheduled for acceptance in2000, achieved acceptance in 2001 along with those products scheduled foracceptance in 2001.  The remainder ofthe INTL increase was a combination of the increases in EDM solution sales bythe Company’s subsidiary in Japan, partially offset by a decrease in theCompany’s European traditional businesses due to the Company’s targeted salesfocus.  The increased revenuefrom the CNS operations was primarily attributable to growth in repair revenuesin the OEM market during 2001.  Theremainder of the CNS increase was primarily due to strategic alliancescomprised of its outsource and system integration partners. The USS decrease was principally in itsintegrated business solutions and manufacturing businesses.  Lower revenues from hardware and softwaresales due to general economic conditions, increased pricing pressures,competition, and the impact of longer acceptance periods on highly customizedproducts accounted for a significant portion of the decrease. Additionally,increased competition in maintenance and products reaching the end of theiruseful lives contributed to a loss of business in that area.  The Company expects these trends to continuein the foreseeable future. Factors impacting future revenue include lowercorporate customer spending for large systems solutions as a result of thecontinuing weakness in the economy, customer and prospective customer mergers,on-going competitive pressures, and a general decline in internationalcurrencies, especially the Euro and the Yen.

 

Consolidated gross profit of $83.4 millionincreased by $37.0 million or 79.7% from the prior year. The increase occurredprimarily in CNS of $24.3 million and INTL of $15.0 million, offset partly by adecrease in USS of $10.6 million. CNS’ gross profit increase wasprimarily attributable to an improved labor model, effectively capping costs onsome jobs with additional benefit provided through a reduction in supportcosts, including streamlining the number of districts and the expandedautomation of its call center operations.Approximately $4.0 million of the INTL increase is non-recurring and resultedfrom the impact of longer acceptance periods on highly customizedproducts.  These products, scheduled foracceptance in 2000, achieved acceptance in 2001 along with those productsscheduled for acceptance in 2001.  Theremaining INTL increase occurred primarily from a margin improvement by theCompany’s subsidiary in Japan, partially offset by a decrease in the Company’sEuropean traditional businesses. The margin decline in the Company’ssubsidiaries in Europe was due primarily to lower revenues without acorresponding percentage decline in fixed expenses, as well as a weakening ofthe Euro and other European currencies. The USS gross profit declines occurredprincipally in its integrated business solutions, and manufacturing businessesand was due primarily to lower than expected revenues and increased costs.Contracts deemed to be in loss positions, thereby requiring an acceleration ofexpense recognition, decreased in comparison to 2000, when $11.1 million ofexpense related to loss contracts was recognized. The Company is in theprocess of transitioning its product offering focus to proven deliverables andnew targeted offerings, including EDM solutions, its other archive solutionsand hardware enhancements. Incorporating more third-party products into the Company’s solutionsrather than developing the products has enabled the concentration of effortsand expenditures on the targeted items which, along with the Company’s ongoingcost containment efforts, allowed for cost reductions to help offset revenuedeclines.  The Company will continue tomonitor the effects of the business climate and its strategic plans on therecoverability of its investment in inventory and long-lived assets, all ofwhich may continue to have a negative impact on gross profit in the future.

 

Operating expenses of $108.6 million decreased$5.2 million compared to the prior year. Operating expenses, by component,changed as follows: Product development expenses decreased by $2.4 million or12.1% primarily due to concentration on developing targeted new applicationsfor the Company’s product lines and selective expansion of existing products.Selling, general, and administrative expenses decreased by $2.8 million or 3.1%due primarily to on-going efforts to realign the cost structure as a result oflower revenues.  Goodwill amortizationremained relatively flat for the comparative periods.

 

Interest expense decreased to $35.5 million in2001 from $37.3 million in 2000. The decrease was due mainly to a loweroutstanding balance on revolving creditfacilities, declining interest rates and the repurchase of a portion ofthe Senior Notes, partially offset by a $17.7 million increase in debt relatedto Sponsor Notes.

 

Sundry items resulted in a net expense of $0.6 million during the yearended December 31, 2001 as compared to a net income of $0.7 million during theprior year primarily due to higher foreigncurrency losses resulting from exchange rate fluctuations in 2001 compared tothe prior year.

 

Pre-tax income in foreign tax jurisdictions resulted in an income taxprovision of $6.7 million for the year ended December 31, 2001 compared to a correspondingprior year period income tax provision of $39.4 million.  The income tax provisions for both periodsrelated to income from the Company’s international subsidiaries and a valuationallowance provided to reduce the Company’s deferred tax assets to an amountmanagement believes is more likely than not to be realized.  The Company’s effective tax rate wasapproximately (17.2)% for the year ended December 31, 2001 as compared to(38.2)% for the prior year.

 

 

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The Company recognized a $23.9 million extraordinary gain resultingfrom the repurchase of Senior Notes with a face amount of $39.0 million. TheCompany recognized a $1.8 million extraordinary loss resulting from the earlyextinguishment of debt.  A $0.7 millionloss from discontinued operations resulted from an adjustment to the estimatednet realizable value of remaining assets related to the Company’s communitybanking business discontinued in 1999.

 

**Comparison ofYears Ended December 31, 2000 and December 31, 1999**

 

Consolidated revenue of $487.7 million for theyear ended December 31, 2000 decreased by $46.9 million or 8.8% from the priortwelve-month period. The decline occurred primarily in NAS of $44.2 million andINTL of $34.3 million, offset partly by an increase in CNS of $31.6 million.The NAS decrease primarily related to continued downward pressure on itstraditional businesses, lower Plexus software sales, and lower large systemssales in Canada. The INTL decrease occurred primarily in the Company’s Europeantraditional businesses, offset significantly by increases in EDM solution salesin the Company’s subsidiary in Japan. Factors contributing to the overalldecline in revenues include lower corporate customer spending for large systemssolutions as a result of the weakening economy, mergers, on-going competitivepressures, and a general decline in international currencies, especially theeuro. The increased revenue from the CNS maintenance and other services isprimarily attributable to the expansion of CNS’ capabilities to offermulti-vendor services for desktop and network products during 2000, comprisedmostly from its Galileo contract which began in the first quarter. Theremainder of the CNS increase is primarily due to on-going OEM partnerrelationships, and to strategic alliances comprised of its outsource and systemintegration partners.

 

Consolidated gross profit of $46.4 milliondecreased by $57.6 million or 55.4% from the prior year. The primary declinesoccurred in NAS and INTL of $41.3 million and $15.8 million, respectively. CNS’gross profit declined slightly for the same periods due to higher costs,particularly those related to the 2000 expansion of capabilities, enabling theoffering of multiple-vendor services for desktop and network products. The NASgross profit declines occurred principally in its integrated businesssolutions, Plexus, and manufacturing businesses in 2000 compared to 1999 andwas due primarily to lower than expected revenues and increased costs. TheCompany is currently in a period of transitioning its product lines, which hashad the impact of decreased sales of established higher-margin traditionalproducts. Some of these existing products are being replaced withnewly-developed and initially lower margin products. As part of an on-goingreview of contracts and as a result of delayed implementations, certaincontracts were deemed to be in loss positions, thereby requiring anacceleration of expense recognition into 2000. The impact of recognizing thesepreviously inventoried costs and costs-to-complete accruals resulted inadditional expenses totaling $11.1 million in 2000. The INTL decline wasfurther attributable to the weakening of the Euro and other Europeancurrencies. As a result, in 2001, the Company narrowed its product offeringfocus to proven deliverables and new targeted offerings, including EDMsolutions, its other archive solutions and hardware enhancements. Incorporatingmore third party products into the Company’s solutions rather than developingthe products enabled the concentration of efforts and expenditures on thetarget items. The INTL decline occurred primarily in its European traditionalbusinesses, partially offset by a margin improvement in the Company’ssubsidiary in Japan. The margin decline in the Company’s subsidiaries in Europewas due primarily to lower revenues without a corresponding percentage declinein fixed expenses.

 

Operating expenses of $113.8 million decreased$4.4 million compared to the prior year. Operating expenses, by component,changed as follows: Product development expenses increased by $4.3 million or26.8% primarily due to concentration on developing new applications for theCompany’s product lines and expanding existing products. Selling, general, andadministrative expenses decreased by $5.7 million or 5.9% due primarily tohigher expenses related to the recapitalization transaction (the“recapitalization”). In addition, lower revenues and on-going efforts torealign the cost structure beginning in the 1999 third quarter resulted in areduction in operating costs. Goodwill amortization decreased by $3.0 millionor 48.0% due primarily to a fourth quarter 1999 write-down of $2.1 million.

 

Interest expense increased to $37.3 million in2000 from $22.7 million in 1999. The increase was due mainly to a $16.1 millionincrease in debt related to subordinated unsecured notes (the “Sponsor Notes”)issued to the Company’s primary owners at the recapitalization date, toincreased short-term borrowings, and to a higher leveraged position for thefull year. See additional discussion in the Liquidity and Capital Resourcessection of this document.

 

Sundry income of $0.7 million increased $0.2million in 2000 primarily due to gains recognized on yen-denominated foreign currencyforward contracts partially offset by higher foreign currency losses resultingfrom exchange rate fluctuations in 2000 compared to the prior year.

 

A pre-tax loss from continuing operations of$103.2 million for the year ended December 31, 2000 resulted in an income taxexpense of $39.4 million as compared with an income tax benefit in 1999 of$13.3 million on a pre-tax loss from continuing operations of $35.8 million.The Company provided a valuation allowance increase to reduce its deferred tax assetsto an amount management believes is more likely than not to be realized. Theincrease had the effect of decreasing the Company’s effective tax rate to(38.2)% from the 1999 rate of 37.0%.

 

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**LIQUIDITY ANDCAPITAL RESOURCES**

 

The Company’s workingcapital requirements are generally provided by cash and cash equivalents, fundsavailable under the Company’s revolving lockbox agreement, as discussed below,which matures May 30, 2006, and by internally generated funds from improvedcash flows from operations. Funds availability under the revolving lockboxagreement will be determined by a borrowing base formula equal to a specifiedpercentage of the value of the Company’s eligible accounts receivable, inventoryand real estate.  General economicconditions, the current weakness in demand for the Company’s systems solutionsproducts offered by USS and the requirement to obtain performance bonds orsimilar instruments for future advances from a significant customer could havea material impact on the Company’s future liquidity.

 

The Company’s cash and cash equivalents totaled$28.6 million at December 31, 2001, compared with $23.8 million at December 31,2000. Working capital decreased $93.7 million to ($8.9 million) at December 31,2001.  The change in working capitalincluded a decrease in accounts receivable of $24.3 million resulting fromimproved collections, a decrease of $31.3 million in inventories, net as aresult of decreased spending and write-downs from the Company’s periodicevaluation of inventory and an increase of $29.0 million from the replacementof term debt and the Company’s prior revolving credit facility with the revolvinglockbox agreement.  The Company usedcash generated from the improved collectionsand cash conserved from decreased spending on inventories to reduce theCompany’s long term debt, as further described below.

 

During 2001, the Company relied primarily on cashflows generated from operating activities, short-term borrowings under its revolvinglockbox agreement, and a capitalcontribution from its primary owners to fund operations. At December 31, 2001the Company had available $19.8 million of borrowing capacity under the NewFacility, of which the Company can draw $9.8 million.

 

Operating activities provided $65.8 million and$4.5 million of cash in 2001 and 2000, respectively. The $61.3 million increasewas due mainly to a decrease in the loss from continuing operations of $75.3million and a $53.0 million impact on inventories (changed from prior year’sincrease of $21.7 million to a current year decrease of $31.3 million),partially offset by uses of $31.3 million and $34.4 million, respectively, inthe prior year related to the Company’s deferred tax assets and the Company’sother accrued expenses and liabilities. See the discussion in Comparison ofYears Ended December 31, 2001 and December 31, 2000 for the factorscontributing to the decreased net loss.

 

Investing activities used net cash of $13.7million during 2001 compared to cash used of $19.3 million in 2000. The $5.6million decrease was due primarily to lower purchases of property, plant andequipment in 2001.

 

Financing activities used $45.1 million of netcash in 2001 compared to net cash provided of $21.6 million in 2000. The $66.7million change related primarily to the reduction of Company’s debt. The cashprovided in 2000 related primarily to proceeds from the issuance of Series APreferred of $15.0 million and to additional short-term borrowings of $6.6million.

 

At December 31, 2001, the Company’s principal outstanding debtinstruments consisted of (i) $25.0 million outstanding under the revolvingcredit facility maturing May 30, 2006 (which is more fully described below),(ii)  $111.0 million of 7.5% Senior Notesdue 2008, and (iii) $193.8 million of Sponsor Notes due 2009.  As of December 31, 2001, the Company’sforeign subsidiaries had outstanding borrowings of $3.8 million.  The Company or its affiliates may from timeto time purchase, redeem or pay deferred interest on some of its outstandingdebt or equity securities.  The Companywould only make these payments in compliance with the covenants of its debtinstruments.

 

The Company continuallyreviews its various lines of business to assess their contribution to theCompany’s business plan and from time to time considers the sale of certainassets in order to raise cash or reduce debt. Accordingly, the Company from time to time has explored and may explorepossible asset sales by seeking expressions of interest from potentialbidders.  However, the Company has notentered into any binding agreements or agreements in principle to sell anyassets 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 salesmay generate.

 

**Bank Debt Facilities**. Certain provisions of the Company’s July 1999 credit agreement withfinancial institutions were amended twice in the first two quarters of 2000 andagain in the third quarter of 2000. As a result of the amendments, interestrates under the credit agreements increased from LIBOR plus 2.75%, or primeplus 1.75%, to LIBOR plus 3.25%, or prime plus 2.25%, at the beginning of 2000.Under these amended covenants, less restrictive EBITDA, capital expenditureprovisions and other financial covenants were required of the Company for theremaining quarters of 2000.  Theamendment in the third quarter of 2000 was agreed to in consideration for anincrease in the guarantee to the Lenders by the Company’s primary owners, WCAS(also referred to as the “Sponsor”), from $10.0 million to $35.0 million, andfor the Company’s receipt of $15.0 million in cash proceeds from a preferredstock issuance to WCAS. The Company refinanced these bank debt facilities on May31, 2001.

 

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**New Credit Facility.**On May 31, 2001, the Company replaced the termloan and revolver with a new $100 million revolving credit facility (the “NewFacility”) provided by Heller Financial, Inc. (“Heller”), which will mature onMay 30, 2006. The interest rate on loans under the New Facility is, atthe Company’s option, either (i) 1.25% over prime or (ii) 2.75% overLIBOR.  At December 31, 2001, theCompany’s weighted average rate on the New Facility was 4.9%.  Beginning August 1, 2002, the interest ratemargins over prime and LIBOR may be increased by 0.25% increments whenavailable borrowing capacity falls below (1) $17.5 million and (2) $12.5million (total rate increase of 0.5%) or decreased by 0.25% increments whenavailable borrowing capacity exceeds (1) $22.5 million and (2) $27.5 million(total rate decrease of 0.5%).  TheCompany had $19.8 million of remaining availability on the New Facility at December31, 2001, of which the Company can draw $9.8 million.  A commitment fee of 0.5% per annum on the unused portion of theNew Facility is payable quarterly.

 

On November 8, 2001, the Company and Heller entered into an amendmentto the New Facility which reduced the committed amount to $60.0 million whilethe sub-limit related to letter of credit availability was increased from $5.0million to $20.0 million.  The sub-limitincrease will allow the Company greater flexibility going forward to obtainperformance bonds or similar instruments for future advances from a significantcustomer.

 

The New Facility is secured by substantially all the assets of theCompany, subject to the limitations on liens securing the Company’s existingSenior Notes. Funds availability under the New Facility will be determined by aborrowing base formula equal to a specified percentage of the value of theCompany’s eligible accounts receivable, inventory and real estate.  The Company had an outstanding balance onletters of credit totaling $0.2 million at December 31, 2001.  At December 31, 2001, the Company’savailable borrowing base was approximately $45.0 million, of which $25.0million was outstanding.

 

Under the New Facility,substantially all of the Company’s domestic cash receipts (including proceedsfrom accounts receivable and asset sales) must be applied to repay theoutstanding loans (thereby restricting the use of cash for dividend payments ornon-scheduled principal payments on other indebtedness), which may bereborrowed subject to availability in accordance with the borrowing baseformula.  Restricted cash at December31, 2001 of $2.0 million represents lockbox cash receipts to be applied to theoutstanding borrowings under the New Facility. The New Facility contains various representations, warranties and covenants,including financial covenants as to maximum capital expenditures, minimum fixedcharge coverage ratio and minimum average borrowing availability.  At December 31, 2001, the Company was incompliance with all covenants under the New Facility. The Company has not beenin compliance with the reporting requirements of the New Facility for the yearended December 31, 2001. Heller has agreed to waive this non-compliance uponthe Company's delivery of the financial statements in this Form 10-K.

 

**Senior Notes**. In August 1998, the Company exchanged thepublic Senior Notes (the “Senior Notes”) for the notes sold in a May 1998 Rule144A private offering. Interest is fixed at 7.5% and is due and payable insemi-annual installments, which began December 1, 1998. The Senior Notescontain covenants placing limitations on the Company’s ability to permitsubsidiaries to incur certain debts, incur certain loans, and engage in certainsale and leaseback transactions. The Company was in compliance with allfinancial covenants at December 31, 2001, 2000 and 1999.  During the fourth quarter of 2001, theCompany repurchased Senior Notes with a face amount of $39.0 million. TheCompany wrote off a proportionate share of deferred financing fees, totalingapproximately $0.2 million, resulting in an extraordinary gain of approximately$23.9 million.  The Company hasnot been in compliance with the reporting requirements of the Senior Notes forthe year ended December 31, 2001 and for the three months ended March 31, 2002.Delivery of the financial statements in this Form 10-K and the financialstatements in the Company’s Form 10-Q for the first fiscal quarter of 2002 willremedy this non-compliance condition.

 

**SubordinatedUnsecured Sponsor Notes**. The Company’s $160.0 million in Sponsor Notes bear interest at 10.0%,due and payable quarterly. The payments began September 30, 1999. However, asprovided under the agreement, the Sponsor Notes’ holder, WCAS, elected to deferquarterly interest payments of $4.0 million for each of the June 2000 throughSeptember 2001 quarterly periods. Such election required a deferred financingfee of 30.0% of each of the interest payments being deferred.  The Company accounts for the additionalfinancing fees as a change in the effective interest rate of the debt.  For the years ended December 30, 2001 and2000, the Company increased the outstanding deferred interest notes by $17.7million and $16.1 million, respectively. The increase was comprised of the $4.0 million quarterly deferrals, plusfinancing fees and interest thereon. At December 31, 2001, the Company had$33.8 million outstanding in deferred interest notes. WCAS may, at itselection, defer each future quarterly payment under similar terms.  WCAS did not elect to defer the December2001 quarterly payment and currently does not intend to elect deferral of thequarterly payments in the near future.

 

**Preferred Stock– Series A**.** **TheSeries A Preferred has an annual cash dividend rate of 7.0% of the then “StatedValue”. The Stated Value equals $150.00 per share, plus accumulated and unpaiddividends. Dividends are paid when and if declared by the Company’s Board ofDirectors. The aggregate liquidation preference/redemption value is $15.0million, plus accumulated and unpaid dividends. The Company shall redeem all ofthe outstanding shares of Series A preferred stock on September 22, 2008 or atan earlier date upon the occurrence of certain other events, as defined in theCertificate of Designations, Preferences and Rights of Series A and B PreferredStock. The Company has the option to redeem the Series A Preferred at any time by paying for each share the Stated Value pershare as of the redemption date.  Eachshare of Series A Preferred includes a warrant to purchase between 2.5 and 7.75shares of Common Stock at $0.01 per share.

 

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Common stock exercisable by the warrant totals 750,000 shares and maybe exercised at any time from the date of purchase to September 22, 2008. As ofDecember 31, 2001, the Stated Value of the Series A Preferred was $163.63.

 

**Preferred Stock– Series B**.** **TheSeries B Preferred has a cumulative annual cash dividend rate of 25.0% of thethen “Stated Value”. The Stated Value equals $150.00 per share, plusaccumulated and unpaid dividends. Dividends are paid when and if declared bythe Company’s Board of Directors.  Eachshare of Series B Preferred is convertible into shares of Common Stock at anytime by paying for each share the StatedValue per share as of the redemption date. The Company has the right toredeem the Series B Preferred at any time. In addition, upon the occurrence ofcertain events, as defined in the Certificate of Designations, Preferences andRights of Series A and B Preferred Stock, and upon the approval of a majorityof the holders of the Series B Preferred, the Company would be required toredeem the shares. As of December 31, 2001, the Stated Value of the Series BPreferred was $183.89.

 

**Foreign CreditAgreements**. Theoutstanding balance on foreign credit agreements as of December 31, 2001 was$3.8 million, payable in Japanese yen. The terms on the agreements ranged from30 to 60 days at interest rates up to 1.4%. The Company had no outstandingforeign credit balances as of December 31, 2000.

 

**Derivatives**. In the fourth quarter of 2001, the Company settled threeyen-denominated foreign currency forward contracts entered into in August 2000.The Company realized a gain of approximately $1.7 million in Sundry, net fromthe three yen-denominated foreign currency forward contracts, having recognized$1.1 million and $0.6 million, respectively, for the years ended December 31,2001 and 2000. These instruments had been recorded in the balance sheet at fairvalue with changes in fair value recorded to the Sundry line item in theaccompanying income statement. At December 31, 2001, the Company was not aparty to any derivative financial instruments.

 

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

 

**NEW ACCOUNTINGPRONOUNCEMENTS**

 

In June 2001, the FASB issued SFAS No. 141,“Business Combinations”, (“SFAS No. 141”) and SFAS No. 142, “Goodwill and OtherIntangible Assets” (“SFAS No. 142”). SFAS No. 141 requires that the purchasemethod of accounting be used for all business combinations. SFAS No. 141specifies criteria that intangible assets acquired in a business combinationmust meet to be recognized and reported separately from goodwill. SFAS No. 142will require that goodwill and intangible assets with indefinite useful livesno longer be amortized, but instead tested for impairment at least annually inaccordance with the provisions of SFAS No. 142. SFAS No. 142 also requires thatintangible assets with estimable useful lives be amortized over theirrespective estimated useful lives to their estimated residual values, andreviewed for impairment in accordance with SFAS No. 121 and, after itsadoption, in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” (discussed below) after its adoption.

 

The Company adopted the provisions of SFAS No.141 as of July 1, 2001, and SFAS No. 142 is effective as of January 1,2002.  Goodwill and intangible assetsdetermined to have an indefinite useful life acquired in a purchase businesscombination completed after June 30, 2001, but before SFAS No. 142 is adoptedin full, are not amortized. Goodwill and intangible assets acquired in businesscombinations completed before July 1, 2001 continued to be amortized and testedfor impairment prior to the full adoption of SFAS No. 142.

 

Upon adoption of SFAS No. 142, the Company isrequired to evaluate its existing intangible assets and goodwill that wereacquired in purchase business combinations, and to make any necessaryreclassifications in order to conform with the new classification criteria inSFAS No. 141 for recognition separate from goodwill.  The Company will be required to reassess the useful lives andresidual values of all intangible assets acquired, and make any necessaryamortization period adjustments by the end of the first interim period afteradoption.  If an intangible asset isidentified as having an indefinite useful life, the Company will be required totest the intangible asset for impairment in accordance with the provisions ofSFAS No. 142 within the first interim period. Impairment is measured as the excess of carrying value over the fairvalue of an intangible asset with an indefinite life.  Any impairment loss will be measured as of the date of adoptionand recognized as the cumulative effect of a change in accounting principle inthe first interim period. The Company is currently evaluating whetherimpairment exists under the provisions of SFAS No. 142.

 

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

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be

 

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Disposed Of.” The Company will adopt SFAS No. 144 in fiscal year 2002.The Company has not determined the impact of the provisions of SFAS No. 144 onits financial condition or results of operations.

 

InMay 2002, the FASB issued SFAS No. 145 , “Rescission of SFAS Nos. 4,44, and 64, Amendment of SFAS No. 13, and Technical Corrections” . Amongother things, SFAS 145 rescinds various pronouncements regarding earlyextinguishment of debt and allows extraordinary accounting treatment for earlyextinguishment only when the provisions of Accounting Principles Board OpinionNo. 30, “Reporting the Results of Operations—Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transaction”, are met. The Company adoptedthe provisions of SFAS 145 regarding early extinguishment of debt duringthe second quarter of 2002. 

 

In July 2002, the FASB issued SFAS No. 146,"Accounting for Exit or Disposal Activities".  SFAS 146 will be effective for the Companyfor disposal activities initiated after December 31, 2002. The Company is inthe process of evaluating the effect that adopting SFAS 146 will have on itsfinancial statements.

 

**FACTORS AFFECTING THE COMPANY'SBUSINESS AND PROSPECTS**

 

From time to time, information provided by the Company or statementsmade by its employees may contain “forward–looking” information, as thatterm is defined in the Private Securities Litigation Reform Act of 1995 (the“PSLRA”). All statements other thanstatements of historical fact are statements that could be deemedforward-looking statements.  TheCompany cautions investors that there can be no assurance that actual resultsor business conditions will not differ materially from those projected orsuggested in such forward–looking statements as a result of variousfactors. The Company undertakes no obligation to update or reviseforward-looking statements to reflect changes in assumptions, the occurrence ofunanticipated results or changes to future operating results over time. Thereare many factors that affect the Company’s business and the results of itsoperations. The following is a description of some of the important factorsthat may cause the actual results of the Company’s operations in future periodsto differ materially from those currently expected or desired.

 

***General EconomicConditions***

 

The Company’s business partly depends on general economic and business conditions.The Company’s sales are to businesses in a wide variety of industries,including banking, financial services, insurance, health care and governmentalagencies.  General economic conditionsthat cause customers in such industries to reduce or delay their investments inproducts and solutions such as those offered by the Company could have amaterial adverse effect on the Company.

 

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

 

***Dependence onSuppliers***

 

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

 

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

 

***Declining FinancialOperating Results and Indebtedness***

 

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

 

***InternationalActivities***

 

The Company’s international operations are a significant part of theCompany’s business.  The success andprofitability of international operations are subject to numerous risks anduncertainties, such as economic and labor conditions, political instability,tax laws (including U.S. taxes on foreign subsidiaries) and changes in thevalue of the U.S. dollar versus the local currency in which products aresold.  Any unfavorable change in one ormore of these factors could have a material adverse effect on the Company.

 

***Fluctuations inOperating Results***

 

The Company’s operating results may fluctuate from period to period andwill depend on numerous factors, including: customer demand and marketacceptance of the Company’s products and solutions, new product introductions,product obsolescence, varying product mix, foreign currency exchange rates andother factors. The Company’s business is sensitive to the spending patterns ofits customers, which in turn are subject to prevailing economic conditions andother factors

 

16

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beyond the Company’s control. Any unfavorable change in one or more ofthese factors could have a material adverse effect on the Company.

 

***TechnologicalChanges and Product Transitions***

 

The Company’s industry is characterized by continuing improvement intechnology, which results in the frequent introduction of new products, shortproduct life cycles and continual improvement in product price/performancecharacteristics.  The Company mustincorporate these new technologies into its products and solutions in order toremain competitive. There can be no assurance that the Company will be able tocontinue to manage technological transitions. A failure on the part of the Company to effectively manage thesetransitions of its product lines to new technologies on a timely basis couldhave a material adverse effect on the Company. In addition, the Company’s business depends on technology trends in itscustomers’ businesses.  Many of theCompany’s traditional products depend on the efficient handling of paper-basedtransactions.  To the extent thattechnological changes impact the future volume of paper transactions, theCompany’s traditional business may be adversely impacted.

 

***Product DevelopmentActivities***

 

The strength of the Company’s overall business is partially dependenton the Company’s ability to develop products and solutions based on new orevolving technology and the market’s acceptance of those products.  There can be no assurance that the Company’sproduct development activities will be successful, that new technologies willbe available to the Company, that the Company will be able to delivercommercial quantities of new products in a timely manner, that those productswill adhere to generally accepted industry standards or that products willachieve market acceptance. The Company believes that it is necessary for itsproducts to adhere to generally accepted industry standards, which are subjectto change in ways that are beyond the control of the Company.

 

17

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**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.**

 

The Company is subject to certain market risksarising from transactions in the normal course of its business, and from debtinstruments. Such risk is principally associated with interest rate and foreignexchange fluctuations, as explained below.

 

**Interest RateRisk**

 

The Company utilizes long-term fixed rate andshort-term variable rate borrowings to finance the working capital and capitalrequirements of the business. At December 31, 2001 and 2000, the Company hadoutstanding Senior Notes, due in 2008, of $111.0 million and $150.0 million,respectively, with a fixed interest rate of 7.5%. At December 31, 2001 and2000, the Company also had Sponsor Notes, due 2009, with a balance of $193.8million and $176.1 million, respectively. The Sponsor Notes bear interest at afixed rate of 10.0%.

 

The Company also utilizes a revolving creditfacility to support working capital needs. Borrowings during 2000 and throughMay 31, 2001 bore interest at the bank’s prime rate plus 2.25% or LIBOR plus3.25%, at the Company’s option. On May 31, 2001, the Company extinguished itsthen existing facility and replaced it with the New Facility.  Borrowings from June 1, 2001 throughDecember 31, 2001 bore interest at the bank’s prime rate plus 1.25% or LIBORplus 2.75%, at the Company’s option. If the bank’s prime rate or LIBOR onDecember 31, 2001 increased by 100 basis points on that date and then remainedconstant at the higher rate throughout 2002, the Company’s interest costs onits outstanding variable rate borrowings at December 31, 2001 of $25.0 millionwould increase by approximately $250,000 for the year ending December 31, 2002.

 

The estimated fair values of the outstandingSenior Notes and Sponsor Notes, based upon comparable borrowing rates and therelative seniority preference of the instruments, were $81.0 million and $105.0million, respectively, at December 31, 2001 and 2000 for the Senior Notes, and$150.0 million and $132.0 million, respectively, at December 31, 2001 and 2000for the Sponsor Notes. The decrease in fair value of the Senior Notes includesthe effect of the repurchase of approximately $39.0 million face value of theSenior Notes during the fourth quarter of 2001.  The increase in fair value of the Sponsor Notes includes theeffect of an increase in the outstanding deferred interest notes of $17.7 million during the year ended December31, 2001. The Company does not expect changes in fair value of the Senior Notesor the Sponsor Notes to have a significant effect on the Company’s operations,cash flow or financial position.

 

**ForeignCurrency Risk**

 

The Company’s international subsidiaries operatein approximately 12 countries and use the local currencies as the functionalcurrency and the U.S. dollar as the reporting currency. Transactions betweenthe 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 significantrisk due to a relatively limited number of transactions and operationsdenominated in foreign currency. Approximately $183 million or 36.4% of theCompany’s revenues are denominated in the international currencies. Transactiongains and losses on U.S. dollar denominated transactions are recorded withinsundry expenses in the consolidated statements of operations, and were notmaterial.

 

The Company may use foreign forward currencyexchange rate contracts to minimize the adverse earnings impact from the effectof exchange rate fluctuations. No hedging activities existed at year-end 2001.At year-end 2000, the Company had three yen-denominated forward currencyexchange contracts outstanding of $10.8 million to buy U.S. dollars for theCompany’s subsidiary in Japan’s anticipated intercompany payables’ settlementsin U.S. dollars. These contracts were settled in the fourth quarter of 2001.

 

18

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**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

 

**INDEPENDENT AUDITORS’ REPORT**

 

Tothe Board of Directors and Stockholders of BancTec, Inc.:

 

Wehave audited the accompanying consolidated balance sheet of BancTec, Inc. andsubsidiaries as of December 31, 2001, and the related consolidated statementsof operations, comprehensive loss, stockholders’ deficit and cash flows for theyear then ended. In connection with our audit of the consolidated financialstatements, we have also audited the accompanying financial statement scheduleas of December 31, 2001 and for the year then ended. These consolidatedfinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audit.

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of BancTec, Inc. andsubsidiaries as of December 31, 2001 and the results of their operations andtheir cash flows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America. Also, in ouropinion, the related financial statement schedule as of December 31, 2001 andfor the year then ended, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

**KPMG LLP**

 

Dallas,Texas

May15, 2002, except as to Note P, which is as of July 30, 2002

 

19

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**INDEPENDENT AUDITORS’ REPORT**

 

Tothe Board of Directors and Stockholders of BancTec, Inc.:

 

Wehave audited the accompanying consolidated balance sheet of BancTec, Inc. andsubsidiaries (the “Company”) as of December 31, 2000, and the relatedconsolidated statements of operations, comprehensive income (loss),stockholders’ equity (deficit) and cash flows for the year then ended. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

Inour opinion, such 2000 consolidated financial statements present fairly, in allmaterial respects, the financial position of BancTec, Inc. and subsidiaries atDecember 31, 2000 and the results of their operations and their cash flows forthe year then ended in conformity with accounting principles generally acceptedin the United States of America.

 

**DELOITTE & TOUCHE LLP**

 

Dallas,Texas

May15, 2001 (except with respect to the matters discussed in Note E, as to whichthe date is May 31, 2001)

 

20

 

**The followingauditors’ report is a copy of the report filed in a previous year and has notbeen reissued. This copy is provided in response to Financial Reporting Release62 “Temporary Final Rule and Final Rule: Requirements for Arthur Andersen LLPAuditing Clients” and has not been modified in any fashion from the latestsigned and dated auditors’ report issued by Arthur Andersen LLP and thereforerefers to financial statements not physically included in the document.**

** **

**Report of Independent Public Accountants**

 

Tothe Board of Directors and Stockholders of BancTec, Inc.:

 

Wehave audited the accompanying consolidated balance sheet of BancTec, Inc. (aDelaware corporation) and subsidiaries as of December 31, 1999 and the relatedconsolidated statements of operations, cash flows, stockholders’ equity(deficit) and comprehensive income (loss) for the two years in the period endedDecember 31, 1999. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basis forour opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of BancTec, Inc. and subsidiaries asof December 31, 1999, and the results of their operations and their cash flowsfor the two years in the period ended December 31, 1999, in conformity withaccounting principles generally accepted in the United States.

 

**ARTHUR ANDERSEN LLP**

 

Dallas,Texas

February16, 2000

 

21

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**BANCTEC, INC.**

**CONSOLIDATED BALANCE SHEETS**

**ASSETS**

(In thousands)

 
|                                                                                                          |   | **December 31,** |    |
|---------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
|                                                                                                          |   | **2001**         |    | **2000** |   |
| CURRENT ASSETS:                                                                                               |   |             |    |   |   |
| Cash and cash equivalents, including restricted cash  of $2,050 and $464 at December 31, 2001 and 2000        |   | $                | 28,577  |   | $ | 23,841 |   |
| Accounts receivable, less allowance for doubtful  accounts of $7,675 and $8,274 at December 31, 2001 and 2000 |   | 81,942           |    | 106,201 |   |
| Inventories, net                                                                                              |   | 51,712           |    | 83,824 |   |
| Prepaid expenses                                                                                              |   | 6,374            |    | 10,709 |   |
| Other current assets                                                                                          |   | 810              |    | 1,737 |   |
| Total current assets                                                                                          |   | 169,415          |    | 226,312 |   |
|                                                                                                          |   |             |    |   |   |
| PROPERTY, PLANT AND EQUIPMENT, AT COST:                                                                       |   |             |    |   |   |
| Land                                                                                                          |   | 2,860            |    | 2,860 |   |
| Field support spare parts                                                                                     |   | 78,055           |    | 96,473 |   |
| Systems and software                                                                                          |   | 64,294           |    | 64,686 |   |
| Machinery and equipment                                                                                       |   | 53,261           |    | 55,574 |   |
| Furniture, fixtures and other                                                                                 |   | 24,108           |    | 26,978 |   |
| Buildings                                                                                                     |   | 28,358           |    | 29,591 |   |
|                                                                                                          |   | 250,936          |    | 276,162 |   |
| Less accumulated depreciation and amortization                                                                |   | 174,723          |    | 174,677 |   |
| Property, plant and equipment, net                                                                            |   | 76,213           |    | 101,485 |   |
| GOODWILL, less accumulated amortization of $33,974 and  $30,953 at December 31, 2001 and 2000                 |   | 48,281           |    | 51,596 |   |
| OTHER ASSETS                                                                                                  |   | 21,140           |    | 20,359 |   |
| TOTAL ASSETS                                                                                                  |   | $                | 315,049 |   | $ | 399,752 |   |

 

Seenotes to consolidated financial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**LIABILITIES AND STOCKHOLDERS’ DEFICIT**

(In thousands, except share data)

 
|                                                                                                                                                  |   | **December 31,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
|                                                                                                                                                  |   | **2001**         |    | **2000** |   |
| CURRENT LIABILITIES:                                                                                                                                  |   |             |    |   |   |
| Revolving credit facilities                                                                                                                           |   | $                | 28,838  |   | $ | — |   |
| Trade accounts payable                                                                                                                                |   | 22,016           |    | 29,347 |   |
| Other accrued expenses and liabilities                                                                                                                |   | 62,147           |    | 66,635 |   |
| Deferred revenue                                                                                                                                      |   | 61,218           |    | 40,687 |   |
| Income taxes                                                                                                                                          |   | 4,166            |    | 4,925 |   |
| Total current liabilities                                                                                                                             |   | 178,385          |    | 141,594 |   |
| LONG-TERM DEBT, less current maturities                                                                                                               |   | 304,798          |    | 388,112 |   |
|                                                                                                                                                  |   |             |    |   |   |
| OTHER LIABILITIES                                                                                                                                     |   | 31,232           |    | 25,750 |   |
|                                                                                                                                                  |   |             |    |   |   |
| COMMITMENTS AND CONTINGENCIES (Note K)                                                                                                                |   |             |    |   |   |
|                                                                                                                                                  |   |             |    |   |   |
| MANDATORY REDEEMABLE PREFERRED STOCK                                                                                                                  |   | 13,151           |    | 11,638 |   |
|                                                                                                                                                  |   |             |    |   |   |
| STOCKHOLDERS’ DEFICIT:                                                                                                                           |   |             |    |   |   |
| Cumulative convertible preferred stock - authorized,  1,000,000 shares and zero shares of $0.01 par value at December 31, 2001 and  December 31, 2000 |   |             |    |   |   |
| Series B preferred stock - issued and outstanding,  35,520 shares and zero shares at December 31, 2001 and December 31, 2000                          |   | 6,532            |    | — |   |
| Common stock-authorized,  32,000,000 shares of $0.01 par value at December 31, 2001 and  2000:                                                   |   |             |    |   |   |
| Common stock-issued and outstanding 17,003,838 shares  at December 31, 2001 and 2000                                                                  |   | 170              |    | 170 |   |
| Class A common stock-issued and outstanding 1,181,946  shares at December 31, 2001 and 2000                                                           |   | 12               |    | 12 |   |
| Subscription stock warrants                                                                                                                           |   | 3,726            |    | 3,726 |   |
| Additional paid-in capital                                                                                                                            |   | 134,432          |    | 137,149 |   |
| Accumulated deficit                                                                                                                                   |   | (345,972         | )       | (300,146 | ) |
| Accumulated other comprehensive loss                                                                                                                  |   | (11,417          | )       | (8,253 | ) |
| Total stockholders’ deficit                                                                                                                      |   | (212,517         | )       | (167,342 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                      |   | $                | 315,049 |   | $ | 399,752 |   |

 

Seenotes to consolidated financial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                                                                        |   | **Years Ended December 31,** |    |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                        |   | **2001**                     |    | **2000** |   | **1999** |   |
|                                                                                                                        |   | **(In thousands)**           |    |
| REVENUE                                                                                                                     |   |                         |    |   |   |   |   |
| Equipment and software                                                                                                      |   | $                            | 234,570 |   | $ | 210,404 |   | $ | 274,989 |   |
| Maintenance and other services                                                                                              |   | 271,167                      |    | 277,303 |   | 259,601 |   |
|                                                                                                                        |   | 505,737                      |    | 487,707 |   | 534,590 |   |
| COST OF SALES                                                                                                               |   |                         |    |   |   |   |   |
| Equipment and software                                                                                                      |   | 192,105                      |    | 189,268 |   | 196,027 |   |
| Maintenance and other services                                                                                              |   | 230,250                      |    | 252,034 |   | 234,531 |   |
|                                                                                                                        |   | 422,355                      |    | 441,302 |   | 430,558 |   |
| Gross profit                                                                                                                |   | 83,382                       |    | 46,405 |   | 104,032 |   |
|                                                                                                                        |   |                         |    |   |   |   |   |
| OPERATING EXPENSES                                                                                                          |   |                         |    |   |   |   |   |
| Product development                                                                                                         |   | 17,744                       |    | 20,181 |   | 15,917 |   |
| Selling, general and administrative                                                                                         |   | 87,661                       |    | 90,441 |   | 96,146 |   |
| Goodwill amortization                                                                                                       |   | 3,215                        |    | 3,217 |   | 6,188 |   |
|                                                                                                                        |   | 108,620                      |    | 113,839 |   | 118,251 |   |
| Loss from operations                                                                                                        |   | (25,238                      | )       | (67,434 | ) | (14,219 | ) |
|                                                                                                                        |   |                         |    |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                                                                     |   |                         |    |   |   |   |   |
| Interest income                                                                                                             |   | 893                          |    | 814 |   | 546 |   |
| Interest expense                                                                                                            |   | (35,548                      | )       | (37,250 | ) | (22,685 | ) |
| Sundry, net                                                                                                                 |   | (627                         | )       | 678 |   | 516 |   |
|                                                                                                                        |   | (35,282                      | )       | (35,758 | ) | (21,623 | ) |
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                                         |   | (60,520                      | )       | (103,192 | ) | (35,842 | ) |
| INCOME TAX EXPENSE (BENEFIT)                                                                                                |   | 6,739                        |    | 39,378 |   | (13,262 | ) |
| LOSS FROM CONTINUING OPERATIONS                                                                                             |   | (67,259                      | )       | (142,570 | ) | (22,580 | ) |
| LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX EXPENSE  (BENEFIT) OF $0, $630 AND ($830) at DECEMBER 31, 2001, 2000 AND 1999 |   | (685                         | )       | (2,280 | ) | (1,415 | ) |
| GAIN ON DISPOSAL OF BUSINESS UNIT, NET OF TAX  PROVISION OF $7,516                                                          |   | —                       |    | — |   | 12,798 |   |
| LOSS BEFORE EXTRAORDINARY ITEMS                                                                                             |   | (67,944                      | )       | (144,850 | ) | (11,197 | ) |
|                                                                                                                        |   |                         |    |   |   |   |   |
| EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENTS OF DEBT                                                                       |   | 22,118                       |    | — |   | — |   |
| NET LOSS                                                                                                                    |   | $                            | (45,826 | ) | $ | (144,850 | ) | $ | (11,197 | ) |
|                                                                                                                        |   |                         |    |   |   |   |   |
| PREFERRED STOCK DIVIDENDS AND ACCRETION OF DISCOUNT                                                                         |   | (2,717                       | )       | (364 | ) | — |   |
|                                                                                                                        |   |                         |    |   |   |   |   |
| NET LOSS APPLICABLE TO COMMON STOCK                                                                                         |   | $                            | (48,543 | ) | $ | (145,214 | ) | $ | (11,197 | ) |

 

Seenotes to consolidated financial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                                          |   | **Years Ended December 31,** |    |
|---------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                          |   | **2001**                     |    | **2000** |   | **1999** |   |
|                                                                                                          |   | **(In thousands)**           |    |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                          |   |                         |    |   |   |   |   |
| Net loss from continuing operations                                                                           |   | $                            | (67,259 | ) | $ | (142,570 | ) | $ | (22,580 | ) |
| Adjustments to reconcile net loss from continuing  operations to cash flows provided by operating activities: |   |                         |    |   |   |   |   |
| Depreciation and amortization                                                                                 |   | 36,514                       |    | 45,327 |   | 43,341 |   |
| Provision for doubtful accounts                                                                               |   | 3,934                        |    | 2,631 |   | 10,914 |   |
| Interest paid in-kind                                                                                         |   | 14,264                       |    | 12,498 |   | — |   |
| Deferred income tax expense (benefit)                                                                         |   | 2,289                        |    | 33,560 |   | (17,913 | ) |
| Loss on disposition of property, plant and equipment                                                          |   | 2,009                        |    | 3,730 |   | 1,929 |   |
| Other non-cash items                                                                                          |   | 3,540                        |    | 384 |   | 2,323 |   |
| Changes in operating assets and liabilities                                                                   |   |                         |    |   |   |   |   |
| Decrease in accounts receivable                                                                               |   | 20,325                       |    | 34,913 |   | 13,995 |   |
| (Increase) decrease in inventories                                                                            |   | 31,286                       |    | (21,707 | ) | 1,041 |   |
| (Increase) decrease in other assets                                                                           |   | 6,182                        |    | (310 | ) | (9,014 | ) |
| Increase (decrease) in trade accounts payable                                                                 |   | (7,331                       | )       | 4,369 |   | 1,926 |   |
| Increase (decrease) in deferred revenue                                                                       |   | 20,531                       |    | (2,247 | ) | 2,254 |   |
| Increase (decrease) in other accrued expenses and  liabilities                                                |   | (450                         | )       | 33,921 |   | (8,739 | ) |
| Cash flows provided by operating activities                                                                   |   | 65,834                       |    | 4,499 |   | 19,477 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                          |   |                         |    |   |   |   |   |
| Purchases of property, plant and equipment                                                                    |   | (13,666                      | )       | (20,833 | ) | (45,880 | ) |
| Purchase of businesses, net of cash acquired                                                                  |   | —                       |    | — |   | (779 | ) |
| Proceeds from disposal of business unit                                                                       |   | —                       |    | — |   | 50,000 |   |
| Change in net assets of discontinued operations                                                               |   | —                       |    | — |   | 3,324 |   |
| Investment in unconsolidated subsidiary                                                                       |   | —                       |    | 1,189 |   | (2,375 | ) |
| Other                                                                                                         |   | —                       |    | 371 |   | — |   |
| Cash flows provided by (used in) investing activities                                                         |   | (13,666                      | )       | (19,273 | ) | 4,290 |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                          |   |                         |    |   |   |   |   |
| Payments of current maturities of long-term debt and  capital lease obligations                               |   | (2,500                       | )       | (354 | ) | (884 | ) |
| Proceeds from long-term borrowings                                                                            |   | 8,000                        |    | — |   | 228,851 |   |
| Payments on long-term borrowing                                                                               |   | (82,592                      | )       | — |   | (30,000 | ) |
| Proceeds from short-term borrowings, net                                                                      |   | 29,035                       |    | 6,590 |   | 5,584 |   |
| Repurchase of common stock                                                                                    |   | —                       |    | — |   | (370,497 | ) |
| Debt issuance costs                                                                                           |   | (2,358                       | )       | — |   | — |   |
| Net proceeds from sales and issuances of preferred  stock                                                     |   | 5,328                        |    | 15,000 |   | — |   |
| Net proceeds from sales and issuances of common stock                                                         |   | —                       |    | — |   | 138,316 |   |
| Other                                                                                                         |   | —                       |    | 333 |   | — |   |
| Cash flows provided by (used in) financing activities                                                         |   | (45,087                      | )       | 21,569 |   | (28,630 | ) |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                       |   | (2,345                       | )       | (3,246 | ) | (158 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                          |   | 4,736                        |    | 3,549 |   | (5,021 | ) |
| CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR                                                              |   | 23,841                       |    | 20,292 |   | 25,313 |   |
| CASH AND CASH EQUIVALENTS—END OF YEAR                                                                    |   | $                            | 28,577  |   | $ | 23,841 |   | $ | 20,292 |   |
| SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:                                                               |   |                         |    |   |   |   |   |
| DEFERRAL OF SPONSOR NOTES QUARTERLY INTEREST PAYMENTS                                                         |   | $                            | 17,735  |   | $ | 16,112 |   | $ | — |   |

 

Seenotes to consolidated financial statements.

 

25

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT**

# **For the yearsended December 31, 2001, 2000 and 1999**

**(In thousands, except share data)**

 
|                                                                |   |             |   |    |   |               |   | **Series**     |   |         |   |        |   |          |   | **Accumulated**   |   |        |   |      |     |
|---------------------------------------------------------------------|--------|------------------|--------|---------|--------|--------------------|--------|----------------|--------|--------------|--------|-------------|--------|---------------|--------|-------------------|--------|-------------|--------|-----------|----------|
|                                                                |   | **Common Stock** |   | **B**   |   | **Subscrip-**      |   | **Additional** |   | **Retained** |   | **Other**   |   | **Unearned**  |   |              |   |
|                                                                |   |             |   |    |   | **Class**          |   | **Pre-**       |   | **tion**     |   | **Paid in** |   | **Earnings**  |   | **Comprehensive** |   | **Compen-** |   |      |     |
|                                                                |   | **Old**          |   | **New** |   | **A**              |   | **ferred**     |   | **Warrants** |   | **Capital** |   | **(Deficit)** |   | **Loss**          |   | **sation**  |   | **Total** |     |
|                                                                |   |             |   |    |   |               |   |           |   |         |   |        |   |          |   |              |   |        |   |      |     |
| Balance at December 31, 1998                                        |   | $                | 194    |    | $      |  —  |   | $              | — |         | $      | —      |   | $             | — |              | $      | 170,318     |   | $         | 54,932   |   | $ | (3,736 | ) | $ | (1,627 | ) | $ | 220,081 |   |
| Net proceeds from common  stock issued pursuant to recapitalization |   | —      |   | 170     |   | 12                 |   | —         |   | —       |   | 137,180     |   | —        |   | —            |   | —      |   | 137,362   |     |
| Common stock issued  principally under employee stock plans         |   | 1                |   | —  |   | —             |   | —         |   | —       |   | 866         |   | —        |   | —            |   | —      |   | 867       |     |
| Common stock  issued/cancelled under restricted stock plan, net     |   | —           |   | —  |   | —             |   | —         |   | —       |   | 87          |   | —        |   | —            |   | (126        | )      | (39       | )        |
| Amortization of unearned  compensation                              |   | —           |   | —  |   | —             |   | —         |   | —       |   | —      |   | —        |   | —            |   | 1,753       |   | 1,753     |     |
| Repurchase of common stock                                          |   | (195             | )      | —  |   | —             |   | —         |   | —       |   | (171,271    | )      | (199,031      | )      | —            |   | —      |   | (370,497  | )        |
| Foreign currency translation  adjustments                           |   | —           |   | —  |   | —             |   | —         |   | —       |   | —      |   | —        |   | (68               | )      | —      |   | (68       | )        |
| Net loss                                                            |   | —           |   | —  |   | —             |   | —         |   | —       |   | —      |   | (11,197       | )      | —            |   | —      |   | (11,197   | )        |
| Balance at December 31, 1999                                        |   | $                | — |    | $      | 170                |   | $              | 12     |         | $      | —      |   | $             | — |              | $      | 137,180     |   | $         | (155,296 | ) | $ | (3,804 | ) | $ | — |   | $ | (21,738 | ) |
|                                                                |   |             |   |    |   |               |   |           |   |         |   |        |   |          |   |              |   |        |   |      |     |
| Subscription warrants                                               |   | —           |   | —  |   | —             |   | —         |   | 3,726        |   | —      |   | —        |   | —            |   | —      |   | 3,726     |     |
| Foreign currency translation  adjustments                           |   | —           |   | —  |   | —             |   | —         |   | —       |   | —      |   | —        |   | (4,449            | )      | —      |   | (4,449    | )        |
| Net loss                                                            |   | —           |   | —  |   | —             |   | —         |   | —       |   | —      |   | (144,850      | )      | —            |   | —      |   | (144,850  | )        |
| Other recapitalization  related costs                               |   | —           |   | —  |   | —             |   | —         |   | —       |   | 333         |   | —        |   | —            |   | —      |   | 333       |     |
| Series A preferred stock  dividends                                 |   | —           |   | —  |   | —             |   | —         |   | —       |   | (263        | )      | —        |   | —            |   | —      |   | (263      | )        |
| Accretion of discount                                               |   | —           |   | —  |   | —             |   | —         |   | —       |   | (101        | )      | —        |   | —            |   | —      |   | (101      | )        |
| Balance at December 31, 2000                                        |   | $                | — |    | $      | 170                |   | $              | 12     |         | $      | —      |   | $             | 3,726  |              | $      | 137,149     |   | $         | (300,146 | ) | $ | (8,253 | ) | $ | — |   | $ | (167,342 | ) |
|                                                                |   |             |   |    |   |               |   |           |   |         |   |        |   |          |   |              |   |        |   |      |     |
| Series B preferred stock  issuance                                  |   | —           |   | —  |   | —             |   | 5,328          |   | —       |   | —      |   | —        |   | —            |   | —      |   | 5,328     |     |
| Foreign currency translation  adjustments                           |   | —           |   | —  |   | —             |   | —         |   | —       |   | —      |   | —        |   | (1,934            | )      | —      |   | (1,934    | )        |
| Net loss                                                            |   | —           |   | —  |   | —             |   | —         |   | —       |   | —      |   | (45,826       | )      | —            |   | —      |   | (45,826   | )        |
| Minimum pension liability,  net of tax                              |   | —           |   | —  |   | —             |   | —         |   | —       |   | —      |   | —        |   | (1,230            | )      | —      |   | (1,230    | )        |
| Series A preferred stock  dividends                                 |   | —           |   | —  |   | —             |   | —         |   | —       |   | (1,100      | )      | —        |   | —            |   | —      |   | (1,100    | )        |
| Series B preferred stock  dividends                                 |   | —           |   | —  |   | —             |   | 1,204          |   | —       |   | (1,204      | )      | —        |   | —            |   | —      |   | —    |     |
| Accretion of discount                                               |   | —           |   | —  |   | —             |   | —         |   | —       |   | (413        | )      | —        |   | —            |   | —      |   | (413      | )        |
| Balance at December 31, 2001                                        |   | $                | — |    | $      | 170                |   | $              | 12     |         | $      | 6,532       |   | $             | 3,726  |              | $      | 134,432     |   | $         | (345,972 | ) | $ | (11,417 | ) | $ | — |   | $ | (212,517 | ) |

 

Seenotes to consolidated financial statements.

 

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**BANTEC, INC.**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS**

 
|                                     |   | **Years Ended December 31,** |    |
|------------------------------------------|--------|------------------------------|---------|
|                                     |   | **2001**                     |    | **2000** |   | **1999** |   |
|                                     |   | **(In thousands)**           |    |
| Net loss                                 |   | $                            | (45,826 | ) | $ | (144,850 | ) | $ | (11,197 | ) |
| Foreign currency translation adjustments |   | (1,934                       | )       | (4,449 | ) | (68 | ) |
| Minimum pension liability                |   | (1,230                       | )       | — |   | — |   |
| Total comprehensive loss                 |   | $                            | (48,990 | ) | $ | (149,299 | ) | $ | (11,265 | ) |

 

**See notes to consolidated financial statements.**

 

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**BANCTEC, INC.**

**NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS**

# **For the yearsended December 31, 2001, 2000, and 1999**

 

**NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**Description of Business**

 

BancTec,Inc., a Delaware corporation, and its subsidiaries (the “Company” or“BancTec”), is a worldwide systems integration and services company with a 29-year history in imaging technology, financial transaction processing andworkflow productivity improvement. Serving a variety of industries, includingbanking, financial services, insurance, healthcare, governmental agencies andothers, the Company offers a portfolio of payment and document processing systemsand services, workflow and image management software products, and computer andnetwork support services.  See Note Lfor further discussion of Company business structure.

 

**Principles of Consolidation**

 

Theconsolidated financial statements include the accounts of BancTec, Inc. and itswholly-owned subsidiaries. The Company accounts for investments in which itdoes not exercise control (generally ownership of 50% or less) under the equitymethod of accounting. At December 31, 2001, retained earnings included $2.4million of undistributed earnings for investments accounted for under theequity method.  During 2001, the Companyrecorded $0.3 million of earnings from these investments in the consolidatedstatement of operations. Intercompany accounts and transactions have beeneliminated in consolidation.

 

**Use of Estimates**

 

Thepreparation of the Company’s consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities and the reported amounts of revenues, costs and expenses during thereporting period. Actual results could differ from those estimates.

 

**Cash and Cash Equivalents andShort-Term Investments**

 

Cashand cash equivalents include cash on hand and on deposit, including highlyliquid investments with original maturities of three months or less. Short-terminvestments are similar instruments with original maturities in excess of threemonths and are valued at cost, which approximates market. Restrictedcash at December 31, 2001 of $2.0 million represents lockbox cash receipts tobe applied to the outstanding borrowings under the New Facility.

 

**Allowance for Doubtful Accounts**

 

The allowance fordoubtful accounts is an estimate prepared by management based on evaluation ofthe collectibility of specific accounts and the overall condition of thereceivable portfolios. The Company analyzes trade receivables, and analyzeshistorical bad debts, customer credits, customer concentrations, customercredit-worthiness, current economic trends and changes in customer paymentterms, when evaluating the adequacy of the allowance for doubtful accounts. Theallowance for doubtful accounts is reviewed periodically and adjustments arerecorded as deemed necessary.

 

**Inventories**

 

Inventories are valued at the lower of cost ormarket and include the cost of raw materials, labor, factory overhead and purchasedsubassemblies. Cost is determined using the first-in, first-out and weightedaverage methods. The Company periodically evaluates the carrying amountof inventory based on the identification of excess and obsolete inventory. TheCompany’s evaluation involves a multi-element approach incorporating inventoryturnover and the stratification of inventory by risk category, among otherelements.  The approach incorporatesboth recent historical information and management estimates of trends. TheCompany’s approach is intended to take into consideration potential excess andobsolescence caused by a decreasing installed base, engineering changes and endof manufacture.  If any of the elementsof the Company’s estimate were to deteriorate, additional write-downs may berequired. The inventory write-down calculations are reviewed periodically andadditional write-downs are recorded as deemed necessary.  Inventoryreserves as of December 31, 2001, 2000, and 1999 were $25.8 million, $26.7million, and $24.2 million, respectively. Inventory reserves establish a new cost basis for inventory and are notreversed in future periods.

 

28

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**Property, Plant, and Equipment**

Property,plant, and equipment are recorded at cost and are depreciated or amortizedprincipally on a straight-line basis over the estimated useful lives of therelated assets. Estimated useful lives range from three to five years for fieldsupport spare parts, three to eight years for systems and software, five toseven years for machinery and equipment, leasehold improvements, and furnitureand fixtures. Buildings are depreciated over 40 years. Depreciation expense forthe years ended December 31, 2001, 2000, and 1999 was $33.3 million, $42.1million, and $39.8 million, respectively.

 

**Intangible Assets**

 

Intangibleassets are amortized on a straight-line basis. Cost in excess of net assetsacquired (Goodwill) is amortized over five to 40 year periods. Other intangibleassets are amortized over three to five years.

 

Long lived assets and certain identifiableintangibles are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of anasset to future net operating cash flows expected to be generated by theasset.  If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the asset exceeds the fair value of the assets. Fairvalue estimates would be determined using a discounted cash flow approach andan interest rate estimated by management to be commensurate with the risksassociated with the future cash flows. Assets to be disposed of are recorded at the lower of the carryingamount or fair value less costs to sell. As of December 31, 2001, managementbelieves there is no impairment of its long-lived assets, including intangibles.  See “New Accounting Pronouncements” belowfor treatment of intangible assets beginning January 1, 2002.

 

Duringthe fourth quarter of 1999 the Company wrote down $2.1 million of goodwill, thecharges for which are included in goodwill amortization in the ConsolidatedStatements of Operations. The 1999 write-down was associated with the Company’ssubsidiary in the United Kingdom and was related to a product linediscontinuance.

 

**Derivative Financial Instruments**

 

Derivativefinancial instruments may be utilized by the Company to reduce interest rate orforeign currency exchange rate risks. The Company has established policies andprocedures for risk assessment and the approval, reporting and monitoring ofderivative financial instrument activities. The Company does not enter intofinancial instruments for trading or speculative purposes.

 

Priorto January 1, 2001, gains and losses on forward foreign exchange contracts usedto hedge the currency fluctuations on transactions denominated in foreigncurrencies and the offsetting losses and gains on hedged transactions arerecorded in Other Income (Expense) caption in the Consolidated Statement ofOperations. The Company entered into three yen-denominated foreign currencyforward contracts in August 2000. At December 31, 2000, an inception-to-dateunrealized gain has been recorded for $0.6 million in Sundry, net.

 

OnJanuary 1, 2001, the Company adopted Statement of Financial AccountingStandards No. 133 “Accounting for Derivatives Instruments and HedgingActivities” (“SFAS 133”), which requires that all derivatives be recognized asassets and liabilities on the balance sheet and measured at fair value. Thecorresponding derivative gains or losses are reported based on the hedgerelationship that exists. Changes in fair value of derivative instruments thatare not designated as hedges or that do not meet the hedge accounting criteriain SFAS 133 are required to be reported in earnings. At the time of adoption ofSFAS No. 133, the Company determined that the derivative did not qualify as ahedge and marked the contracts to market, reflecting the changes in thestatement of operations in Sundry, net. The Company recognized an immaterialtransition adjustment at adoption.  Inthe fourth quarter of 2001, the Company settled all remaining yen-denominatedforeign currency forward contracts. The Company realized a gain ofapproximately $1.7 million in Sundry, net from the three yen-denominatedforeign currency forward contracts, having recognized $1.1 million and $0.6million, respectively, for the years ended December 31, 2001 and 2000.  At December 31, 2001, the Company was not aparty to any derivative financial instruments.

 

**Revenue Recognition**

 

The Company derives revenue from primarily two sources- 1) productsales- systems integration solutions which address complex data andpaper-intensive work processes, including advanced web-enabled imaging andworkflow technologies with both BancTec-manufactured  equipment and third party equipment,  and 2) services- which consist primarily of application design, developmentand maintenance, all aspects of desktop outsourcing, including fieldengineering, as well as help desk and LAN/WAN network outsourcing.

 

The Company applies the provisions of Statement of Position 97-2,“Software Revenue Recognition,” as amended by Statement of Position 98-9“Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain

 

29

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Transactions” to all transactions involving the sale of softwareproducts and sales of hardware where the software is not incidental. For thosetransactions that involve acceptance certificates, the Company recognizesrevenue upon receipt of the acceptance certificate, or when it can beobjectively demonstrated that acceptance criteria have been met.  For hardware transactions where software isconsidered incidental, or no software is included, revenue is recognized whenthe product has been delivered and all obligations have been fulfilled.

 

TheCompany recognizes revenue from sales of equipment and supplies upon deliveryand transfer of title or upon customer acceptance.

 

Maintenancecontracts are primarily one year in duration and the revenue generated isrecognized ratably over the term of the contract.

 

The Company recognizes hardware and software revenue when persuasiveevidence of an arrangement exists, delivery has occurred, the sales price isfixed or determinable and collectibility is probable. At the time of thetransaction, the Company determines whether the fee associated with revenuetransactions is fixed or determinable and whether or not collection isreasonably assured. The Company determines whether the fee is fixed ordeterminable based on the payment terms associated with the transaction. If asignificant portion of a fee is due after the normal payment terms, which aregenerally 30 days from invoice date, the Company recognizes revenue as the feesbecome due. The Company assesses collectibility based on a number of factors,including past transaction history with the customer and the credit-worthinessof the customer. The Company does not request collateral from customers. If theCompany determines that collection of the fee is not reasonably assured, theCompany defers the revenue and recognizes revenue at the time collection becomesreasonably assured, which is generally upon receipt of cash. For all sales, theCompany generally uses either a binding purchase order or signed salesagreement as evidence of an arrangement.

 

The Company’s services revenue is primarily billed based on contractualrates and terms, and the Company generally recognizes revenue as these servicesare performed which, in some cases is ratably over the contract term. Certain customers advance funds prior to theperformance of the services. The Company recognizes revenue related tothese advances as services are performed on a “per call” basis.

 

**Research and Development**

 

Researchand development costs are expensed as incurred. Research and development costsfor the year ended December 31, 2001 were $10.1 million.

 

**Income Taxes**

 

The Company and its domestic subsidiaries file a consolidated Federal income tax return. The Company’s foreign subsidiaries file separate income tax returns in the countries in which their operations are based.

 

Incometaxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards. TheCompany records valuation allowances related to its deferred income tax assetswhen, in the opinion of management, it is more likely than not that someportion or all of the deferred income tax assets will not be realized. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

**Foreign Currency Translation**

 

Foreignassets and liabilities are translated using the exchange rate in effect at thebalance sheet date, and results of operations are translated using an averagerate for the period. Translation adjustments are accumulated and reported as acomponent of stockholders’ deficit and comprehensive income. Transaction gainsand losses are included in results of operations in “Sundry, net”. Foreigncurrency transaction losses for the years ended December 31, 2001, 2000, and1999 were $0.6 million, $1.1 million, and $0.4 million, respectively.

 

**Concentration of Risk**

 

Financialinstruments which potentially subject the Company to concentrations of creditrisk consist principally of trade receivables. Concentrations of credit riskfor these instruments are limited due to the large number of customerscomprising the Company’s customer base, and their dispersion across differentgeographic areas.

 

TheCompany sells its products to customers under specified credit terms in thenormal course of business. These customers’

 

30

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businessescan generally be classified as banking, personal computer manufacturers,financial services, insurance, healthcare, government agencies, utilities andtelecommunications. During 2001, the Company derived 12.2% of revenues from asingle customer. The loss of this customer could have a material adverse effecton the Company. The customer currently advances funds prior to the performanceof the services they relate to and management does not currently consider thecustomer to be a credit risk.  The Companydid not derive 10% or more of revenue from a single customer during 2000 or1999.  Due to the diversity of theCompany’s customers, management does not consider there to be a concentrationof risk within any single classification. However, general economic conditionsthat cause customers in such industries to reduce or delay their investments inproducts and solutions such as those offered by the Company could have amaterial adverse effect on the Company.

 

TheCompany’s hardware and systems solutions are assembled using various purchased componentssuch as PC monitors, minicomputers, encoders, communications equipment andother electronic devices. Certain products are purchased from sole sourcesuppliers. The Company generally has contracts with these suppliers that arerenewed periodically. The Company has not experienced, nor does it foresee, anysignificant difficulty in obtaining necessary components or subassemblies;however, if the supply of certain components or subassemblies was interruptedwithout sufficient notice, the result could be an interruption of productdeliveries.

 

**Fair Value of Financial Instruments**

 

Thefollowing estimated fair values of financial instruments have been determinedby the Company using available market information and valuation methodologies:

 

Cashand short term investments: Carrying amount approximates fair value due to theshort term nature of the instruments.

 

Shortterm borrowings: Carrying amount approximates fair value due to the short termnature of the instruments.

 

Seniornotes: The Company estimated fair value using a discount rate of 14% based on asurvey of similar high yield instruments.

 

Sponsornotes: The Company estimated fair value using a discount rate of 15% based onthe Sponsor Notes junior position to the Company’s Senior Notes.

 

Theestimated fair values of the Company’s financial instruments at December 31 areas follows: 

 
|                                 |   | **2001**             |   | **2000**        |   |
|--------------------------------------|--------|----------------------|--------|-----------------|--------|
|                                 |   | **(in thousands)**   |   |
|                                 |   | **Carrying  Amount** |   | **Fair  Value** |   | **Carrying  Amount** |   | **Fair  Value** |   |
| Cash and short term  investments     |   | $                    | 28,577 |            | $      | 28,577 |   | $ | 23,841 |   | $ | 23,841 |   |
| Foreign currency contracts           |   | —               |   | —          |   | — |   | 10,192 |   |
| Term loan                            |   | —               |   | —          |   | 45,000 |   | 45,000 |   |
| Short term borrowings                |   | 28,838               |   | 28,838          |   | — |   | — |   |
| Revolver loan                        |   | —               |   | —          |   | 17,000 |   | 17,000 |   |
| Senior Notes                         |   | 110,950              |   | 81,000          |   | 150,000 |   | 105,000 |   |
| Sponsor Notes                        |   | 193,848              |   | 150,000         |   | 176,112 |   | 132,000 |   |
| Mandatory redeemable preferred stock |   | 13,151               |   | 13,151          |   | 11,638 |   | 11,638 |   |
|                                      |        |                      |        |                 |        |  |  |  |  |  |  |  |  |

** **

**Stock-Based Compensation**

 

TheCompany accounts for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board (“APB No. 25”), Accounting for StockIssued to Employees. The Company has adopted the disclosure requirements ofStatement of Financial Accounting Standards (“SFAS No. 123”), Accounting forStock-Based Compensation.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2001, the FASB issued SFAS No. 141,“Business Combinations”, (“SFAS No. 141”) and SFAS No. 142, “Goodwill and OtherIntangible Assets” (“SFAS No. 142”). SFAS No. 141 requires that the purchasemethod of accounting be used for all business combinations. SFAS No. 141specifies criteria that intangible assets acquired in a business combinationmust meet to be recognized and reported separately from goodwill. SFAS No. 142will require that goodwill and intangible assets with indefinite useful lives nolonger be amortized, but instead tested for impairment at least annually inaccordance with the

 

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provisions of SFAS No. 142. SFAS No. 142 alsorequires that intangible assets with estimable useful lives be amortized overtheir respective estimated useful lives to their estimated residual values, andreviewed for impairment periodically.

 

The Company adopted the provisions of SFAS No.141 as of July 1, 2001, and SFAS No. 142 is effective January 1, 2002.  Goodwill and intangible assets determined tohave an indefinite useful life acquired in a purchase business combinationcompleted after June 30, 2001, but before SFAS No. 142 is adopted in full, arenot amortized. Goodwill and intangible assets acquired in business combinationscompleted before July 1, 2001 continued to be amortized and tested forimpairment prior to the full adoption of SFAS No. 142.  The impact of adopting SFAS No. 141 had noimpact on the consolidated financial statements.

 

Upon adoption of SFAS No. 142, the Company isrequired to evaluate its existing intangible assets and goodwill that wereacquired in purchase business combinations, and to make any necessaryreclassifications in order to conform with the new classification criteria inSFAS No. 141 for recognition separate from goodwill.  The Company will be required to reassess the useful lives andresidual values of all intangible assets acquired, and make any necessaryamortization period adjustments by the end of the first interim period afteradoption.  If an intangible asset isidentified as having an indefinite useful life, the Company will be required totest the intangible asset for impairment in accordance with the provisions ofSFAS No. 142 within the first interim period. Impairment is measured as theexcess of carrying value over the fair value of an intangible asset with anindefinite life.  Any impairment losswill be measured as of the date of adoption and recognized as a cumulativeeffect of a change in accounting principle in the first interim period of 2002.The Company is currently evaluating whether impairment exists under theprovisions of SFAS No. 142.

 

In August 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.” SFAS No. 143 requires entities to record the fairvalue of a liability for an asset retirement obligation in the period in whichit is incurred. The Company will adopt SFAS No. 143 on January 1, 2003. TheCompany has not determined the impact of the provisions of SFAS No. 143 on itsfinancial condition or results of operations.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of.” The Company will adopt SFAS No. 144 on January 1, 2002. TheCompany has not determined the impact of the provisions of SFAS No. 144 on itsfinancial condition or results of operations.

 

InMay 2002, the FASB issued SFAS No. 145 , “Rescission of SFAS Nos. 4,44, and 64, Amendment of SFAS No. 13, and Technical Corrections” . Amongother things, SFAS 145 rescinds various pronouncements regarding earlyextinguishment of debt and allows extraordinary accounting treatment for earlyextinguishment only when the provisions of Accounting Principles Board OpinionNo. 30, “Reporting the Results of Operations—Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transaction”, are met. The Company adoptedthe provisions of SFAS 145 regarding early extinguishment of debt duringthe second quarter of 2002. 

 

In July 2002, the FASB issued SFAS No. 146,"Accounting for Exit or Disposal Activities".  SFAS 146 will be effective for the Companyfor disposal activities initiated after December 31, 2002. The Company is inthe process of evaluating the effect that adopting SFAS 146 will have on itsfinancial statements.

 

**Reclassification**

 

Certainamounts have been reclassified from the prior years to conform to the currentyear presentation.

 

**NOTE B - RECAPITALIZATION**

 

InJuly 1999, BancTec entered into a recapitalization transaction. Welsh, Carson,Anderson & Stowe, (“WCAS”), a private investment partnership and ConvergentEquity Partners, L.P., (“Convergent”), formed Colonial Acquisition Corp.,(“Colonial”) with WCAS owning 93.5% and Convergent owning 6.5%. Through themerger of Colonial into BancTec, WCAS acquired 17,003,838 shares of BancTec’scommon stock and Convergent acquired 1,181,946 shares of BancTec’s Class Acommon stock. In connection with the recapitalization, each previouslyoutstanding share of BancTec common stock was converted into the right toreceive $18.50 in cash, totaling approximately $360.2 million, andsimultaneously canceled. Funding for the distribution to the former BancTecshareholders was provided by a $145.0 million capital contribution from WCASand Convergent, by the Tranche A Term Loan, the Sponsor Notes, and theRevolving Credit Facility discussed in Note F to the Consolidated FinancialStatements. In addition to the funds that were paid for the shares, cashpayments were made for employee stock options of $9.3 million and an employeestock purchase plan of $0.3 million. The options and the employee stockpurchase plan payments were recorded as a reduction to stockholders’ equity.

 

Holdersof both common stock and Class A common stock are entitled to one vote pershare. The Class A holder is entitled to one seat on the Company’s Board ofDirectors.

 

Underthe terms of the merger agreement, a rabbi trust in the approximate amount of$5.5 million was established for potential senior management separation payoutspursuant to related employment agreements. As of December 31, 2001, paymentsunder the plan are complete. The balance of the accrual at December 31, 2000and 1999 was approximately $0.5 million and $2.5 million, respectively. Fees of$17.8 million were paid in conjunction with the recapitalization transaction.Of this amount, $11.4 million was allocated to the capital portion of thetransaction and reflected as a reduction to stockholders’ equity, and $6.2million was allocated to the Company’s new debt instruments to be amortizedover their respective lives. Included in the above-referenced fees werepayments to WCAS in the amount of $5.8 million and to Convergent in the amountof $0.2 million.

 

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**NOTE C - DISCONTINUED OPERATIONS,RESTRUCTURING AND IMPAIRMENT**

 

*Discontinued Operations.*  In 1999,BancTec completed the sale of substantially all of the net assets of itscommunity banking business to Jack Henry and Associates (“JHA”). The Companyreceived proceeds of $50.0 million in cash from the sale and recorded a pre-taxgain of approximately $20.3 million. During 2001 and 2000, an additional $0.7million and $1.7 million, respectively, was accrued representing changes inestimate for additional expenses related to the Company’s obligation tocomplete certain development activities. For financial statement purposes, the Company treated the sale as adiscontinued operation, and accordingly, financial statement presentation wasmade in accordance with APB Opinion No. 30, “Reporting the Results ofOperations - Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions”.Revenues in 1999 from the community banking business were $20.7 million.

 

*Restructuring*.  As apart of the Company’s focus on cost efficiency, management has targeted andaccrued for ongoing staff reductions. Severance charges are included in the Cost of sales, Selling, generaland administrative and Product development expense line items in theaccompanying Consolidated Statements of Operations.  At December 31, 2000, the Company’s balance sheet accrual forseverance was approximately $1.9 million. During 2001, the Company recorded additional accruals of approximately$7.7 million and recorded payments of approximately $5.1 million against theseaccruals, resulting in a liability balance of $4.5 million at December 31,2001.  The additional accrualscontemplated the termination of approximately 500 employees.  Approximately 300 employees had beenterminated as of December 31, 2001, including employees in production, productdevelopment, sales and marketing and other administrative functions.

 

*Impairment.***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. During the fourth quarter of 2001, the Company determined that long-lived tangible assets totaling approximately $4.1 million were impaired. Impairment charges are included in Cost of sales, Selling, general and administrative and Product development expenses in the Company’s Consolidated Statements of Operations.  The impairments included approximately $1.9 million for capitalized spare parts, which were determined to be obsolete, and approximately $2.2 million for property, plant and equipment (of which $1.5 million was from vacating an owned facility currently being offered for sale).

 

**NOTE D—INVENTORIES**

 

Inventoryconsists of the following: 

 

|             |   | **2001**           |   | **2000** |   |
|------------------|--------|--------------------|--------|----------|--------|
|             |   | **(In thousands)** |   |
|             |   |               |   |     |   |
| Raw materials    |   | $                  | 9,053  |     | $      | 10,264 |   |
| Work-in-progress |   | 22,090             |   | 34,507   |   |
| Finished goods   |   | 20,569             |   | 39,053   |   |
|             |   | $                  | 51,712 |     | $      | 83,824 |   |

 

33

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**NOTE E—DEBT AND OTHER OBLIGATIONS**

 

Debtand other obligations consist of the following: 

 

|                                            |   | **December 31,**   |    |
|-------------------------------------------------|--------|--------------------|---------|
|                                            |   | **2001**           |    | **2000** |   |
|                                            |   | **(in thousands)** |    |
|                                            |   |               |    |   |   |
| 7.5% Senior Notes, due 2008                     |   | $                  | 110,950 |   | $ | 150,000 |   |
| New Facility                                    |   | 25,040             |    | — |   |
| Tranche A Term Loan, due 2004                   |   | —             |    | 45,000 |   |
| Revolving Credit Facility                       |   | —             |    | 17,000 |   |
| Subordinated Sponsor Notes, unsecured, due 2009 |   | 193,848            |    | 176,112 |   |
| Other                                           |   | 3,798              |    | — |   |
|                                            |   | 333,636            |    | 388,112 |   |
| Less:  Current  portion                    |   | (28,838            | )       | — |   |
|                                            |   | $                  | 304,798 |   | $ | 388,112 |   |

 

New Credit Facility.  On May 31, 2001, the Company replaced itsexisting bank debt facilities (which included the Tranche A Term Loan and $50.0million Revolving Credit Facility) provided by a syndicate of lenders led byThe Chase Manhattan Bank with a $100.0 million revolving credit facility (the“New Facility”) provided by Heller Financial, Inc. (“Heller”), which willmature on May 30, 2006. On November 8, 2001, the Company and Heller enteredinto an amendment to the New Facility which reduced the committed amount to$60.0 million while the sub-limit related to letter of credit availability wasincreased from $5.0 million to $20.0 million..

 

The New Facility is secured by substantially all the assets of theCompany, subject to the limitations on liens contained in the Company’sexisting Senior Notes. Funds availability under the New Facility is determinedby a borrowing base formula equal to a specified percentage of the value of theCompany’s eligible accounts receivable, inventory and real estate.  The Company had an outstanding balance onletters of credit totaling $0.2 million at December 31, 2001.  At December 31, 2001, the Company’sborrowing base was approximately $45.0 million, of which $25.0 million had beenutilized.

 

The interest rate on loans under the New Facility is, at the Company’soption, either (i) 1.25% over prime or (ii) 2.75% over LIBOR.  At December 31, 2001, the Company’s weightedaverage rate on the New Facility was 4.9%. Beginning August 1, 2002, theinterest rate margins over prime and LIBOR may be increased by 0.25% incrementswhen available borrowing capacity falls below (1) $17.5 million and (2) $12.5million (total rate increase of 0.5%) or decreased by 0.25% increments whenavailable borrowing capacity exceeds (1) $22.5 million and (2) $27.5 million(total rate decrease of 0.5%). A commitment fee of 0.5% per annum on the unusedportion of the New Facility is payable quarterly.

 

Under the New Facility, substantially all of the Company’s domesticcash receipts (including proceeds from accounts receivable and asset sales)must be applied to repay the outstanding loans (thereby restricting the use ofcash for dividend payments or non-scheduled principal payments on otherindebtedness), which may be re-borrowed subject to availability in accordancewith the borrowing base formula. Restricted cash at December 31, 2001 of $2.0 million represents lockboxcash receipts to be applied to the outstanding borrowings under the NewFacility.

 

The New Facility contains various representations, warranties andcovenants, including financial covenants as to maximum capital expenditures,minimum fixed charge coverage ratio and minimum average borrowing availability.At December 31, 2001, the Company was in compliance with all covenants underthe New Facility.

 

Senior Notes.  Interest on the Senior Notes is fixed at7.5% and is due and payable in semi-annual installments. Payments beganDecember 1, 1998. The Notes contain covenants placing limitations on theCompany’s ability to permit subsidiaries to incur certain debts, incur certainloans, and engage in certain sale and leaseback transactions. As of December31, 2001, the Company is in compliance with all covenants. During the fourth quarter of 2001, the Companyrepurchased Senior Notes with a face amount of $39.0 million. The Company wroteoff a proportionate share of deferred financing fees, totaling approximately$0.2 million, resulting in an extraordinary gain of approximately $23.9 million.

 

Term Loan. In the fourth quarter of1999, the Company used $30.0 million of the proceeds from the sale of itscommunity banking business to pay down the Term Loan to $45.0 million. Aspermitted under the terms of the agreements, BancTec exercised its option todefer quarterly principal payments until March 30, 2001; thus a portion of the$30.0 million pay down

 

34

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in 1999 was used to cover the third and fourth quarter paymentsoriginally scheduled for payment in 2000. The Company paid the $2.5 millionquarterly payment in full on its March 2001 due date. The Term Loan, due June2004, was payable in fourteen consecutive quarterly installments. Effective withthe execution of the first amendment to the credit agreements, interest ratesincreased at the beginning of 2000. Interest under these agreements, at theCompany’s option, was LIBOR plus 3.25%, or prime plus 2.25%. Collateral forthese credit facilities included all tangible and intangible assets of theCompany, subject to certain limitations contained in the Senior Notesagreements.  On May 31, 2001, theCompany paid off the outstanding balance of the Term Loan with proceeds fromthe New Facility.

 

Revolver. Prior to May 31, 2001, theCompany had a $50.0 million Revolver under which maximum borrowings allowed,including letters of credit, was $43.6 million.  Interest under the Revolver, at the Company’s option, was LIBORplus 3.25%, or prime plus 2.25%. A commitment fee of 0.5% on the unused portionof the Revolver was payable quarterly. On May 31, 2001, the Company paid offthe $25.0 million of borrowings then outstanding under the Revolver withproceeds from the New Facility.  Inconnection with the pay-off of the Term Loan and Revolver on May 31, 2001, theCompany recorded an extraordinary loss of $1.8 million, as a result of thewrite-off of unamortized deferred financing costs.

 

Subordinated Unsecured Sponsor Notes.The Company’s $160.0 million in Sponsor Notes are issued in U.S. dollars, withinterest at 10.0% due and payable quarterly. The payments began September 30,1999. However, as provided under the agreement, the Sponsor Notes’ holder,WCAS, elected to defer quarterly interest payments of $4.0 million for each ofthe June 2000 through September 2001 quarterly periods. Such election requireda deferred financing fee of 30.0% of each of the interest payments beingdeferred.  The Company accounts for theadditional financing fees as a change in the effective interest rate of thedebt.  For the years ended December 31,2001 and 2000, the Company increased the outstanding deferred interest notes by$17.7 million and $16.1 million, respectively.   These increases were comprised of the $4.0 million quarterlydeferrals, plus financing fees and interest thereon. At December 31, 2001, theCompany had $33.8 million outstanding in WCAS notes representing deferredinterest. WCAS may, at its election, defer each future quarterly payment undersimilar terms.  WCAS did not elect todefer the December 2001 quarterly payment.

 

The outstanding balance on foreign creditagreements as of December 31, 2001 was $3.8 million, payable in Japanese yen.The terms on the agreements ranged from 30 to 60 days at interest rates up to1.4%. The Company had no outstanding foreign credit balances as of December 31,2000.

 

Asof December 31, 2001, the future maturities of debt are as follows:

 

| **Year**   |   | **(In thousands)** |    |
|------------|--------|--------------------|---------|
| 2002       |   | $                  | 28,838  |   |
| 2003       |   | —             |    |
| 2004       |   | —             |    |
| 2005       |   | —             |    |
| 2006       |   | —             |    |
| Thereafter |   | 304,798            |    |
|       |   | $                  | 333,636 |   |

 

TheCompany paid cash totaling $15.9 million, $22.4 million, and $21.2 million, forinterest during the twelve months ended December 31, 2001, 2000, and 1999,respectively. During the years ended December 31, 2001, 2000 and 1999, theCompany capitalized no interest costs.

 

The Company has not beenin compliance with the reporting requirements of the New Facility and theSenior Notes for the year ended December 31, 2001. Heller has agreed to waivethis non-compliance upon the Company’s delivery of the financial statements inthis Form 10-K.  Delivery of thefinancial statements in this Form 10-K and the financial statements in theCompany’s Form 10-Q for the first fiscal quarter of 2002 will remedy thisnon-compliance condition of the Senior Notes.

 

**NOTE F— PREFERRED STOCK**

 

**REDEEMABLE PREFERRED STOCK**

 

Inconsideration for amending the Company’s credit agreements with its Lenders, inSeptember 2000, the Company issued 100,000 shares of $0.01 par value Series APreferred Stock to WCAS, its primary owners. In exchange, WCAS contributed

 

35

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anadditional $15.0 million in cash to the Company. Dividends on the Series APreferred accrue quarterly at an annual dividend rate of 7.0% of the thenStated Value. The Stated Value equals $150.00 per share, plus accumulated andunpaid dividends. Dividends are paid when declared by the Company’s Board ofDirectors. The aggregate liquidation preference/redemption value is $15.0million, plus accumulated and unpaid dividends. The Company shall redeem all ofthe outstanding shares of Series A preferred stock on September 22, 2008 or atan earlier date upon the occurrence of certain other events, as defined in theCertificate of Designations, Preferences and Rights of Series A and B PreferredStock. The Company has the option toredeem the Series A Preferred at any time by paying for each share the StatedValue per share as of the redemption date. Each share of Series A Preferredincludes 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 sharesand may be exercised at any time from the date of purchase to September 22,2008.

 

The Company allocated the proceeds from theSeries A preferred stock issuance based upon the relative fair value of thepreferred stock and warrants which resulted in recording mandatory redeemablepreferred stock of $11.3 million and warrants of $3.7 million. The relateddiscount is being accreted such that the carrying amount of the mandatoryredeemable preferred stock will equal the mandatory redemption amount atSeptember 22, 2008. For the years ended December 31, 2001 and 2000, accretionof the related discount and accrued but unpaid dividends totaled $1.5 millionand $0.4 million, respectively, increasing the carrying amount to $13.1 millionand $11.6 million, respectively. As of December 31, 2001, the stated value ofthe Series A Preferred, including accumulated but unpaid dividends, was $163.63.

 

**SERIES BPREFERRED STOCK**

 

In February 2001, theCompany issued 35,520 shares of  $0.01par value Series B Preferred Stock (“Series B Preferred”) to its primaryowners, WCAS. In exchange, WCAS contributed an additional $5.3 million in cashto the Company. Dividends on the Series BPreferred accrue quarterly at an annual dividend rate of 25.0% of thethen “Stated Value.” The Stated Value equals $150.00 per share, plusaccumulated and unpaid dividends. Dividends are paid when declared by theCompany’s Board of Directors. The aggregate liquidation preference/redemptionvalue at December 31, 2001, is $6.5 million, including accumulated and unpaiddividends. The Company has the right to redeem the Series B Preferred at anytime by paying for each share the StatedValue per share as of the redemption date. In addition, upon theoccurrence of certain events, as defined inthe Certificate of Designations, Preferences and Rights of Series A and BPreferred Stock, and upon the approval of a majority of the holders ofthe Series B Preferred, the Company would be required to redeem the shares.Each share of Series B Preferred is convertible into shares of Common Stock atany time. The number of shares of Common Stock is determined by multiplying thenumber of shares being converted by $150.00 and dividing the result by $8.325per share. The conversion rate is subject to various adjustments (including, other than in cases to protectagainst dilution, those related to the additional consideration, if any,payable upon the conversion or exchange of any Convertible Securities, orchanges to the rate at which any Convertible Securities are convertible into orexchangeable for Common Stock). The Company is required to keep available approximately 640,000 commonshares for issuance upon conversion of all outstanding shares of Series BPreferred.

 

For the year ended December 31, 2001, accrued butunpaid dividends totaled $1.2 million. As of December 31, 2001, the stated value of the Series B Preferred,including accumulated but unpaid dividends, was $183.89.

 

**NOTE G—OTHER ACCRUED EXPENSES ANDLIABILITIES**

 

Otheraccrued expenses and liabilities consist of the following:

 

|                                   |   | **December 31,**   |   |
|----------------------------------------|--------|--------------------|--------|
|                                   |   | **2001**           |   | **2000** |   |
|                                   |   | **(In thousands)** |   |
| Salaries, wages and other compensation |   | $                  | 17,602 |   | $ | 18,976 |   |
| Accrued taxes, other than income taxes |   | 8,446              |   | 7,795 |   |
| Advances from customers                |   | 1,859              |   | 12,043 |   |
| Accrued interest payable               |   | 5,939              |   | 1,128 |   |
| Accrued invoices and costs             |   | 5,534              |   | 5,812 |   |
| Other                                  |   | 22,767             |   | 20,881 |   |
| Total                                  |   | $                  | 62,147 |   | $ | 66,635 |   |

 

36

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**NOTE H—TAXES**

 

Theincome tax expense (benefit) consists of the following:

 
|           |   | **Years Ended December 31,** |   |
|----------------|--------|------------------------------|--------|
|           |   | **2001**                     |   | **2000** |   | **1999** |   |
|           |   | **(In thousands)**           |   |
| Current:       |   |                         |   |   |   |   |   |
| Federal        |   | $                            | — |   | $ | — |   | $ | 3,205 |   |
| State          |   | —                       |   | — |   | 231 |   |
| Foreign        |   | 4,450                        |   | 6,448 |   | 7,901 |   |
| Total current  |   | 4,450                        |   | 6,448 |   | 11,337 |   |
| Deferred:      |   |                         |   |   |   |   |   |
| Federal        |   | —                       |   | 33,041 |   | (15,744 | ) |
| Foreign        |   | 2,289                        |   | 519 |   | (2,169 | ) |
| Total deferred |   | 2,289                        |   | 33,560 |   | (17,913 | ) |
|           |   | $                            | 6,739  |   | $ | 40,008 |   | $ | (6,576 | ) |

 

Thedifference between the income tax provision computed at the statutory federalincome tax rate and the financial statement provision for taxes is summarizedas follows: 

 
|                                                               |   | **Years Ended December 31,** |    |
|--------------------------------------------------------------------|--------|------------------------------|---------|
|                                                               |   | **2001**                     |    | **2000** |   | **1999** |   |
|                                                               |   | **(In thousands)**           |    |
| Provision (benefit) at U.S. statutory rate of 35% for  all periods |   | $                            | (13,680 | ) | $ | (36,695 | ) | $ | (6,221 | ) |
| Increase in tax expense resulting from:                            |   |                         |    |   |   |   |   |
| Impact of foreign and Puerto Rico income tax rates                 |   | 1,735                        |    | 2,019 |   | 1,310 |   |
| State income tax, net of federal income tax benefit                |   | —                       |    | — |   | 150 |   |
| Expiration of net operating losses                                 |   | 400                          |    | — |   | — |   |
| Foreign losses not providing a current benefit                     |   | —                       |    | — |   | — |   |
| Goodwill amortization                                              |   | 774                          |    | 962 |   | 7,481 |   |
| Change in valuation allowance                                      |   | 17,799                       |    | 78,604 |   | (8,103 | ) |
| Other                                                              |   | (289                         | )  | (4,882 | ) | (1,193 | ) |
|                                                               |   | $                            | 6,739   |   | $ | 40,008 |   | $ | (6,576 | ) |

 

TheCompany paid cash totaling $5.3 million, $7.6 million, and $14.6 million, forincome taxes during the years ended December 31, 2001, 2000 and 1999,respectively.

 

37

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Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and liabilities at December 31, 2001 and 2000 arepresented below (dollars in thousands): 

 
|                                  |   | **December 31,**   |   |
|---------------------------------------|--------|--------------------|--------|
|                                  |   | **2001**           |   | **2000** |   |
|                                  |   | **(In thousands)** |   |
| Gross deferred tax assets:            |   |               |   |   |   |
| Net operating losses                  |   | $                  | 75,903 |   | $ | 58,181 |   |
| Inventory reserves                    |   | 9,493              |   | 8,213 |   |
| Receivable allowance                  |   | 3,041              |   | 1,281 |   |
| Intangible assets previously deducted |   | 2,213              |   | 2,102 |   |
| Deferred revenues                     |   | 2,177              |   | 9,262 |   |
| Deferred compensation                 |   | 3,515              |   | 3,652 |   |
| Foreign timing differences, net       |   | 5,096              |   | 2,407 |   |
| Taxes paid on intercompany profits    |   | 902                |   | 741 |   |
| Other                                 |   | 8,738              |   | 9,310 |   |
| Total gross deferred tax asset        |   | 111,078            |   | 95,149 |   |
| Gross deferred tax liabilities:       |   |               |   |   |   |
| Depreciation                          |   | (3,272             | )      | (2,853 | ) |
| Total gross deferred tax liability    |   | (3,272             | )      | (2,853 | ) |
| Deferred tax asset valuation reserve  |   | (105,393           | )      | (87,594 | ) |
| Net deferred tax asset                |   | $                  | 2,413  |   | $ | 4,702 |   |

 

Avaluation allowance has been provided to reduce the deferred tax assets to anamount management believes is more likely than not to be realized. Expectedrealization of deferred tax assets for which a valuation allowance has not beenrecognized is based upon the reversal of existing taxable temporary differences.The Company’s effective tax rate decreased to (17.2%) from the 2000 rate of(38.2%).

 

TheCompany’s net operating loss carryforwards of $75.9 million expire as follows:$15.9 million in the period from 2002 through 2005, $9.2 million in the periodfrom 2006 through 2010, $47.5 million in the period from 2016 through 2021 and$3.3 million with no expiration.

 

Componentsof income (loss) before income tax expense (benefit) are as follows:

 

|          |   | **Years Ended December 31,** |    |
|---------------|--------|------------------------------|---------|
|          |   | **2001**                     |    | **2000** |   | **1999** |   |
| United States |   | $                            | (71,223 | ) | $ | (96,602 | ) | $ | (48,916 | ) |
| Foreign       |   | 10,703                       |    | (6,590 | ) | 13,074 |   |
| Total loss    |   | $                            | (60,520 | ) | $ | (103,192 | ) | $ | (35,842 | ) |

 

Undistributedearnings of foreign subsidiaries were approximately $29.9 million, $32.7million, and $30.3 million, at December 31, 2001, 2000 and 1999, respectively.No taxes have been provided on these undistributed earnings as they areconsidered to be permanently reinvested.

 

**NOTE I— EQUITY COMPENSATION**

 

2000Stock Plan:

 

EffectiveJuly 1, 2000, the Company adopted the 2000 Stock Plan (the Plan), whichprovides for the grant to employees of incentive options, non-qualified stockoptions, and restricted stock awards.

 

IncentiveOptions. During the year ended December 31, 2000, 1,303,460 incentive optionswere granted by the Company. During 2001, no additional incentive options weregranted.  Under the Plan, incentiveoptions are granted at a fixed exercise

 

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pricenot less than 100% of the fair market value of the shares of stock on the dateof grant (or 110% of the fair market value in certain circumstances). A portionof the incentive options vest over a four-year period at 25% per year beginningJanuary 2, 2001; the remainder vest based on the performance of the Company. Asa part of an employee retention program, vesting of 20.0% of theperformance-based incentive options was accelerated in October 2000.

 

Non-qualifiedstock options. During the year ended December 31, 2000, 377,040 non-qualifiedstock options were granted by the Company. During 2001, no additionalnon-qualified options were granted. Under the Plan, non-qualified options are granted at a fixed exerciseprice equal to, more than, or less than 100% of the fair market value of theshares of stock on the date of grant. A portion of the non-qualified optionsvest over a four-year period at 25% per year beginning January 2, 2001; theremainder vest based on the performance of the Company. As a part of anemployee retention program, vesting of 20.0% of the performance-based incentiveoptions was accelerated in October 2000.

 

Restrictedstock awards. The amount, if any, to be paid by the award recipient to acquirethe share of stock pursuant to a restricted stock award is a fixed exerciseprice equal to, more than, or less than 100% of the fair market value of theshares of stock subject to the award on the date of grant. The restricted stockawards are subject to vesting provisions determined by the Company’s Board ofDirectors. At December 31, 2001, no restricted stock awards had been granted.

 
|                                       |   | **Incentive  Shares** |   | **Non-qualified  Shares** |   | **Weighted  Average  Exercise  Price** |   |
|--------------------------------------------|--------|-----------------------|--------|---------------------------|--------|----------------------------------------|--------|
| Options outstanding—December 31, 1999 |   | 0                     |   | 0                         |   | —                                 |   |
| Granted                                    |   | 1,303,460             |   | 377,040                   |   | 9.25                                   |   |
| Forfeited                                  |   | (138,500              | )      | 0                         |   | 9.25                                   |   |
| Options outstanding—December 31, 2000 |   | 1,164,960             |   | 377,040                   |   | 9.25                                   |   |
|                                       |   |                  |   |                      |   |                                   |   |
| Forfeited                                  |   | (532,720              | )      | (345,280                  | )      | 9.25                                   |   |
| Options outstanding—December 31, 2001 |   | 632,240               |   | 31,760                    |   | 9.25                                   |   |

 

Optionsand awards expire and terminate the earlier of ten years from the date of grantor the date the employee ceases to be employed by the Company.

 

AtDecember 31, 2001, options to purchase 664,000 shares were outstanding, ofwhich 149,400 were vested. All options outstanding have an exercise price of$9.25. No options have been exercised.

 

**Prior Stock Plan:**

 

Priorto the recapitalization (see Note C to the Consolidated Financial Statements),the Company had various stock award plans (the Plans). In general, the Plansprovided for the granting of options or restricted shares to key employees. Asa result of the recapitalization, all options and restricted shares becamefully vested and were converted into the right to receive $18.50 in cash, netof exercise price, per common share. A summary of the key provisions of eachtype of award is as follows:

 

StockOptions. In general, the Plans provided for the granting of options at not lessthan fair market value of the stock at the grant date, and vesting occurredover a five-year period. At December 31, 1999, there were no optionsoutstanding.

 

RestrictedStock Awards. Prior to the Company’s recapitalization, the Board of Directorsperiodically awarded restricted stock to key employees as compensation, andvesting was pro rata and subject to future service. In conjunction with theJuly 1999 recapitalization, all restricted shares became fully vested and werepurchased by WCAS and Convergent. Accordingly, there was no restricted stockoutstanding at December 31, 1999. Unearned compensation was charged for themarket value of the shares on the date of grant and was amortized to expenseover the vesting period. These amounts were shown as a reduction ofstockholders’ equity in the accompanying 1999 consolidated balance sheets.During the year ended December 31, 1999, 9,518 restricted shares were awardedand unearned compensation of $0.1 million was recorded. The weighted averageprice of the shares awarded during the year ended December 31, 1999 was $13.25.Vesting on such shares ranged from three years to 21 years. During the yearended December 31, 2000 and 1999, $0 and $1.8 million, respectively, wereamortized to expense.

 

Asummary of activity in the Company’s stock option plans follows: 

 

39

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|                                  |   | **Shares** |   | **Range of  Exercise Prices  Per Share** |   | **Weighted  Average  Exercise  Price** |   |
|---------------------------------------|--------|------------|--------|------------------------------------------|--------|----------------------------------------|--------|
| Options outstanding-December 31, 1998 |   | 3,030,664  |   | 7.09                                     |   | 25.81                                  |   | 16.94 |   |
|                                  |   |       |   |                                     |   |                                   |   |   |   |
| Granted                               |   | 87,000     |   | 13.25                                    |   | 13.25                                  |   | 13.25 |   |
|                                  |   |       |   |                                     |   |                                   |   |   |   |
| Exercised                             |   | (1,722,854 | )      | 12.56                                    |   | 18.00                                  |   | 13.17 |   |
|                                  |   |       |   |                                     |   |                                   |   |   |   |
| Forfeited                             |   | (1,394,810 | )      | 12.56                                    |   | 25.81                                  |   | 21.01 |   |
| Options outstanding-December 31, 1999 |   | 0          |   |                                     |   |                                   |   |   |   |

 

Ofthe options forfeited during 1999, 217,195 shares had exercise prices between$12.56 and $18.83, with a weighted average exercise price of $18.72. Theremaining 1,177,615 options forfeited had exercise prices between $19.88 and$25.81, with a weighted average exercise price of $21.43.

 

Ofthe options exercised during 1999, options for 1,543,795 shares had exerciseprices between $12.56 and $13.25 with a weighted average exercise price of$12.73. The remaining 179,059 options had exercise prices between $13.44 and$17.38 with a weighted average exercise price of $17.01.

 

Asstated in Note A to the Consolidated Financial Statements, the Company haselected to follow the intrinsic value approach prescribed in APB Opinion No. 25and has adopted the disclosure-only provisions of SFAS No. 123. Hadcompensation costs for these plans been determined consistent with fair valuebased approach in SFAS No. 123, the Company’s net income (loss) would havechanged to the following pro forma amounts:

 

|               |   | **Years Ended December 31** |    |
|--------------------|--------|-----------------------------|---------|
|               |   | **2001**                    |    | **2000** |   | **1999** |   |
|               |   | **(in thousands)**          |    |
| Net Income (loss): |   |                        |    |   |   |   |   |
| As reported        |   | $                           | (45,826 | ) | $ | (144,850 | ) | $ | (11,197 | ) |
| Pro Forma          |   | $                           | (44,805 | ) | $ | (148,242 | ) | $ | (13,194 | ) |

 

Therewere no stock option grants in 2001. The fair value of each stock option grantunder the stock option plans was estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted averageassumptions and results:

 

|                          |   | **Years Ended December 31,** |   |
|-------------------------------|--------|------------------------------|--------|
| **Weighted  Average**         |   | **2001**                     |   | **2000** |   | **1999** |   |
| Risk free interest rate       |   | N/A                          |   | 5.9 | % | 6.3 | % |
| Expected life                 |   | N/A                          |   | 10 years |   | 3.5 years |   |
| Expected volatility           |   | N/A                          |   | 0 |   | 58 | % |
| Fair value of options granted |   | N/A                          |   | $4.06 |   | $6.15 |   |

 

**NOTE J—EMPLOYEE BENEFIT PLANS**

 

TheCompany’s Employees’ Savings Plan allows substantially all full-time andpart-time U.S. employees to make contributions defined by Section 401(k) of theInternal Revenue Code. Beginning in February 2001, the Company’s 401(k) Planchanged to match 50.0% of the participants’ qualifying total pre-taxcontributions, up to a maximum which is tied to the Company’s achievement ofcertain financial objectives.  Duringthe years ended December 31, 2000 and 1999 the Company contributed 50.0% of theparticipants’ qualifying total pre-tax contributions. Amounts expensed underthe plan for the years ended December 31, 2001, 2000 and 1999 were $0.5 million, $2.7 million and $2.8 million, respectively.

 

TheCompany’s subsidiaries in Japan and the United Kingdom provide pension benefitsto retirees and eligible dependents. Employees eligible for participationinclude all full-time regular employees who are more than three years fromretirement. A retirement pension or a lump-sum payment may be paid dependentupon length of service at the mandatory retirement age.

 

40

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TheCompany accrues the cost of these benefits over the service lives of thecovered employees based on an actuarial calculation.

 

Thefollowing table provides a reconciliation of the benefit obligation, planassets and funded status of the pension fund. The presentation for the yearended December 31, 2001 includes actuarial information for a pension plan inthe United Kingdom .  This informationwas not historically provided for the years ended December 31, 2000 and 1999,and prior year amounts have not been restated. 

 
|                                                      |   | **Years Ended December 31,** |   |
|-----------------------------------------------------------|--------|------------------------------|--------|
|                                                      |   | **2001**                     |   | **2000** |   | **1999** |   |
|                                                      |   | **(Dollars in thousands)**   |   |
| Change in Benefit Obligation                              |   |                         |   |   |   |   |   |
| Benefit obligation at beginning of year                   |   | $                            | 20,771 |   | $ | 7,820 |   | $ | 6,361 |   |
| Service cost                                              |   | 1,559                        |   | 819 |   | 635 |   |
| Interest cost                                             |   | 999                          |   | 222 |   | 224 |   |
| Participant’s contributions                          |   | 417                          |   | — |   | — |   |
| Actuarial loss                                            |   | 155                          |   | 97 |   | 584 |   |
| Benefits paid                                             |   | (413                         | )      | (514 | ) | (760 | ) |
| Foreign exchange rate changes                             |   | (1,371                       | )      | (872 | ) | 776 |   |
| Benefit Obligation at end of year                         |   | 22,117                       |   | 7,572 |   | 7,820 |   |
|                                                      |   |                         |   |   |   |   |   |
| Change in Plan Assets                                     |   |                         |   |   |   |   |   |
| Estimated fair value of plan assets at beginning of  year |   | 12,056                       |   | 2,680 |   | 2,354 |   |
| Actual return on plan assets                              |   | (1,768                       | )      | 9 |   | 44 |   |
| Employer contribution                                     |   | 1,761                        |   | 949 |   | 774 |   |
| Employee contribution                                     |   | 417                          |   | — |   | — |   |
| Benefits paid                                             |   | (413                         | )      | (514 | ) | (760 | ) |
| Foreign exchange rate changes                             |   | (626                         | )      | (312 | ) | 268 |   |
| Estimated fair value of plan assets at end of year        |   | 11,427                       |   | 2,812 |   | 2,680 |   |
|                                                      |   |                         |   |   |   |   |   |
| Funded status                                             |   | (10,690                      | )      | (4,760 | ) | (5,140 | ) |
| Unrecognized actuarial loss                               |   | 4,454                        |   | 2,216 |   | 2,417 |   |
| Unrecognized transition cost                              |   | 1,593                        |   | 1,349 |   | 1,621 |   |
| Accrued benefit cost                                      |   | $                            | (4,643 | ) | $ | (1,195 | ) | $ | (1,102 | ) |
| Weighted average assumptions as of December 31, 2001      |   |                         |   |   |   |   |   |
| Discount Rate                                             |   | 3.0                          | %      | 3.0 | % | 3.5 | % |
| Expected asset return                                     |   | 3.0                          | %      | 3.0 | % | 3.0 | % |
| Rate of compensation increase                             |   | 3.5                          | %      | 3.5 | % | 3.5 | % |

 

Thecomponents of the net periodic benefit cost are as follows:

 
|                              |   | **Years Ended December 31,** |   |
|-----------------------------------|--------|------------------------------|--------|
|                              |   | **2001**                     |   | **2000** |   | **1999** |   |
|                              |   | **(Dollars in thousands)**   |   |
| Service Cost                      |   | $                            | 1,559  |   | $ | 819 |   | $ | 635 |   |
| Interest Cost                     |   | 999                          |   | 222 |   | 224 |   |
| Expected return on plan assets    |   | (719                         | )      | (76 | ) | (71 | ) |
| Amortization of transition amount |   | 348                          |   | 104 |   | 100 |   |
| Recognized actuarial loss         |   | 98                           |   | 103 |   | 67 |   |
| Net periodic benefit cost         |   | $                            | 2,285  |   | $ | 1,172 |   | $ | 955 |   |

 

**NOTE K—COMMITMENTS AND CONTINGENCIES**

 

*Leases.* The Company leases certain sales and serviceoffice facilities and equipment under non-cancelable operating leases expiringthrough year 2010. Total Company rent expense for the years ended December 31,2001, 2000, and 1999 was $14.3

 

41

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million,$13.9 million, and $9.3 million, respectively.

 

Futureminimum payments under non-cancelable operating leases, net of sublease incomeof $0.6 million, $0.6 million and $0.2 million in calendar years 2002, 2003 and2004, respectively, are as follows:

 

| **Calendar Year** |   | **(In thousands)** |   |
|-------------------|--------|--------------------|--------|
| 2002              |   | $                  | 11,175 |   |
| 2003              |   | 7,267              |   |
| 2004              |   | 3,623              |   |
| 2005              |   | 2,157              |   |
| 2006              |   | 1,709              |   |
| Thereafter        |   | 2,908              |   |
|              |   | $                  | 28,839 |   |

 

TheCompany believes that its facility leases can be either renewed or replacedwith alternate facilities at comparable cost.

 

*Litigation.* The Company and its subsidiaries are parties tovarious legal proceedings. Although the ultimate disposition of suchproceedings is not presently determinable, in the opinion of the Company, anyliability that may ensue would not have a material adverse impact on thefinancial position or results of operations or cash flows of the Company.

 

**NOTE L—BUSINESS SEGMENT DATA**

 

Managementhas chosen to structure the organization around product lines and geography.

 

In1999, the Company segmented its operations based on geographical areas  (North American Systems (“NAS”) andInternational Systems (“INTL”)) and product lines (Computer and NetworkServices (“CNS”)). INTL offered similar products as NAS and consisted ofoperations throughout the world excluding North America. In 2001, the Companyrealigned its reporting structure. Under this realigned structure, NorthAmerican Systems has been renamed U.S. Solutions (“USS”), and excludes Canadianoperations and Plexus® products(“Plexus”). Plexus and Advanced Enterprise Solutions (“AES”), which developsand sells the Company’s OpenARCHIVEÔand other archive solutions, are grouped as “Other”. International Solutions(“INTL”) reporting now includes the Canadian operations. Canadian operationsare not material to USS or to INTL operations. Under the new structure, thecomposition of Computer and Network Services remains unchanged. Prior periodinformation has been reclassified to reflect the new alignment.

 

*US Solutions and InternationalSolutions.* USS and INTLoffer similar systems integration and business process solutions and servicesand market to similar types of customers. The solutions offered primarilyinvolve high volume transaction processing using advanced technologies andprocesses. Key applications include payment and check processing, documentimaging and workflow, and ongoing service and support. These segments providetheir products and services to other customers, including financial servicescompanies and insurance providers, telecommunications companies, utilitycompanies, governmental agencies, and transportation firms.

 

*Computer and Network Services.* The Company is a leading provider of personalcomputer repair services in the United States, including many Fortune 1000companies. One focus of CNS is providing fulfillment services and relatedsupport to manufacturers of desktop/enterprise products. Another focus is thesupport of desktop/enterprise applications.

 

*Other.*  AES develops and sells the Company’sOpenARCHIVEÔ and other archive solutions. Plexus offers a complete suite of Internet-enableddocument imaging and workflow software solutions under the Plexus® brand.

 

Datafor the USS, CNS, INTL, and Other segments is available on a comparative basisfor 2001 and 2000 only. For more meaningful disclosure, also presented aretables reflecting historical segment data for 2000 and 1999.

 

Wheneverpossible, the Company uses market prices to determine inter-segment pricing.Other products are transferred at cost or cost plus an agreed uponmark-up.  Included in 2001 segment dataare severance expenses of $2.4 million, $0.9 million, $1.7 million, $0.8million and $1.9 million, respectively, for USS, CNS, INTL, Other andCorporate.

 

Table1—New Segments 

 

42

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|                                 |   | **US  Solutions**  |    | **Computer  & Network  Services** |   | **International** |   | **Other** |    | **Corp/Elims** |   | **Total** |   |
|--------------------------------------|--------|--------------------|---------|---------------------------------------|--------|-------------------|--------|-----------|---------|----------------|--------|-----------|--------|
|                                 |   | **(In thousands)** |    |
| For the year ended December 31, 2001 |   |               |    |                                  |   |              |   |      |    |           |   |      |   |
|                                 |   |               |    |                                  |   |              |   |      |    |           |   |      |   |
| Revenue from external customers      |   | $                  | 161,262 |                                  | $      | 147,016           |   | $         | 182,581 |           | $      | 14,878    |   | $ | — |   | $ | 505,737 |   |
| Intersegment revenues                |   | 30,202             |    | —                                |   | 3,537             |   | 1,943     |    | (35,682        | )      | —    |   |
| Segment gross profit                 |   | 8,152              |    | 21,830                                |   | 46,163            |   | 6,429     |    | 808            |   | 83,382    |   |
| Segment operating income (loss)      |   | (21,740            | )       | 5,363                                 |   | 8,690             |   | (6,712    | )       | (10,839        | )      | (25,238   | )      |
| Segment identifiable assets          |   | 124,720            |    | 40,258                                |   | 93,275            |   | 5,361     |    | 51,435         |   | 315,049   |   |
| Capital appropriations               |   | 5,147              |    | 1,779                                 |   | 5,205             |   | 160       |    | 1,375          |   | 13,666    |   |
|                                 |   |               |    |                                  |   |              |   |      |    |           |   |      |   |
| For the year ended December 31, 2000 |   |               |    |                                  |   |              |   |      |    |           |   |      |   |
|                                 |   |               |    |                                  |   |              |   |      |    |           |   |      |   |
| Revenue from external customers      |   | $                  | 185,881 |                                  | $      | 141,460           |   | $         | 148,088 |           | $      | 12,278    |   | $ | — |   | $ | 487,707 |   |
| Intersegment revenues                |   | 35,338             |    | —                                |   | 2,191             |   | 2,119     |    | (39,648        | )      | —    |   |
| Segment gross profit (loss)          |   | 18,783             |    | (2,479                                | )      | 31,119            |   | (2,014    | )       | 996            |   | 46,405    |   |
| Segment operating loss               |   | (22,174            | )       | (14,436                               | )      | (8,079            | )      | (11,277   | )       | (11,468        | )      | (67,434   | )      |
| Segment identifiable assets          |   | 180,735            |    | 52,872                                |   | 104,827           |   | 5,955     |    | 55,363         |   | 399,752   |   |
| Capital appropriations               |   | 8,807              |    | 5,062                                 |   | 5,729             |   | 240       |    | 995            |   | 20,833    |   |

 

Table2-Historical Segments

 
|                                 |   | **North  American  Systems** |    | **Computer  & Network  Services** |   | **International** |   | **Corp/Elims** |    | **Total** |   |
|--------------------------------------|--------|------------------------------|---------|---------------------------------------|--------|-------------------|--------|----------------|---------|-----------|--------|
|                                 |   | **(In thousands)**           |    |
| For the year ended December 31, 2000 |   |                         |    |                                  |   |              |   |           |    |      |   |
|                                 |   |                         |    |                                  |   |              |   |           |    |      |   |
| Revenue from external customers      |   | $                            | 206,621 |                                  | $      | 141,460           |   | $              | 139,626 |      | $      | — |   | $ | 487,707 |   |
| Intersegment revenues                |   | 37,524                       |    | —                                |   | 2,124             |   | (39,648        | )       | —    |   |
| Segment gross profit (loss)          |   | 18,474                       |    | (2,479                                | )      | 29,414            |   | 996            |    | 46,405    |   |
| Segment operating loss               |   | (26,747                      | )       | (9,864                                | )      | (4,150            | )      | (26,673        | )       | (67,434   | )      |
| Segment identifiable assets          |   | 184,638                      |    | 52,829                                |   | 105,697           |   | 56,588         |    | 399,752   |   |
| Capital appropriations               |   | 9,179                        |    | 5,062                                 |   | 5,402             |   | 1,190          |    | 20,833    |   |
|                                 |   |                         |    |                                  |   |              |   |           |    |      |   |
| For the year ended December 31, 1999 |   |                         |    |                                  |   |              |   |           |    |      |   |
|                                 |   |                         |    |                                  |   |              |   |           |    |      |   |
| Revenue from external customers      |   | $                            | 250,895 |                                  | $      | 109,821           |   | $              | 173,874 |      | $      | — |   | $ | 534,590 |   |
| Intersegment revenues                |   | 65,951                       |    | (83                                   | )      | 4,786             |   | (70,654        | )       | —    |   |
| Segment gross profit (loss)          |   | 59,811                       |    | (427                                  | )      | 45,191            |   | (543           | )       | 104,032   |   |
| Segment operating income (loss)      |   | 16,680                       |    | (10,824                               | )      | 11,434            |   | (31,509        | )       | (14,219   | )      |
| Segment identifiable assets          |   | 205,666                      |    | 58,194                                |   | 116,368           |   | 92,877         |    | 473,105   |   |
| Capital appropriations               |   | 15,927                       |    | 16,200                                |   | 6,776             |   | 6,977          |    | 45,880    |   |

 

**NOTE M—GEOGRAPHIC OPERATIONS**

 

TheCompany operates in the following geographic areas: the United States, Japan,the UK, and other international areas consisting primarily of Canada, France,Sweden, Germany, and the Netherlands. Inter-area sales to affiliates areaccounted for at established transfer prices.

 

Salesto unaffiliated customers and affiliates for the years ended December 31, 2001,2000 and 1999, and long-lived assets, other than deferred taxes, at the end ofeach of those periods, classified by geographic area, are as follows:

 
|                                        |   | **United  States** |    | **Japan** |   | **United  Kingdom** |   | **Other  International** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------|--------|--------------------|---------|-----------|--------|---------------------|--------|--------------------------|--------|------------------|--------|------------------|--------|
|                                        |   | **(In thousands)** |    |
| Year ended December 31, 2001                |   |               |    |      |   |                |   |                     |   |             |   |             |   |
| Sales to unaffiliated customers             |   | $                  | 323,156 |      | $      | 78,473              |   | $                        | 49,198 |             | $      | 54,910           |   | $ | — |   | $ | 505,737 |   |
| Inter-area sales to affiliates              |   | 32,145             |    | —    |   | 1,997               |   | 1,540                    |   | (35,682          | )      | —           |   |
| Long-lived assets other than deferred taxes |   | 152,347            |    | 6,152     |   | 3,566               |   | 5,442                    |   | (24,286          | )      | 143,221          |   |
|                                        |   |               |    |      |   |                |   |                     |   |             |   |             |   |
| Year ended December 31, 2000                |   |               |    |      |   |                |   |                     |   |             |   |             |   |
| Sales to unaffiliated customers             |   | $                  | 339,619 |      | $      | 75,087              |   | $                        | 30,574 |             | $      | 42,427           |   | $ | — |   | $ | 487,707 |   |
| Inter-area sales to affiliates              |   | 37,457             |    | —    |   | 1,850               |   | 341                      |   | (39,648          | )      | —           |   |
| Long-lived assets other than deferred taxes |   | 178,777            |    | 6,650     |   | 4,698               |   | 5,792                    |   | (27,179          | )      | 168,738          |   |
|                                        |   |               |    |      |   |                |   |                     |   |             |   |             |   |
| Year ended December 31, 1999                |   |               |    |      |   |                |   |                     |   |             |   |             |   |
| Sales to unaffiliated customers             |   | $                  | 345,977 |      | $      | 59,585              |   | $                        | 55,862 |             | $      | 73,166           |   | $ | — |   | $ | 534,590 |   |
| Inter-area sales to affiliates              |   | 65,393             |    | —    |   | 4,785               |   | 476                      |   | (70,654          | )      | —           |   |
| Long-lived assets other than deferred taxes |   | 203,216            |    | 5,960     |   | 6,142               |   | 6,183                    |   | (27,179          | )      | 194,322          |   |

 

43

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**NOTE N—SUMMARIZED QUARTERLY DATA(UNAUDITED)**

 

ASRESTATED

 
|                            |   | **Year Ended December 31, 2001** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **Q1(1)**                        |    | **Q2(1)** |   | **Q3(1)** |   | **Q4(2)** |   | **Total** |   |
|                            |   | **(In thousands)**               |    |
| Revenue                         |   | $                                | 117,880 |   | $ | 128,531 |   | $ | 118,786 |   | $ | 140,540 |   | $ | 505,737 |   |
| Gross profit                    |   | 19,000                           |    | 24,857 |   | 18,819 |   | 20,706 |   | 83,382 |   |
| Loss from continuing operations |   | (16,008                          | )       | (10,334 | ) | (16,770 | ) | (23,630 | ) | (66,742 | ) |
| Net income (loss)               |   | (16,008                          | )       | (12,330 | ) | (17,455 | ) | 484 |   | (45,309 | ) |
|                                 |        |                                  |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                            |   | **Year Ended December 31, 2000** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **Q1(1)**                        |    | **Q2(1)** |   | **Q3(1)** |   | **Q4(1)** |   | **Total** |   |
|                            |   | **(In thousands)**               |    |
| Revenue                         |   | $                                | 128,100 |   | $ | 140,750 |   | $ | 128,412 |   | $ | 90,445 |   | $ | 487,707 |   |
| Gross profit (loss)             |   | 19,318                           |    | 14,424 |   | 16,469 |   | (3,806 | ) | 46,405 |   |
| Loss from continuing operations |   | (11,694                          | )       | (17,163 | ) | (15,466 | ) | (98,247 | ) | (142,570 | ) |
| Net loss                        |   | (11,694                          | )       | (17,163 | ) | (15,466 | ) | (100,527 | ) | (144,850 | ) |
|                                 |        |                                  |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

ASPREVIOUSLY REPORTED

 
|                            |   | **Year Ended December 31, 2001** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **Q1**                           |    | **Q2** |   | **Q3** |   |   |   |   |   |
|                            |   | **(In thousands)**               |    |
| Revenue                         |   | $                                | 123,615 |   | $ | 132,262 |   | $ | 119,874 |   |   |   |   |   |
| Gross profit                    |   | 21,421                           |    | 26,421 |   | 19,000 |   |   |   |   |   |
| Loss from continuing operations |   | (13,503                          | )       | (8,654 | ) | (16,470 | ) |   |   |   |   |
| Net loss                        |   | (13,867                          | )       | (10,650 | ) | (17,155 | ) |   |   |   |   |
|                                 |        |                                  |         |  |  |  |  |  |  |  |  |  |  |  |

 
|                            |   | **Year Ended December 31, 2000** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **Q1**                           |    | **Q2** |   | **Q3  as restated(3)** |   | **Q4  (4)(5)** |   | **Total** |   |
|                            |   | **(In thousands)**               |    |
| Revenue                         |   | $                                | 128,390 |   | $ | 138,804 |   | $ | 127,126 |   | $ | 93,387 |   | $ | 487,707 |   |
| Gross profit (loss)             |   | 19,318                           |    | 14,424 |   | 18,134 |   | (5,471 | ) | 46,405 |   |
| Loss from continuing operations |   | (11,694                          | )       | (17,163 | ) | (15,466 | ) | (98,247 | ) | (142,570 | ) |
| Net loss                        |   | (11,694                          | )       | (17,163 | ) | (15,466 | ) | (100,527 | ) | (144,850 | ) |
|                                 |        |                                  |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Subsequent to the issuance of the Company’s financial statements as ofand for the quarters ended March 31, June 30 and September 30, 2001 and thefiling of Form 10-Q for the respective quarters of 2001, management determinedthat certain revenue items totaling $10.6 million, cost of sales of $6.4 millionand that $0.3 million of expense items recorded in the statement of operationsas Sundry, net were not accrued in the proper period. Additionally, certainamounts have been reclassified from the prior years to conform to the currentyear presentation. Accordingly, the summarized quarterly data for the first,second and third quarter of 2001 has been restated from amounts previouslyreported to appropriately report such revenues, costs and expenses.

(2)          During the fourth quarter of 2001, the Company determined that long-livedtangible assets totaling approximately $4.1 million were impaired. Theimpairments included approximately $1.9 million for capitalized spare parts,which were determined to be obsolete, and approximately $2.2 million forproperty, plant and equipment (of which $1.5 million was from vacating an ownedfacility currently being offered for sale). Also during the fourth quarter of 2001, the Company accruedapproximately $2.4 million of costs related to contracts deemed to be in a lossposition and recorded reserves of approximately $6.1 million from the Company’speriodic evaluation of the carrying amount of inventory.  The Company also recognized a gain of $23.9million from the repurchase of a portion of the Senior Notes.

(3)          Subsequent to the issuance of the Company’s financial statements as ofand for the three months and nine months ended September 30, 2000 and thefiling of Form 10-Q for the third quarter of 2000, management determined thatcertain revenue items totaling $4.0 million and the related cost of sales of$2.2 million were incorrectly recognized in that period and that $2.4 millionof predominately operating expense items were not accrued in the proper periodand should have been recognized in the third quarter. Additionally, certainamounts have been reclassified from the prior years to conform to the currentyear presentation. Accordingly, the summarized quarterly data for the thirdquarter of 2000 has been restated from amounts previously reported toappropriately report such revenues, costs and expenses. A summary of theeffects on the quarterly data is as follows:

 

|                            |   | **Three Months Ended September 30, 2000** |   |
|---------------------------------|--------|-------------------------------------------|--------|
|                            |   | **As Previously  Reported**               |   | **As Restated** |   |
| Revenue                         |   | 131,162                                   |   | 127,126 |   |
| Gross Profit                    |   | 19,948                                    |   | 18,134 |   |
| Loss from Continuing Operations |   | (12,447                                   | )      | (15,466 | ) |
| Net Loss                        |   | (12,447                                   | )      | (15,466 | ) |

 

(4)          Due to changes in managements’ estimates, a valuation allowance has beenprovided to reduce the deferred tax assets to an amount management believes ismore likely than not to be realized. The increase had the effect of decreasingthe Company’s effective tax rate to (38.2%) from 37.0% in 1999. The net changein the valuation reserve in the fourth quarter of 2000 was an increase of $78.6million.

 

(5)          Due to changes in business conditions, management increased inventoryreserves and allowance for doubtful accounts by $1.4 million and $0.7 millionrespectively. Also during the 2000 fourth quarter, management recorded $4.2million of additional depreciation on its spares, $8.2 million of additionalexpenses attributable to cost of sales, and $5.1 million related to changes inits revenue recognition estimates.

 

44

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**NOTE O—ACCUMULATED OTHER COMPREHENSIVELOSS**

 

Thecomponents of accumulated other comprehensive loss at December 31, 2001 consistof foreign currency translation adjustments related to the Company’international operations and minimum pension liability related to the Company’ssubsidiaries in Japan and the United Kingdom of $0.0 million and $1.2 million,respectively.  The minimum pensionliability is net of tax benefit of $0.2 million with a corresponding valuationallowance of $0.2 million, for an effective tax of zero.

 

**NOTE P—SUBSEQUENT EVENTS**

 

Duringthe second quarter of 2002, the Company repurchased Senior Notes with a faceamount of $4.6 million. The Company wrote off a proportionate share of deferredfinancing fees, resulting in a gain of approximately $2.8 million.

 

On July 30, 2002, the Company and Heller amended the NewFacility, which reduced the Company’s fixed charge coverage ratio covenantduring quarters 1, 2 and 3 of 2002, and reduced the minimum undrawnavailability requirement from $10.0 million to $4.0 million.  The amendment also waives the reportingrequirement violation upon submission of the audited financial statements.

 

 

45

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**BANCTEC, INC.**

 

**INDEX TOFINANCIAL STATEMENTS AND SCHEDULES**

 
| **Financial Statements and Independent Auditors’ Report**                                               |
|--------------------------------------------------------------------------------------------------------------|
|                                                                                                         |
| Independent Auditors’  Report                                                                           |
|                                                                                                         |
| Reports of  Independent Public Accountants                                                                   |
|                                                                                                         |
| Consolidated Balance Sheets  at December 31, 2001 and December 31, 2000                                      |
|                                                                                                         |
| Consolidated  Statements of Operations for the years ended December 31, 2001, 2000 and 1999                  |
|                                                                                                         |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999                  |
|                                                                                                         |
| Consolidated  Statements of Stockholders’ Deficit for the years ended December 31, 2001,  2000 and 1999 |
|                                                                                                         |
| Consolidated  Statements of Comprehensive Loss for the years ended December 31, 2001, 2000  and 1999         |
|                                                                                                         |
| Notes to  Consolidated Financial Statements                                                                  |
|                                                                                                         |
| **Supplemental Schedules**                                                                                   |
|                                                                                                         |
| Schedule II-Valuation  and Qualifying Accounts for the years ended December 31, 2001, 2000 and 1999          |

 

Allother schedules have been omitted as the required information is inapplicable,not required, or the information is included in the financial statements andnotes thereto.

 

46

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**PART III**

 

**ITEM 10. Directors and ExecutiveOfficers of BancTec, Inc.**

 

Thefollowing table sets forth the names, ages, and positions of each of thedirectors and executive officers of the Company as of June 1, 2002.

 

TheBoard of Directors elects executive officers annually. No family relationshipsexist among the executive officers of the Company.

 
| **Name**             |   | **Age** |   | **Position**                                       |
|----------------------|--------|---------|--------|----------------------------------------------------|
| Craig  D. Crisman    |   | 61      |   | President  and Chief Executive Officer             |
| Brian  R. Stone      |   | 42      |   | Senior  Vice President and Chief Financial Officer |
| Mark  D. Fairchild   |   | 42      |   | Senior  Vice President                             |
| Mark  D. Spire       |   | 54      |   | Senior  Vice President                             |
| Neil  Snowdon        |   | 46      |   | Vice  President                                    |
| P.  Weston Hebert    |   | 49      |   | Vice  President and Corporate Controller           |
| Robert  A. Minicucci |   | 50      |   | Chairman  of the Board and Director                |
| Eric  J. Lee         |   | 30      |   | Director                                           |
| Murray  Holland      |   | 48      |   | Director                                           |
| Sanjay  Swani        |   | 35      |   | Director                                           |

 

Mr.Crisman has been President and Chief Executive Officer since May 2001.  From August 1994 through April 2001, Mr.Crisman served as Chief Executive Officer of Applied Magnetics Corporation andfrom November 1995 through April 2001, also served as Chairman of the Board. InJanuary 2000, Applied Magnetics Corporation filed for protection under Chapter11 of the United States Bankruptcy Code, from which it was discharged inNovember 2001.

 

Mr.Stone has been Senior Vice President and Chief Financial Officer since May2001.  From September 1999 through May2001, Mr. Stone provided management consulting services to several U.S.companies. From March 1996 through August 1999, Mr. Stone served as ChiefExecutive Officer of Magnetic Data Technologies, LLC.

 

Mr.Fairchild has been Vice President since April 2000 and Senior Vice President sinceAugust 2000. Since August 1985, Mr. Fairchild has been employed by the Companyin various management capacities.

 

Mr.Spire has been Vice President since June 1996 and Senior Vice President sinceJuly 2000. Since July 1979, Mr. Spire has been employed by the Company invarious management capacities.

 

Mr.Snowdon has been Vice President since September 2000. From January 1998 throughAugust 2000, Mr. Snowdon has been employed by the Company in various managementcapacities.  From January 1996 throughDecember 1997, Mr. Snowdon served as Managing Director of LK Global SoftwareEngineering.

 

Mr.Hebert has been Vice President and Controller since August 2001. From August2000 through July 2001, Mr. Hebert was Controller of the Company’s USSsegment.  From May 1999 through July2000, Mr. Hebert was Divisional Controller of CertainTeed Corporation.  From 1995 to May 1998, Mr. Hebert served asDirector of Accounting for GS Roofing Products Company, Inc.

 

Mr.Minicucci has been a director of the Company since July 1999. Mr. Minicuccialso serves as a Managing Member of Welsh, Carson, Anderson & Stowe VIII,L.P. (a private investment company) and as a director of Amdocs Limited (atelecom customer care and billing software and services company). Mr. Minicuccihas served as a General Partner of Welsh, Carson, Anderson & Stowe since1993.

 

Mr.Lee has been a director of the Company since January 2002.  He joined WCAS as an Associate in July 1999and focuses on investments in the information services and healthcare industries.  From July 1995 to June 1999, Mr. Lee wasemployed by Goldman, Sachs & Company where he worked in the High Technologyand Mergers & Acquisitions groups.

 

Mr.Holland has been a director of the Company since July 1999. Mr. Holland hasalso served as Principal of Convergent Equity Partners L.P. (a privateinvestment company) and as Chairman and Chief Executive Officer of ConvergentMedia Systems Corporation (a provider of interactive distance learningsolutions) since 1992. Mr. Holland also served as Chairman of Convergent GroupCorporation (an independent systems integrator for geographic informationsystems) from June 1993 through August 1999, when the company was sold, and asChairman and Chief Executive Officer of BTI Americas, Inc. (a

 

47

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travelagency) from February 1995 through June 1998, when the company was sold.

 

Mr.Swani has been a director of the Company since December 2000. Mr. Swani becamea General Partner of Welsh, Carson, Anderson & Stowe in October 2001. Mr.Swani also served as a director of Fox Paine & Company (a SanFrancisco-based buyout firm) from June 1998 to June 1999 and worked in themergers and acquisitions department of Morgan Stanley & Co. (a globalfinancial services firm) from August 1994 to June 1998. Mr. Swani is also adirector of BTI Telecommunications Services, Inc. (an integratedtelecommunications provider).

 

## *Section 16(a)Beneficial Ownership Reporting Compliance*

 

Notapplicable.

 

**ITEM 11. Executive Compensation**

 

**Summary Compensation Table**

 

Thefollowing table sets forth certain information regarding compensation earnedduring  the fiscal years ended December31, 2001, 2000 and 1999, by the Company’s Chief Executive Officer and each ofthe Company’s four other most highly compensated executive officers (based uponsalary and bonus earned during the fiscal year ended December 31, 2001).

 
|                               |   | **Annual Compensation** |   | **Long Term  Compensation Awards** |   |
|------------------------------------|--------|-------------------------|--------|------------------------------------|--------|
| **Name and Principal Position(s)** |   | **Fiscal  Year**        |   | **Salary($)**                      |   | **Bonus  ($)(1)** |   | **Restricted  Stock  Award(s)($)** |   | **Options  (#)(2)** |   | **All Other  Compensation  ($)(3)** |   |
| Craig D. Crisman                   |   | 2001                    |   | 294,219                            |   | 267,750 |   | 0 |   | 0 |   | 0 |   |
| President and Chief Executive      |   | 2000                    |   | 0                                  |   | 0 |   | 0 |   | 0 |   | 0 |   |
| Officer                            |   | 1999                    |   | 0                                  |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                               |   |                    |   |                               |   |   |   |   |   |   |   |   |   |
| John D. Staedke (4)                |   | 2001                    |   | 300,014                            |   | 150,000 |   | 0 |   | 0 |   | 0 |   |
| Chairman of the Board of           |   | 2000                    |   | 300,014                            |   | 150,000 |   | 0 |   | 400,000 |   | 274,233 |   |
| Directors                          |   | 1999                    |   | 0                                  |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                               |   |                    |   |                               |   |   |   |   |   |   |   |   |   |
| Brian R. Stone                     |   | 2001                    |   | 214,583                            |   | 193,460 |   | 0 |   | 0 |   | 0 |   |
| Senior Vice President              |   | 2000                    |   | 0                                  |   | 0 |   | 0 |   | 0 |   | 0 |   |
| and Chief Financial Officer        |   | 1999                    |   | 0                                  |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                               |   |                    |   |                               |   |   |   |   |   |   |   |   |   |
| James S. Kildebeck (5)             |   | 2001                    |   | 200,400                            |   | 98,220 |   | 0 |   | 60,000 |   | 0 |   |
| Senior Vice President              |   | 2000                    |   | 106,366                            |   | 19,090 |   | 0 |   | 0 |   | 0 |   |
|                               |   | 1999                    |   | 0                                  |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                               |   |                    |   |                               |   |   |   |   |   |   |   |   |   |
| Mark D. Fairchild                  |   | 2001                    |   | 170,526                            |   | 223,138 |   | 0 |   | 0 |   | 0 |   |
| Senior Vice President              |   | 2000                    |   | 177,009                            |   | 51,328 |   | 0 |   | 100,000 |   | 54,165 |   |
|                               |   | 1999                    |   | 156,410                            |   | 50,000 |   | 0 |   | 0 |   | 116,961 |   |
|                               |   |                    |   |                               |   |   |   |   |   |   |   |   |   |
| Mark D. Spire                      |   | 2001                    |   | 134,923                            |   | 163,817 |   | 0 |   | 0 |   | 0 |   |
| Senior Vice President              |   | 2000                    |   | 115,077                            |   | 49,095 |   | 0 |   | 32,500 |   | 0 |   |
|                               |   | 1999                    |   | 0                                  |   | 0 |   | 0 |   | 0 |   | 0 |   |

 

----

(1)Reflects bonus earned for the fiscal year, including retention payments made in2001.

 

(2)Options to acquire shares of Common Stock.

 

(3)Includes cash compensation received for: surrender of vested and unexercisedstock options by Mr. Fairchild; surrender of unexercised option to purchaseEmployee Stock Purchase Plan shares by Mr. Fairchild; relocation expensereimbursement by Mr. Staedke; one-time signing bonus to Mr. Staedke; housingallowance to Mr. Fairchild; and commissions to Mr. Fairchild.

 

(4)Mr. Staedke served as President and Chief Executive Officer from December 1999to May 2001, Director from December 2000 to May 2001 and Chairman of the Boardof Directors from May 2001 to December 2001. Mr. Staedke terminated employmenteffective December 31, 2001.

 

(5)Mr. Kildebeck terminated employment effective January 31, 2002.

 

**Option Grants in 2001**

 

TheCompany did not grant options during 2001.

 

48

----

 

**Aggregated Option Exercises in 2001 andFiscal Year-End Option Values**

 

Nooptions were exercised by any named executive officer in 2001. The followingtable provides information related to the number and value of options held bythe named executive officers at the end of 2001. 

 

 
|               |   | **Shares  Acquired  on Exercise(#)** |   | **Value  Realized($)** |   | **Number of Unexercised Options  at Fiscal Year-End** |   | **Value of Unexercised  In-the-Money Options  at Fiscal Year-End** |
|--------------------|--------|--------------------------------------|--------|------------------------|--------|-------------------------------------------------------|--------|--------------------------------------------------------------------|
| **Name**           |   |                                 |   | **Exercisable(#)**     |   | **Unexercisable(#)**                                  |   | **Exercisable($)**                                                 |   | **Unexercisable($)** |
| Craig D. Crisman   |   | 0                                    |   | 0                      |   | 0                                                     |   | 0                                                                  |   | — |   | — |
| John D. Staedke    |   | 0                                    |   | 0                      |   | 0                                                     |   | 0                                                                  |   | — |   | — |
| Brian R. Stone     |   | 0                                    |   | 0                      |   | 0                                                     |   | 0                                                                  |   | — |   | — |
| James S. Kildebeck |   | 0                                    |   | 0                      |   | 13,500                                                |   | 46,500                                                             |   | — |   | — |
| Mark D. Fairchild  |   | 0                                    |   | 0                      |   | 22,500                                                |   | 77,500                                                             |   | — |   | — |
| Mark D. Spire      |   | 0                                    |   | 0                      |   | 7,313                                                 |   | 25,187                                                             |   | — |   | — |

 

**Compensation of Directors**

 

Directorsof the Company are not compensated for their services.

 

**Employment Agreements**

 

During2001, Mr. Crisman was compensated at an annualized salary rate of$450,000.  Mr. Crisman also received abonus of $267,750 for his services during 2001. Effective July 1, 2002, theCompany entered into an employment agreement with Mr. Crisman which provides forthe payment of an annual base salary of $450,000, subject to annual review bythe Board of Directors, and a discretionary bonus. The agreement expires December 31, 2002 and automatically renewsfor successive one-year periods unless terminated by either party. Theagreement provides for severance in an amount equal to the sum of the thencurrent salary and the bonus awarded in the preceding 12-month period, in thecase of termination for reasons other than cause or without good reason.

 

During2001, the Company retained the services of Brian R. Stone, a consultant ofACR/BI Limited Partnership, as Chief Financial Officer of the Company. During2001, the Company paid to ACR/BI Limited Partnership a monthly fee of $27,083and a bonus of $193,460 for Mr. Stone’s services during 2001. Effective August1, 2002, the Company entered into an employment agreement with Mr. Stone whichprovides for the payment of an annual base salary of $325,000, subject toannual review by the Board of Directors, and a discretionary  bonus. The agreement expires December 31,2002 and automatically renews for successive one-year periods unless terminatedby either party. The agreement provides for severance in an amount equal to thesum of the then current salary and the bonus awarded in the preceding 12-monthperiod, in the case of termination for reasons other than cause or without goodreason.

 

Executiveofficers of the Company are covered by the Company’s Special Severance Plan forCorporate Officers which provides for severance in the case of termination forreasons other than cause. The severance amount ranges from six to twelve monthsof base salary, plus a prorated annual bonus.

 

**Compensation Committee and OptionCommittee Interlocks and Insider Participation**

 

TheCompany did not have a Compensation Committee from the July 23, 1999 mergerdate through December 3, 2000. From December 4, 2000 through December 31, 2001,the Compensation Committee was composed of Robert A. Minicucci and Anthony J.de Nicola. From July 1, 2000 through December 3, 2000, the Option Committee wascomposed of Robert A. Minicucci, Anthony J. de Nicola (a former director of theCompany), and Murray Holland and from December 4, 2000 through December 31,2001, the Option Committee was composed of Robert A. Minicucci and Anthony J.de Nicola. No member of the Compensation Committee or the Option Committee wasan officer of the Company. No member of the Compensation Committee or theOption Committee was formerly an officer of the Company.

 

49

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**ITEM 12. Security Ownership of CertainBeneficial Owners and Management**

 

Thefollowing table sets forth certain information as of July 1, 2002 regarding theownership of Common Stock, Class A Common Stock, and Preferred Stock of: (i)each person who is known by the Company to be the beneficial owner of more thanfive percent of the outstanding shares of the named class of Stock; (ii) eachdirector of the Company; (iii) each executive officer named in the SummaryCompensation Table; and (iv) all executive officers and directors of theCompany as a group. Percentage of ownership is based on 17,003,838 shares ofCommon Stock and 1,181,946 shares of Class A Common Stock (both issued andoutstanding at July 1, 2002), 100,000 shares of Series A Preferred Stock(Preferred A), and 35,520 shares of Series B Preferred Stock (Preferred B)outstanding as of July 1, 2002.   Theassumed exercise of the Series A Preferred warrants (“Series A Warrants”) andthe assumed conversion of the Series B Preferred (“Series B Conversion Rights”)results in 750,000 and 640,000 additional shares, respectively, of CommonStock. Additionally, the assumed exercise of options results in 201,950additional shares of Common Stock. Included in the Number of SharesBeneficially Owned are shares attributable to stock options, stock warrants,and conversion rights that are exercisable as of, or will be exercisable within60 days after, July 1, 2002. 

 
| **Name of  Beneficial Owner (1)**                 |   | **Class ofShares Held** |   | **Number****of Shares   Beneficially  Owned(2)(3)** |   | **Percent of****Outstanding  Class of  Stock** |   |
|---------------------------------------------------|--------|-------------------------|--------|-----------------------------------------------------|--------|------------------------------------------------|--------|
| Welsh, Carson, Anderson & Stowe VIII, L.P.(4) |   | Common                  |   | 15,096,877                                          |   | 76.3                                           | %      |
| 320 Park Avenue, Suite 2500                       |   | Preferred  A            |   | 94,880                                              |   | 94.9                                           | %      |
| New York, NY 10022                                |   | Preferred  B            |   | 33,700                                              |   | 94.9                                           | %      |
|                                              |   |                    |   |                                                |   |                                           |   |
| WCAS Capital Partners III, L.P.                   |   | Common                  |   | 2,508,108                                           |   | 12.7                                           | %      |
| 320 Park Avenue, Suite 2500                       |   |                    |   |                                                |   |                                           |   |
| New York, NY 10022                                |   |                    |   |                                                |   |                                           |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| Convergent Equity Partners, L.P.(5)               |   | Common                  |   | 1,181,946                                           |   | 6.0                                            | %      |
| 100 Crescent Court, Suite 230                     |   |                    |   |                                                |   |                                           |   |
| Dallas, TX 75201                                  |   |                    |   |                                                |   |                                           |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| WCAS Information Partners, L.P.(6)                |   | Common                  |   | 57,502                                              |   | *                                              |   |
| 320 Park Avenue, Suite 2500                       |   | Preferred  A            |   | 373                                                 |   | *                                              |   |
| New York, NY 10022                                |   | Preferred  B            |   | 133                                                 |   | *                                              |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| Robert A. Minicucci(7)                            |   | Common                  |   | 17,719,987                                          |   | 89.6                                           | %      |
| 320 Park Avenue, Suite 2500                       |   | Preferred  A            |   | 95,626                                              |   | 95.6                                           | %      |
| New York, NY 10022                                |   | Preferred  B            |   | 33,966                                              |   | 95.6                                           | %      |
|                                              |   |                    |   |                                                |   |                                           |   |
| Eric J. Lee(8)                                    |   | Common                  |   | 0                                                   |   | *                                              |   |
| 320 Park Avenue, Suite 2500                       |   | Preferred  A            |   | 0                                                   |   | *                                              |   |
| New York, NY 10022                                |   | Preferred  B            |   | 0                                                   |   | *                                              |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| Murray Holland(9)                                 |   | Common                  |   | 1,181,946                                           |   | 6.0                                            | %      |
| 100 Crescent Court, Suite 230                     |   |                    |   |                                                |   |                                           |   |
| Dallas, TX 75201                                  |   |                    |   |                                                |   |                                           |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| Sanjay Swani(10)                                  |   | Common                  |   | 15,096,877                                          |   | 76.3                                           | %      |
| 320 Park Avenue, Suite 2500                       |   | Preferred  A            |   | 94,880                                              |   | 94.9                                           | %      |
| New York, NY 10022                                |   | Preferred  B            |   | 33,700                                              |   | 94.9                                           | %      |
|                                              |   |                    |   |                                                |   |                                           |   |
| Craig D. Crisman(11)                              |   | Common                  |   | 0                                                   |   | *                                              |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| John D. Staedke(11),(12)                          |   | Common                  |   | 0                                                   |   | *                                              |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| Brian R. Stone(11)                                |   | Common                  |   | 0                                                   |   | *                                              |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| Mark D. Fairchild(11)                             |   | Common                  |   | 35,000                                              |   | *                                              |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| James S. Kildebeck(11),(13)                       |   | Common                  |   | 0                                                   |   | *                                              |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| Mark D. Spire(11)                                 |   | Common                  |   | 11,375                                              |   | *                                              |   |
|                                              |   |                    |   |                                                |   |                                           |   |
| All executive officers and directors as a         |   | Common                  |   | 18,955,308                                          |   | 95.8                                           | %      |
| group (11 persons)                                |   | Preferred  A            |   | 95,626                                              |   | 95.6                                           | %      |
|                                              |   | Preferred B             |   | 33,966                                              |   | 95.6                                           | %      |

 

----

*Less than one percent.

(1)Except as otherwise indicated, each stockholder has sole investment and solevoting power with respect to the shares of Stock shown.

(2)Each share of Series A Preferred includes a warrant to purchase between 2.5 and7.75 shares of Common Stock. Common Stock exercisable by the warrants totals750,000 shares.

(3)Each share of Series B Preferred Stock includes the right to convert intoCommon Stock. The number of shares of Common Stock is determined by multiplyingthe number of shares being converted by $150 and dividing the result by $8.325per share. The conversion rate is subject to various adjustments.

(4)Common Stock includes 13,754,070 shares of Common Stock, 735,600 shares ofCommon Stock (Series A Warrants), and 607,207 shares of Common Stock (Series BConversion Rights).

(5)Convergent Equity Partners, L.P. holds shares of Class A Common Stock. Allothers hold shares of Common Stock.

(6)Common Stock includes 54,056 shares of Common Stock, 1,050 shares of CommonStock (Series A Warrants), and 2,396 shares of Common Stock (Series BConversion Rights).

(7)Includes 15,096,877 shares of Common Stock, 94,880 shares of Preferred A, and33,700 shares of Preferred B held by Welsh, Carson, Anderson & Stowe VIII,L.P., 2,508,108 shares of Common Stock held by WCAS Capital Partners III, L.P.and 57,502 shares of Common Stock, 373 shares of Preferred A, and 133 shares ofPreferred B held by WCAS Information Partners, L.P. Mr. Minicucci is a managingmember of each of Welsh, Carson, Anderson & Stowe VIII, L.P. and WCASCapital Partners III, L.P. Mr. Minicucci disclaims beneficial ownership of suchshares.

(8)Mr. Lee is not a general partner of Welsh, Carson, Anderson & Stowe VIII,L.P., WCAS Capital Partners III, L.P. or of WCAS Information Partners, L.P. Mr.Lee does not have beneficial ownership of any BancTec shares.

(9)Includes 1,181,946 shares of Class A Common Stock held by Convergent EquityPartners, L.P. Mr. Holland is a principal of Convergent Equity Partners, L.P.Mr. Holland disclaims beneficial ownership of such shares.

(10)Includes 15,096,877 shares of Common Stock, 94,880 shares of Preferred A, and33,700 shares of Preferred B held by Welsh, Carson, Anderson & Stowe VIII,L.P. Mr. Swani is a managing member of Welsh, Carson, Anderson & StoweVIII, L.P. Mr. Swani disclaims beneficial ownership of such shares.

(11)Represents Common Shares that may be acquired pursuant to stock options held bythe executive officer.

(12)Mr. Staedke served as President and Chief Executive Officer from December 1999to May 2001, Director from December 2000 to May 2001 and Chairman of the Boardof Directors from May 2001 to December 2001. Mr. Staedke terminated employmenteffective December 31, 2001.

(13)Mr. Kildebeck terminated employment effective January 31, 2002.

 

50

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**ITEM 13. Certain Relationships andRelated Transactions**

 

None.

 

51

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**PART IV**

 

**ITEM 14. Exhibits, Financial StatementSchedules, and Reports on Form 8-K**

 

(a)          (1) and (2) Financial Statements: See Index to Financial Statements andSchedules.

 

(b)         Reports on Form 8-K:

 

The Company filed aCurrent Report on Form 8-K dated November 5, 2001, regarding the dismissal ofDeloitte & Touche LLP as its independent accountant and the engagement ofKPMG LLP as its independent accountant.

 

(c)Exhibits:

 

3.1— Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to theCompany’s Annual Report on Form 10-K for the year ended December 31, 1999.

 

3.2— Amendment to Certificate of Incorporation, incorporated by reference toExhibit 3.2 to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 1999.

 

3.3— By-Laws, incorporated by reference to Exhibit 3.3 to the Company’s AnnualReport on Form 10-K for the year ended December 31, 1999.

 

4.1— Certificate of Designations, Preferences and Rights of Series A PreferredStock, incorporated by reference to Exhibit 3.3 to the Company’s QuarterlyReport on Form 10-Q for the period ended September 30, 2000.

 

4.2— Securities Purchase Agreement dated as of September 22, 2000, incorporated byreference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for theperiod ended September 30, 2000.

 

4.3— Certificate of Designations, Preferences and Rights of Series A and BPreferred Stock, incorporated by reference to Exhibit 4.3 to the Company’sAnnual Report on Form 10-K for the year ended December 31, 2000.

 

4.4— Securities Purchase Agreement dated as of February 27, 2001, incorporated byreference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for theyear ended December 31, 2000.

 

4.5— Indenture dated May 22, 1998 by and between the Company and The FirstNational Bank of Chicago, incorporated by reference to Exhibit 4.2 to theCompany’s Registration Statement on Form S-4 dated August 28, 1998.

 

4.6— Exchange and Registration Rights Agreement dated May 22, 1998 by and amongthe Company, Chase Securities, Inc., Goldman, Sachs & Co. and NationsBancMontgomery Securities LLC, incorporated by reference to Exhibit 4.1 to theCompany’s Registration Statement on Form S-4 dated August 28, 1998.

 

4.7— Senior Subordinated Note dated July 22, 1999, among Colonial AcquisitionCorp., a predecessor in interest to the Company, WCAS CP III and the severalPurchasers named in Schedules I and II thereto.  *

 

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 byreference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for theyear 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 onForm 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 onForm 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 onForm 10-Q for the period ended September 30, 2000.

 

10.5— Stock Subscription Warrant, incorporated by reference to Exhibit 10.3 to theCompany’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 tothe Company’s Quarterly Report on Form

 

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10-Qfor the period ended September 30, 2000.

 

10.7— Loan and Security Agreement, dated as of May 30, 2001, between HellerFinancial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.1 tothe 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 November8, 2001, between Heller Financial, Inc. and BancTec, Inc., incorporated byreference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q forthe period ended September 30, 2001.

 

10.9—  Letter Agreement regarding Loan andSecurity Agreement—Waiver and Consent Relating to BTC International HoldingsTransaction, dated December 31, 2001 between Heller Financial, Inc. andBancTec, Inc. *

 

10.10— Second Amendment to Loan and Security Agreement, dated as of February5, 2002, between Heller Financial, Inc. and BancTec, Inc. *

 

10.11— Third Amendment to Loan and Security Agreement, dated as of July 30,2002, between Heller Financial, Inc. and BancTec, Inc. *

 

21.1— Subsidiaries of Registrant

 

99.1 — Certificate of Chief Executive Officer andChief Financial Officer*

 

 

**EXECUTIVECOMPENSATION PLANS AND ARRANGEMENTS**

 

10.12— Special Severance Plan for Corporate Officers effective October 1, 2000,incorporated by reference to Exhibit 10.7 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.

 

10.13— Employment Agreement with John D. Staedke dated November 18, 1999,incorporated by reference to Exhibit 10.8 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.

 

10.14— Amendment to Employment Agreement with John D. Staedke, incorporated byreference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for theyear ended December 31, 2000.

 

10.15— Employment Agreement with Craig D. Crisman dated July 1, 2002.  *

 

10.16— Employment Agreement with Brian R. Stone dated August 1, 2002.  *

 

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*Filed herewith.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Company has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

**BancTec, Inc.**

 
|                   | *By*   | */s/ Craig D. Crisman*                   |   |
|------------------------|--------|------------------------------------------|--------|
|                   |   | *Craig D. Crisman*                       |
|                   |   | *President and Chief Executive  Officer* |
|                   |   |                                     |
| Dated:  August 9, 2002 |   |                                     |
|                        |        |                                          |        |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisreport has been signed below by the following persons on behalf of the Companyand in the capacities and on the dates indicated: 

 
| **Signature**                  |   | **Title**                                                                                 |   | **Date**        |
|--------------------------------|--------|-------------------------------------------------------------------------------------------|--------|-----------------|
| /s/  Craig D.  Crisman    |   | President  and Chief Executive Officer (Principal   Executive Officer); and Director |   | August  9, 2002 |
| Craig D. Crisman               |   |                                                                                      |   |            |
|                           |   |                                                                                      |   |            |
| /s/  Brian R.  Stone      |   | Senior  Vice President, Chief Financial Officer, and Treasurer                            |   | August  9, 2002 |
| Brian R. Stone                 |   | (Principal  Accounting Officer); and Director                                             |   |            |
|                           |   |                                                                                      |   |            |
| /s/  Robert A.  Minicucci |   | Chairman  of the Board and Director                                                       |   | August  9, 2002 |
| Robert A. Minicucci            |   |                                                                                      |   |            |
|                           |   |                                                                                      |   |            |
| /s/  Eric J.  Lee         |   | Director                                                                                  |   | August  9, 2002 |
| Eric J. Lee                    |   |                                                                                      |   |            |
|                           |   |                                                                                      |   |            |
| /s/  Murray  Holland      |   | Director                                                                                  |   | August  9, 2002 |
| Murray Holland                 |   |                                                                                      |   |            |
|                           |   |                                                                                      |   |            |
| /s/  Sanjay  Swani        |   | Director                                                                                  |   | August  9, 2002 |
| Sanjay Swani                   |   |                                                                                      |   |            |

 

54

 

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**INDEPENDENT AUDITORS’ REPORT**

 

Tothe Board of Directors and Stockholders of BancTec, Inc:

 

Wehave audited the consolidated financial statements of BancTec, Inc. as of andfor the year ended December 31, 2000, and have issued our report thereon datedMay 15, 2001; (except with respect to the matters discussed in Note E, as towhich the date is May 31, 2001) such consolidated financial statements andreport are included elsewhere in this Form 10-K. Our audit also included thefinancial statement schedule of BancTec, Inc., listed in Item 14. The financialstatement schedule is the responsibility of the Company’s management. Ourresponsibility is to express an opinion based on our audit. In our opinion,such financial statement schedule, when considered in relation to the basic financialstatements taken as a whole, present fairly in all material respects theinformation set forth therein.

 

**DELOITTE & TOUCHE LLP**

 

Dallas,Texas

May 15, 2001

 

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** **

**The following auditors’ report is a copy of the report filedin a previous year and has not been reissued. This copy is provided in responseto Financial Reporting Release 62 “Temporary Final Rule and Final Rule:Requirements for Arthur Andersen LLP Auditing Clients” and has not been modifiedin any fashion from the latest signed and dated auditors’ report issued byArthur Andersen LLP and therefore refers to financial statements not physicallyincluded in the document.**

 

**To the Board of Directors andStockholders of BancTec, Inc:**

 

Wehave audited in accordance with auditing standards generally accepted in theUnited States, the consolidated financial statements of BancTec, Inc. (theCompany) as of December 31, 1999 and for the two years in the period endedDecember 31, 1999 included in this Form 1O-K, and have issued our reportthereon dated February 16,2000. Our audits were made for the purpose of formingan opinion on those consolidated financial statements taken as a whole. Theschedule listed in the Index to Financial Statements and Schedules is theresponsibility of the Company’s management and is presented for purposes ofcomplying with the Securities and Exchange Commission’s rules and is not partof the basic consolidated financial statements. This schedule has beensubjected to the auditing procedures applied in the audit of the basicconsolidated financial statements and, in our opinion, fairly states in allmaterial respects the financial data for the two years ended December 31, 1999,required to be set forth therein in relation to the basic consolidatedfinancial statements taken as a whole.

 

**ARTHUR ANDERSENLLP**

 

Dallas,Texas

February 16, 2000

 

 

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**SCHEDULE II**

 

**BANCTEC, INC.**

 

**VALUATION ANDQUALIFYING ACCOUNTS**

 

Forthe Years Ended December 31, 2001, 2000 and 1999

 
| **Column A**                               |   | **Column B**                         |   | **Column C**                                   |   | **Column D**                |   | **Column E**                   |   |
|--------------------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|-----------------------------|--------|--------------------------------|--------|
|                                       |   | **Balance at  beginning  of period** |   | **Additions  charged to  costs and  expenses** |   | **Deductions  (a) (b) (c)** |   | **Balance at  end of  period** |   |
|                                       |   |                                 |   |                                           |   |                        |   |                           |   |
| Allowance for Doubtful Accounts            |   |                                 |   |                                           |   |                        |   |                           |   |
| Year ended December 31, 2001               |   | $                                    | 8,274  |                                           | $      | 3,934                       |   | $                              | (4,533 | )(a) | $ | 7,675 |   |
| Year ended December 31, 2000               |   | 12,790                               |   | 2,631                                          |   | (7,147                      | )(a)   | 8,274                          |   |
| Year ended December 31, 1999               |   | 9,333                                |   | 10,914                                         |   | (7,457                      | )(a)   | 12,790                         |   |
|                                       |   |                                 |   |                                           |   |                        |   |                           |   |
| Reorganization Accrual                     |   |                                 |   |                                           |   |                        |   |                           |   |
| Year ended December 31, 2001               |   | $                                    | 115    |                                           | $      | —                      |   | $                              | (67    | )(b) | $ | 48 |   |
| Year ended December 31, 2000               |   | 215                                  |   | —                                         |   | (100                        | )(b)   | 115                            |   |
| Year ended December 31, 1999               |   | 3,879                                |   | —                                         |   | (3,664                      | )(b)   | 215                            |   |
|                                       |   |                                 |   |                                           |   |                        |   |                           |   |
| Accrued Recapitalization Charges and Costs |   |                                 |   |                                           |   |                        |   |                           |   |
| Year ended December 31, 2001               |   | $                                    | — |                                           | $      | —                      |   | $                              | — |   | $ | — |   |
| Year ended December 31, 2000               |   | —                               |   | 309                                            |   | (309                        | )(c)   | —                         |   |
| Year ended December 31, 1999               |   | 332                                  |   | —                                         |   | (332                        | )(c)   | —                         |   |

 

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(a)          Write-off of uncollectible accounts.

(b)         Severance and related payments.

(c)          Payment of recapitalization charges.

 

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