**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**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, 2002**                                                                    |
|                                                                                                                |
| **OR**                                                                                                              |
|                                                                                                                |
| **o****  TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                |
| **Commission File Number 0-9859**                                                                                   |

 

| **BANCTEC, INC.**                                      |
|--------------------------------------------------------|
| (Exact Name of Registrant as Specified in its Charter) |
|                                                   |   |   |
| **Delaware**                                           |   | **75-1559633** |
| (State or Other Jurisdiction of                        |   | (I.R.S. Employer |
| Incorporation or Organization)                         |   | Identification No.) |
|                                                   |   |   |
| **2701 East  Grauwyler**                               |   |   |
| **Irving, Texas**                                      |   | **75061** |
| (Address of Principal Executive Offices)               |   | (Zip Code) |

 

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

** **

Securities registered pursuant to Section 12(b)of the Act:

 

**None**

 

Securities registered pursuant to Section 12(g)of the 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: ý No: o

 

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.

 

Indicate by check mark whether the registrant is an accelerated filer(as defined by Rule 12b-2 of the Act). YES oNO ý

 

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  March 15, 2003** |
|---------------------------------------|--------|------------------------------------------------------|
| 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, 2002

 

**FORWARD-LOOKING STATEMENTS**

 

*This Annual Report on Form 10-K, including Management’sDiscussion and Analysis of Financial Condition and Results of Operations inItem 7 and Quantitative and Qualitative Disclosure About Market Risk in Item7A, contains forward-looking statements as that term is defined in the PrivateSecurities Litigation 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.*

 

 

TABLE OF CONTENTS

 
|      | PART I                                                                                           |   |
|-----------|--------------------------------------------------------------------------------------------------|--------|
|      |                                                                                             |   |
| ITEM 1.   | Business                                                                                         |   |
| ITEM 2.   | Properties                                                                                       |   |
| ITEM 3.   | Legal Proceedings                                                                                |   |
| ITEM  4.  | Submission  of Matters to a Vote of Security Holders                                             |   |
|      |                                                                                             |   |
|      | PART II                                                                                          |   |
|      |                                                                                             |   |
| ITEM  5.  | Market  for Registrant’s Common Equity and Related Stockholder Matters                      |   |
| ITEM 6.   | Selected Financial  Data                                                                         |   |
| ITEM  7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |   |
| ITEM  7A. | Quantitative  and Qualitative Disclosure About Market Risk                                       |   |
| ITEM  8.  | Financial  Statements and Supplementary Data                                                     |   |
| ITEM  9.  | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure            |   |
|      |                                                                                             |   |
|      | PART III                                                                                         |   |
|      |                                                                                             |   |
| ITEM  10. | Directors  and Executive Officers of the Registrant                                              |   |
| ITEM 11.  | Executive Compensation                                                                           |   |
| ITEM  12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |
| ITEM  13. | Certain  Relationships and Related Transactions                                                  |   |
| ITEM 14.  | Controls and  Procedures                                                                         |   |
|      |                                                                                             |   |
|      | PART IV                                                                                          |   |
|      |                                                                                             |   |
| ITEM 15.  | Financial Statement Schedules,  Exhibits, and Reports on Form 8-K                                |   |

 

2

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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 provides 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. Worldwide, the Companyemploys 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 2002 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 andConvergent acquired 1,181,946 shares of BancTec’s Class A common stock. Inconnection with the recapitalization, each previously outstanding share ofBancTec common stock was converted into the right to receive $18.50 in cash,totaling approximately $360.2 million, and simultaneously canceled. Funding forthe distribution to the former BancTec stockholders was provided by a $145.0million capital contribution from WCAS and Convergent, by the Tranche A TermLoan, the Sponsor Note, and the Revolving Credit Facility discussed in theNotes to the Consolidated Financial Statements. In addition to the funds thatwere paid for the shares, cash payments were made for employee stock options of$9.3 million and an employee stock purchase plan of $0.3 million. The optionsand the employee stock purchase plan payments were recorded as a reduction tostockholders’ equity.

 

WCAS also owned Series A preferred stock (“SeriesA Preferred”) which included warrants, and Series B preferred stock (“Series BPreferred”) which included conversion rights.

 

Effective as of November 1, 2002, the Company and the owners of all theoutstanding capital stock of the Company consummated a series of transactionsin order to create a two-tier holding company structure above the Company.   As a consequence of the restructuring, allthe outstanding capital stock of the Company and warrants to purchase capitalstock of the Company (but not employee stock options) are held by BancTec IntermediateHolding, Inc., a Delaware corporation (“Intermediate Holding”).  In turn, all the outstanding capital stockof Intermediate Holding is held by BancTec Upper-Tier Holding, LLC, a Delawarelimited liability company (“Upper-Tier Holding”), whose members consist of theprior owners of all the outstanding capital stock of the Company and seniormanagement of the Company (or entities controlled by them). As part of therestructuring, WCAS Capital Partners III, L.P. contributed to Upper-TierHolding the Senior Subordinated Note Due 2009 originally issued to it by theCompany, together with pay-in-kind interest thereon, in an aggregate principalamount of approximately $193.8 million (the “Sponsor Note”).  In addition, Intermediate Holdingcontributed $100,000 to the Company in exchange for 667 shares of Series APreferred Stock of the Company.

 

WCAS is strategically focused on the acquisitionof information services, health care and telecommunications companies,traditionally investing for growth.

 

**U.S. Solutions and International Solutions.** U.S. Solutions (“USS”) and InternationalSolutions (“INTL”) offer similar systems integration and business processsolutions and services, and market to similar types of customers. The solutionsoffered primarily involve high-volume transaction processing using advancedtechnologies that capture, process and archive paper and electronic documents.Key applications include payment and check processing, document imaging andworkflow, 

 

3

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as well as related ongoing service and support.The Company’s powerful, high-volume integrated systems deliver importantbenefits to some of the world’s largest credit card companies and major banks.In addition, these segments provide their products and services to other customers,including financial services companies and insurance providers,telecommunications companies, utility companies, governmental agencies, andtransportation 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, digitize,process and archive checks and other documents, 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-basedsolutions for check exception handling, enabling financial institutions thathandle large volumes of checks to reprocess more efficiently items that wererejected in normal operating cycles.

 

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.

 

**Archive Solutions**. BancTec’s multi-tiered archival system is targeted to support industryefforts to reduce and eventually eliminate the multiple handling of checks anddocuments through truncation and electronic check presentment initiatives. Thesystems also improve accessibility to the data and reduce access time. TheCompany believes that this technology also has application for other marketsegments.

 

**Plexus(R) Products**. The Company offers a complete suite ofinternet-enabled document imaging and workflow software solutions under thePlexus(R) brand designed for high-volume, complex and distributed environments.These software products offer workflow, data management and forms processingcapabilities that enable users to automate, coordinate and streamline businessprocesses. The products are also incorporated into the Company’s applicationsolutions to enhance functionality and provide competitive distinction.

 

**Document and Check Processing EquipmentProducts**. The Companymanufactures low, medium, and high-speed document reader/sorters and relatedcomponents that read magnetic ink character recognition and optical characterrecognition data from financial documents and sort the documents according toestablished patterns. The Company’s high-speed, full-page scanners utilizephoto-optical technology, gray scale image capture capabilities, characterrecognition software and high precision document transports to scan anddigitize full-sized business documents such as invoices, statements andbusiness forms. The Company markets these products and solutions to end-users,other manufacturers and various resellers and systems integrators throughoutthe 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 theCompany’s Products**. TheCompany installs and provides maintenance and support services for its ownhardware and software products, as well as third-party hardware, includingdocument reader/sorters, scanners and software products / solutions. TheCompany employs customer service engineers located in the United States andinternational locations to perform such service. The Company’s maintenancecontracts usually include both parts and labor, and the one-year contracts aretypically renewed annually for five to seven years.

 

**Computer and Network Services**. The Company is a leading provider of personalcomputer repair services in the United States. The Company provides such services to many companies, including Fortune1000 companies, and consumers. Computer and Network Services (“CNS”) isstructured around the following three customer areas:

 

**Strategic alliances, includingoutsource and system integration partners**. The Company enters into strategic alliances toestablish and maintain partnerships with industry-recognized providers ofoutsourcing services as well as with system integrators who offer specificsupport to their customer base. The partnerships with these organizationsenable CNS to provide services consistent with its core competencies fordesktop/enterprise applications, while enabling the strategic alliance partnersto focus on program management and specific services.

 

4

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**OEM partner relationships**. The focus of the CNS OEM partner relationshipgroup is on providing warranty fulfillment services and related support tomanufacturers of desktop/enterprise products. CNS provides OEMs with access toCNS’ extensive national field-service organization, while enabling the OEMs tofocus on the production process and customer requirements.

 

**Fortune and retail market accounts**. The Fortune and retail accounts group servesthose customers that have support needs consistent with CNS’ core competenciesin desktop/enterprise applications while leveraging the nationwide serviceorganization. Typical customers require national service in order to supporttheir various sites. Agreements with these customers require flexibility tomanage support needs ranging from high-priority mission-critical systems tooffice automation with lower-priority support requirements.

 

**Information About Industry Segments**

 

Operating segments are defined as components of acompany about which separate financial information is available that isevaluated regularly by the company’s chief operating decision-maker, ordecision-making group, in deciding how to allocate resources and inassessing performance.  In 2000, the Company reported its operations asthree primary segments, North American Systems (“NAS”), International Systems(“INTL”), and CNS. The operations of NAS and INTL included manufacturing andsupplies, maintenance of Company-manufactured products, integrated systems, andPlexus products. The CNS operations included personal computer repair servicesand administration of third-party extended-service contracts.  As a part of the reporting structurerealignment discussed below, International Systems has been renamedInternational Solutions. INTL consists of operations throughout the worldexcluding North America.

 

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.

 

Effective the first quarter of 2002, the Companyemployed a new structure.  Under the newstructure, USS includes AES. INTL reporting includes both US and Internationaloperations of Plexus products.  Thecomposition of CNS remains unchanged.

 

On November 27, 2002, the Company sold itsoperations in Japan.  As a result, allsegment reporting has been restated to reflect the Japanese operations as discontinuedoperations.  The details of thisdisposition are discussed in Notes to the Consolidated Financial Statements.

 

Note K – Business Segment Data, contained inNotes to the Consolidated Financial Statements, includes detailed financialinformation concerning the Company’s segments.

 

**Geographical Locations**

 

There are no significant risks associated withforeign operations other than the fluctuation of international currencies (inEurope), political environments and economic cycles.  Note L – Geographic Operations, contained in Notes to theConsolidated Financial Statements, includes detailed financial informationconcerning the Company’s geographic operations.

 

**Product Development**

 

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 December 31, 2002.

 

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

 
|                         |   | **For the years ended December 31,** |   |
|------------------------------|--------|--------------------------------------|--------|
|                         |   | **2002**                             |   | **2001** |   | **2000** |   |
|                         |   | **(dollars in thousands)**           |   |
| Product Development Expenses |   | $                                    | 15,984 |   | $ | 15,926 |   | $ | 20,141 |   |
| Percent of Total Revenue     |   | 4.2                                  | %      | 3.7 | % | 4.9 | % |
|                              |        |                                      |        |  |  |  |  |  |  |  |

 

5

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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.

 

*Electronic Document Management.* BancTec’s EDM business is organized around thecreation of a set of high-level reusable components that form the basis ofvertical solutions for specific markets. Components of this suite are calledeFIRST(TM) Capture, eFIRST Case++ and eFIRST Archive+. BancTec’s EDM solutionsare differentiated from competitors in that the Company’s solutions areconstructed from the complete, pre-integrated eFIRST components.  The eFIRST product suite is also, whereapplicable, integrated with FloWare from Plexus. As a result, any integrationissues are addressed at the product level so that the customer- solution levelis a seamless event with respect to integration issues. Flexibility androbustness of the solution enable customers to adapt the scalable system astheir business needs change. Among the target uses for which eFIRST solutionsare well-suited include complex and large-scale invoicing and billings systems,customer relationship management systems, applications handling such assubscriptions, account openings, governmental, including immigration visahandling, social security claims and records management, and insurance claimshandling. Three core modules exist in the eFIRST suite of solutions – genericcapture system, business process case management, and archiving - which can beintegrated within the same environment and expanded.

 

eFIRST Capture focuses on interaction betweencustomers and suppliers and addresses certain problems of hybrid environments.eFIRST Capture recognizes data from many types of interaction such as e-mail,web, scanned documents, faxes and web-forms. From these various types ofsources, eFIRST Capture extracts useful data previously thought unsuitable forsuch purposes as general correspondence, non-standard invoices and deliverynotes.

 

eFIRST Case focuses on the interaction betweenthe customer channel and repository - the processes and interfaces whichconstitute the core competencies of businesses and how value is added throughthe application of accumulated knowledge and data to their raw customer inputs,e.g., developing meaningful electronic pathways, and collating information frommany sources. eFIRST Case addresses these issues by providing a technologyplatform and user tools to construct workflows, data views, user environmentsand access permission models that draw in existing systems and people toautomate business processes.

 

eFIRST Archive addresses the other end of thebusiness transaction - the secure, structured repository. eFIRST Archiveenables the creation of structures for information that relate to the waybusiness is conducted, facilitating the meaningful grouping of different kindsof stored objects such as scanned images, mainframe records, and word documentfiles. eFIRST Archive can be searched using specific indices or across allobjects’ contents for certain keywords or phrases which can be specified longafter the data has been stored.

 

*PaymentsProducts*. The Company’sPayments products are currently being expanded to include a new WholesaleSystem to replace the legacy system that has been installed in a number ofclients for over 12 years. In parallel, the Company is integrating this newsystem with eCAP, which is the ‘Check and List ‘ product for automaticallycapturing invoice data from semi-structured forms. This new product set willdramatically reduce the operational cost of running a Wholesale system.

 

*Hardware Enhancements.* In 2003, the Company plans to continuedevelopment and enhancements to its portfolio of document transport products.Introduced in 2002, the Company’s X-Series(TM) Reject Repair System is 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, cameras cancapture a downstream image of all items, providing a more accurate record ofthe completed transaction for research purposes.  Faster and slower versions of the X-Series will bedeveloped in 2003 to address more markets and provide replacement equivalentsfor an installed base of the Company’s hardware.  Other X-Series enhancements include a range of incremental featuresto improve image enhancement and productivity.

 

Other development activity includes a new scanner that directlyaddresses the market for mixed financial documents and white mail. The envelopeand its contents are scanned, the images are machine read and directed to theappropriate place in the organization based on the content.  This will target a new market for theCompany and supports the Company’s focus on Document Imaging.

 

6

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**Sales and Distribution**

 

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.

 

**Customer Diversification**

 

For the years ended December 31, 2002, 2001 and2000, Dell, accounted for 16.2%, 14.5%, and 10.6%, respectively, of the totalrevenue of the Company (as restated for discontinued operations).  The Company’s ten largest customersaccounted for 39.6%, 45.1%, and 40. 8%, of the Company’s revenues (as restated fordiscontinued operations) for the years ended December 31, 2002, 2001, and 2000,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 Company willhave the resources, marketing and service capability, or technologicalknowledge to continue to compete successfully.

 

**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 foreignpatents and holds licenses under numerous patents owned by others. The Companyalso owns a number of registered and common-law trademarks in the U.S. andother countries relating to the Company’s trade names and product names.

 

The validity of any patents issued, or that maybe issued, 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 byothers, that would render the Company’s patents obsolete. Management does notconsider the Company’s patents and licenses to be critical to the ongoingoperations of the Company.

 

**Employees**

 

At December 31, 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.

 

7

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**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 December 31, 2002, the Company owned orleased numerous facilities throughout the world to support its operations. TheCompany believes that these facilities are adequate to meet its ongoing needs.The loss of any of the Company’s principal facilities could have an adverseimpact on operations in the short term. The Company has the option to renew itsfacility leases or can replace them with alternate facilities at comparablecost. The Irving manufacturing facility, which the Company owns, is the primarylocation for the Company’s administration, assembly and manufacturingactivities.

 

**ITEM 3.****                             LEGAL PROCEEDINGS****.**

 

A lawsuit captioned Cerberus International, Ltd., et al. vs.BancTec, Inc., et al. (Case No. 03600287) was filed on January 28, 2003 inthe Supreme Court of the State of New York for the County of New York naming asdefendants the Company and certain of its affiliates.  The complaint alleges that the Company improperly made a paymentto the holder of the Sponsor Note.  Thecomplaint seeks damages of not less than $89 million as a result of the allegedimproper payment and the imposition of a constructive trust on monies paid bythe Company to the holder of the Sponsor Note. The Company’s $90 million payment to the holder of the Sponsor Note, wasdisclosed in the Company’s Current Report on Form 8-K dated November 27, 2002.  This action is in its earliest stages.  The Company believes that the allegationsare without merit and intends to defend against them vigorously.

 

If the lawsuit results in a determination that the payment to reducethe principal amount of the Sponsor Note was in contravention of the terms ofthe Sponsor Note, a position strongly opposed by the Company, under its terms,such payment shall be held in trust to be paid over to the holders of theSenior Notes, to the extent they remain unpaid.  Therefore, in the event of an unfavorable outcome in thislitigation, there will be no adverse effect on the Company’s financialstatements.

 

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

 

**ITEM 4.****                             SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

None.

 

8

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**PART II**

 

**ITEM5.****                             MARKETFOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS****.**

 

None.

 

**ITEM 6.****                             SELECTED FINANCIAL DATA.**

 

The following table presents selected consolidated historical financialdata for the periods indicated.  Theselected historical consolidated financial data set forth below should be readin conjunction with “Management’s Discussion and  Analysis  of  Financial Condition  and  Results of  Operations”  and the Consolidated  Financial  Statements of the  Company  for the three  years ended December 31, 2002, 2001 and 2000, and the relatednotes thereto.

 

 
|                                                         |   | **Years Ended**        |    |
|--------------------------------------------------------------|--------|------------------------|---------|
|                                                         |   | **December 31,  2002** |    | **December 31,2001** |   | **December 31,2000** |   | **December 31,1999** |   | **December 31,1998** |   |
|                                                         |   | **(In thousands)**     |    |
| Revenue                                                      |   | $                      | 379,433 |   | $ | 427,264 |   | $ | 412,620 |   | $ | 475,005 |   | $ | 509,384 |   |
| Gross profit                                                 |   | 96,205                 |    | 55,885 |   | 25,231 |   | 89,020 |   | 111,542 |   |
| Operating expenses                                           |   | 70,968                 |    | 94,364 |   | 102,487 |   | 109,377 |   | 99,338 |   |
| Interest expense                                             |   | 33,080                 |    | 35,527 |   | 37,239 |   | 22,652 |   | 8,955 |   |
| Income (loss) from continuing operations before income taxes |   | 700                    |    | (52,258 | ) | (113,501 | ) | (42,646 | ) | 6,024 |   |
| Income tax expense (benefit)                                 |   | 344                    |    | 445 |   | 34,236 |   | (17,355 | ) | 1,526 |   |
| Net income (loss)                                            |   | 56,928                 |    | (45,826 | ) | (144,850 | ) | (11,197 | ) | 4,813 |   |
|                                                         |   |                   |    |   |   |   |   |   |   |   |   |
| Total assets                                                 |   | 231,395                |    | 315,049 |   | 399,752 |   | 473,105 |   | 520,312 |   |
| Working capital (deficit)                                    |   | (8,877                 | )       | (8,970 | ) | 84,718 |   | 130,448 |   | 144,405 |   |
| Long-term debt, less current maturities                      |   | 201,723                |    | 304,798 |   | 388,112 |   | 350,500 |   | 150,352 |   |
| Mandatory redeemable preferred stock                         |   | 14,856                 |    | 13,151 |   | 11,638 |   | — |   | — |   |
| Stockholders’ equity (deficit)                          |   | (153,400               | )       | (212,517 | ) | (167,342 | ) | (21,738 | ) | 220,081 |   |
|                                                              |        |                        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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.

 

In November 2002, the Company completed the saleof BancTec Japan.  For financialstatement purposes, the sale was treated as a discontinued operation.  As a result, the financial data above hasbeen restated for 2002 and prior years to reflect the continuing operations ofthe Company.

 

**ITEM 7.****                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.**

 

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 “ForwardLooking Statements”. The Company cautions investors that there can be noassurance that actual results or business conditions will not differ materiallyfrom those projected or suggested in such forward-looking statements as aresult of various factors, including those described below under the caption“Factors Affecting the Company’s Business and Prospects”.  The Company undertakes no obligation toupdate or revise forward-looking statements to reflect changes in assumptions,the occurrence of unanticipated results or changes to future operating resultsover time.*

 

The Company believes several factors continued to create a challengingand competitive sales and cost-containment environment during the year endedDecember 31, 2002.  These factorsinclude: general economic conditions and reduced

 

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corporate customer technology spending; ongoing competitive pressures;an ongoing planned change in revenue mix within the Company’s U.S. Solutions(“USS”) and International Solutions (“INTL”) segments; and a highly leveragedfinancial position.  The change inrevenue mix is partially a result of trends in payment processing, includingtruncation, which impacts domestic and international markets.  Additionally, during 2002, the USS and INTLsegments experienced additional unexpected revenue declines, the duration ofwhich the Company cannot predict.  TheCompany has undertaken a process of evaluating the recovery of all itsinvestments in inventory and long-lived assets.  This evaluation has resulted in write-downs and impairments ofinventory and other long-lived assets in response to current businessconditions and other decisions reached during the planning process.

 

Expected economic and business conditions into 2003 indicate a cautiousoutlook regarding the Company’s near-term revenue and earnings growthprospects.  Most of the Company’sproduct offerings represent a significant capital expenditure for itscustomers.  The general economic conditionshave caused a significant weakening in demand for systems solutions productsoffered by USS and INTL. The Company has concentrated its emphasis on costreductions and on existing offerings. Product-development efforts are focused on payment, check and documentprocessing technologies, in addition to investments in Electronic DocumentManagement (“EDM”) vertical solutions and an investment in archiving solutionsfor all markets, as well as hardware enhancements. By incorporating morethird-party products into the Company’s solutions rather than developing theproducts, the Company can more easily target its efforts and expenditures tothese core products and solutions.

 

**CriticalAccounting Policies**

 

The Company’s significant accounting policies and methods used in thepreparation of the Consolidated Financial Statements are discussed in Note A ofthe Notes to Consolidated Financial Statements. The following is a listing ofthe Company’s critical accounting policies and a brief discussion of each:

 

•                  Revenuerecognition;

•                  Allowancefor doubtful accounts;

•                  Inventoryvaluation

•                  Goodwill

**•**                  Income taxes

 

**RevenueRecognition**. The Company derives revenue from primarily twosources (1) product sales- systems integration solutions which address complexdata and paper-intensive work processes, including advanced web-enabled imagingand workflow technologies with both BancTec-manufactured  equipment 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 to CertainTransactions” to all transactions involving the sale of software products andsales of hardware where the software is not incidental. For those transactionsthat involve acceptance certificates, the Company recognizes revenue uponreceipt of the acceptance certificate, or when it can be objectivelydemonstrated that acceptance criteria have been met.  For hardware transactions where software is consideredincidental, or no software is included, revenue is recognized when the producthas 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 feesare invoiced. 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 signed salesagreement as evidence of an arrangement.

 

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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 over time or on a “per call” basis.

 

**Allowance for Doubtful Accounts**. TheCompany’s allowance for doubtful accounts relates to trade accounts receivable.The allowance for doubtful accounts is an estimate prepared by management basedon identification of the collectibility of specific accounts and the overallcondition of the receivable portfolios. The Company analyzes trade receivables,and analyzes historical bad debts, customer credits, customer concentrations,customer credit-worthiness, current economic trends and changes in customer paymentterms, when evaluating the adequacy of the allowance for doubtful accounts. Ifthe financial condition of the Company’s customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required. Likewise, should the Company determine that itwould be able to realize more of its receivables in the future than previouslyestimated, an adjustment to the allowance would increase income in the periodsuch determination was made. The allowance for doubtful accounts is reviewedperiodically and adjustments are recorded as deemed necessary.

 

**InventoryValuation**. The Company periodically evaluates the carryingamount of inventory based on the identification of excess and obsoleteinventory. The Company’s evaluation involves a multi-element approachincorporating inventory turnover and the stratification of inventory by riskcategory, among other elements.  Theapproach incorporates both recent historical information and managementestimates of trends. The Company’s approach is intended to take intoconsideration potential excess and obsolescence caused by a decreasinginstalled base, engineering changes and end of manufacture.  If any of the elements of the Company’s estimatewere to deteriorate, additional write-downs may be required. The inventorywrite-down calculations are reviewed periodically and additional write-downsare recorded as deemed necessary.

 

**Goodwill**. The Company assesses theimpairment of goodwill whenever events or changes in circumstances indicatethat the carrying value may not be recoverable. If the Company determines thatthe carrying value of  goodwill may notbe recoverable based upon the existence of one or more indicators ofimpairment, the Company assesses the recoverability of the goodwill bydetermining whether the amortization of the asset balance over its remaininglife can be recovered through undiscounted future operating cash flow of theacquired operations, to the extent they remain separately identifiable. Anyimpairment is measured based on a projected discounted cash flow method using adiscount rate reflecting the Company’s average cost of funds. Goodwill amountedto approximately $41.5 million as of December 31, 2002. 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 amortization during 2001. In lieu of amortization, SFAS No. 142requires the Company to have performed an initial impairment review of goodwillin 2002 and an annual impairment review thereafter.  As a result of that review, during 2002, the Company recorded asa cumulative effect of a change in accounting principle, a non-cash charge of$6.9 million, after applicable income taxes, to write off a portion of thecarrying value of goodwill.

 

**IncomeTaxes**. The Company is required to estimate income taxes ineach of the jurisdictions in which the Company operates. This process involvesestimating the Company’s actual current tax exposure together with assessingtemporary differences resulting from differing treatment of items for tax andaccounting purposes. These differences result in deferred tax assets andliabilities, which would be included within the Company’s consolidated balancesheet. The Company must then assess the likelihood that the deferred tax assetswill be recovered from future taxable income and to the extent that the Companybelieves recovery is not likely, the Company must establish a valuationallowance. To the extent the Company establishes a valuation allowance in aperiod, the Company must include an expense within the tax provision in thestatement of operations. The Company has recorded a valuation allowance toreduce the carrying amount of recorded deferred tax assets representing futuredeductions. In the event the Company were to determine that it would be able torealize its deferred tax assets in the future, an adjustment to the deferredtax asset would increase income in the period such determination was made.

 

**DISCONTINUED OPERATIONS**

 

In 1999, the Company 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 the estimates 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 ofOperations - Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events andTransactions."

 

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On November 27, 2002, the Company completed the sale of itswholly-owned subsidiary, BancTec Japan (“BTJ”), to JAFCO MBO Co., Ltd.(“JAFCO”) pursuant to a Stock Purchase Agreement dated as of November 27, 2002,between the Company and JAFCO.  The saleinvolved two separate transactions: (1) the purchase by JAFCO of 100% of theoutstanding shares of BTJ for 6.5 billion yen, and (2) a one-time, up-frontpayment by BTJ to the Company of 4.0 billion yen under certain distribution andlicensing agreements.  Under suchagreements, BTJ will continue to supply the Company products and services inits markets, and will continue to operate under the name “BancTec Japan”.  After foreign-currency conversions andtransaction costs, the Company received approximately US $82.5 million inaggregate net proceeds and recorded a pre-tax gain of approximately $63.0million.  For financial statementpurposes, the Company treated the sale as a discontinued operation, andaccordingly, financial statement presentation was made in accordance with SFAS144, "Accounting for the Impairment or Disposal of Long-LivedAssets."

 

**RESULTS OF OPERATIONS**

 

The operating resultsof BancTec Japan have been treated as a discontinued operation in theaccompanying financial statements.  As aresult, all prior-year amounts have been restated to exclude the results ofBancTec Japan from continuing operations.

 

### **Comparison ofYears Ended December 31, 2002 and December 31, 2001**

 

Consolidated revenue of $379.4 million for theyear ended December 31, 2002 decreased by $47.8 million or 11.2% from thecomparable prior-year period. The CNS decrease of $10.0 million resulted frompricing decreases resulting from competitive pressure.  The INTL decrease of $19.4 million resultedprimarily from the impact of longer acceptance periods on highly customizedproducts in the prior-year period. These products, scheduled for acceptance in 2000, achieved acceptance in2001 along with those products scheduled for acceptance in 2001.  The USS decrease of $18.5 million wasprincipally related to the impact of continued economic weakness, and declinesin maintenance revenue due to the Company's installed products reaching the endof their useful lives and from increased competition.  The Company expects these trends to continue in the foreseeablefuture. Factors impacting future revenue include lower corporate-customerspending for large systems solutions as a result of the continuing weakness inthe economy, customer and prospective customer mergers, on-going competitivepressures, and fluctuations in international currencies.

 

Consolidated gross profit of $96.2 millionincreased by $40.3 million or 72.1% from the comparable prior-year period. Theincrease occurred primarily in USS, which increased by $28.4 million, and CNS,which increased $11.9 million, offset partially by a decrease in INTL of $0.9million. CNS’ gross profit increase was primarily attributable to animproved labor model, with additional benefit provided through a reduction insupport costs, including streamlining the number of districts and the expandedautomation of its call center operations.The INTL decrease resulted from a margin decline in the Company’s subsidiariesin Europe due primarily to lower revenues without a corresponding percentagedecline in fixed expenses.  USS grossprofit increased despite decreased revenues due to significantly lower cost ofsales resulting from the Company’s cost-containment efforts. The Companyis in the process of transitioning its product-offering focus to provendeliverables and new targeted offerings, including EDM solutions, its otherarchive solutions and 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 $71.0 million decreased$23.4 million compared to the comparable prior-year period. Operating expenses,by component, changed as follows: Product development expenses were flatcompared to the prior year.  Selling, general,and administrative expenses decreased by $20.2 million or 26.9% dueprimarily to on-going efforts to realign the cost structure.  Goodwill amortization ceased in 2002 as aresult of the implementation of SFAS 142. Goodwill amortization for the yearended December 31, 2001 was $3.2million.

 

Interest expense for the year ended December 31, 2002 decreased to $33.1 million from $35.5 million in the comparableprior-year period. The decrease was due mainly to the repurchase of aportion of the Senior Notes, a lower outstanding balance on the revolving credit facilities and declininginterest rates, partially offset by a $6.1 million increase in debt related tothe Sponsor Note subsequent to June 30,2001.

 

Sundry items resulted in a net income of $8.3 million during the yearended December 31, 2002 as comparedto net income of $20.9 million during thecomparable prior-year period.  Thisdecrease is primarily due to foreign exchange gains of $1.4 million and a gainof approximately $6.8 million from the Company’s repurchase of Senior Notesduring the current year period, compared to foreign exchange losses of $1.8million and a net gain of $22.1 million as a result of the repurchase of SeniorNotes during 2001, partially offset by the extinguishment of a previous creditfacility during 2001.

 

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Pre-tax income in foreign tax jurisdictions resulted in an income taxprovision (on continuing operations) of $0.3 million for the year ended December 31, 2002 compared to acorresponding prior-year period income tax provision of $0.4 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 5.1% for the year ended December31, 2002 as compared to (17.2%) for the corresponding prior-year period.

 

OnNovember 27, 2002, the Company completed the sale of its wholly-ownedsubsidiary, BancTec Japan (“BTJ”). After foreign-currency conversions and transaction costs, the Companyreceived approximately US $82.5 million in aggregate net proceeds.  For financial statement purposes, theCompany treated the sale as a discontinued operation and its operating resultshave been segregated and reported as discontinued operations.  The Company recorded a gain on the disposalof the business of $63.0 million (net of income tax expense of $0).  Income from the discontinued operations ofBTJ for the year ended December 31, 2002 was $2.7 million compared to income of$7.6 million in the prior-year period.

 

The Company adopted SFAS No. 142 as of January 1, 2002.  SFAS 142 required the Company to perform aninitial review of impairment of goodwill in 2002.  As a result of that review, during 2002, the Company recorded asa cumulative effect of a change in accounting principle, a non-cash charge of $6.9million, after applicable income taxes, to write off a portion of the carryingvalue of goodwill.

 

**Comparison of Years Ended December 31, 2001 and December 31,2000**

 

Consolidated revenue of $427.3 million for theyear ended December 31, 2001 increased by $14.7 million or 3.6% from the prior year.The increase occurred primarily in INTL of $30.8 million and CNS of $5.6million, offset partly by a decrease in USS of $21.7 million. The INTL increaseis non-recurring and resulted from the impact of longer acceptance periods onhighly customized products.  Theseproducts, scheduled for acceptance in 2000, achieved acceptance in 2001 alongwith those products scheduled for acceptance in 2001.  The increased revenue from the CNS operations wasprimarily attributable to growth in the OEM market due to strategic alliancescomprised of its outsource and system integration partners during 2001. The USS decrease was principally in itsintegrated business solutions and manufacturing businesses.  In USS, lower revenues from hardware andsoftware sales 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.

 

Consolidated gross profit of $55.9 millionincreased by $30.7 million or 121.8% from the prior year. The increase occurredprimarily in CNS, which increased by $24.3 million and INTL, which increased by$19.7 million, offset partly by a decrease in USS of $13.2 million. CNS’ grossprofit increase was primarily attributable to an improved labor model,effectively capping costs on some jobs with additional benefit provided througha reduction in support costs, including streamlining the number of districts,and the expanded automation of its call center operations. Approximately $4.0 million of the INTL increaseis non-recurring and resulted from the impact of longer acceptance periods onhighly customized products.  Theseproducts, scheduled for acceptance in 2000, achieved acceptance in 2001 alongwith those products scheduled for acceptance in 2001.  The INTL increase was partially offset by a decrease in theCompany’s European maintenance businesses. The margin decline in the Company’ssubsidiaries in Europe was due primarily to lower revenues without a correspondingpercentage decline in fixed expenses, as well as a weakening of the Euro andother European currencies. The decline in USS gross profit occurred principallyin its integrated business solutions and manufacturing businesses and was dueprimarily to lower than expected revenues and increased costs. Contracts deemedto be in loss positions, thereby requiring an acceleration of expenserecognition, decreased in comparison to 2000, when $11.1 million of expenserelated to loss contracts was recognized.  The Company will continue to monitor the effects of the businessclimate and its strategic plans on the recoverability of its investment ininventory and long-lived assets, all of which may continue to have a negativeimpact on gross profit in the future.

`

Operating expenses of $94.4 million decreased$8.1 million from the prior year. Operating expenses, by component, changed asfollows: (1) product development expenses decreased by $4.2 million or 20.9%primarily due to concentration on developing targeted new applications for theCompany’s product lines and selective expansion of existing products; and (2)

 

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selling, general, and administrative expensesdecreased by $3.9 million or 4.9% due primarily to on-going efforts torealign the cost structure as a result of lower revenues.  Goodwill amortization remained relativelyflat for the comparative periods.

 

Interest expense decreased to $35.5 million in2001 from $37.2 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 the Sponsor Note.

 

Sundry items resulted in net income of $20.9 million during the yearended December 31, 2001 as compared to a net income of $0.3 million during theprior year.  The Company repurchasedSenior Notes during 2001, resulting in a net gain from the extinguishment ofdebt of $22.1 million.  The remainingdifference was primarily due to higherforeign-currency losses resulting from exchange rate fluctuations in 2001compared to the prior year.

 

Pre-tax income in foreign tax jurisdictions resulted in an income taxprovision of $0.4 million for the year ended December 31, 2001 compared to acorresponding prior-year period income tax provision of $34.2 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.

 

Incomefrom the discontinued operations of BTJ for the year ended December 31, 2001was $7.6 million compared to income of $5.2 million in the prior-yearperiod.  An adjustment to theestimated net realizable value of remaining assets related to the Company’scommunity-banking business discontinued in 1999 resulted in a $0.7 million lossfrom discontinued operations for the year ended December 31, 2001 compared to aloss of $2.3 million in the prior-year period.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s working capital requirements are generally provided bycash and cash equivalents, funds available under the Company’s revolving creditagreement, as discussed below, which matures May 30, 2006, and by internallygenerated funds from operations. Funds availability under the revolving creditagreement is determined by a borrowing-base formula equal to a specifiedpercentage of the value of the Company’s eligible accounts receivable,inventory and real estate.  Generaleconomic conditions, the current weakness in demand for the Company’ssystems-solutions products offered by USS and the requirement to obtainperformance bonds or similar instruments could have a material impact on theCompany’s future liquidity.

 

The Company’s cash and cash equivalents totaled$31.6 million at December 31, 2002, compared to $22.4 million at December 31,2001.  Working capital increased $0.1million to a working capital deficit of $8.9 million at December 31, 2002.  The change in working capital included acurrent liability decrease of $25.0 million resulting from payments on the revolvingcredit agreement and a decrease in accrued liabilities of $12.7 million, offsetby an increase in deferred revenue and maintenance contracts of $12.6 million,a current asset decrease in accountsreceivable of $14.4 million and an inventory decrease of $13.0 million.  The Company used cash generated fromthe improved collections and cash conservedfrom decreased spending on inventories to reduce the Company’s long-term debt,as further described below.

 

During 2002, the Company relied primarily on cashflows generated from operating activities to fund operations. At December 31,2002, the Company’s borrowing base under the New Facility, as hereinafterdefined, was $33.1 million, of which the Company could draw $9.4 million.

 

Operating activities provided $59.5 million and$62.6 million of cash in 2002 and 2001, respectively, a decrease of $3.1million.  Although net income fromcontinuing operations increased $53.1 million, $25.5 million of thisimprovement resulted from non-cash expenses. In addition, cash generated by changes in working capital assets andliabilities was $24.9 million less than in the prior-year period.  See the discussion in Comparison of YearsEnded December 31, 2002 and December 31, 2001 for the factors contributing tothe decreased net loss.

 

Investing activities provided net cash of $75.0million during 2002 compared to cash used of $11.6 million in 2001. The $86.6million increase was due to proceeds from the disposal of discontinuedoperations of $82.5 million and lower purchases of property, plant andequipment in 2002.

 

Financing activities used $125.2 million of netcash in 2002 compared to $45.3 million of net cash in 2001. The $79.9 millionchange related primarily to the reduction of the Company’s debt, offset by theissuance of preferred stock of $5.3 million in the year ended December 31,2001.

 

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At December 31, 2002, the Company’s principal outstanding debtinstruments consisted of (1) $97.9 million of 7.5% Senior Notes due 2008, and(2) a $103.8 million Sponsor Note due 2009. As of December 31, 2002, the Company’s foreign subsidiaries had nooutstanding borrowings.  The Company orits affiliates may from time to time purchase, redeem or pay deferred intereston some of its outstanding debt or equity securities.  The Company would only make these payments in compliance with thecovenants of its debt instruments.

 

The Company continually reviews its various lines of business to assesstheir contribution to the Company’s business plan and from time to timeconsiders the sale of certain assets in order to raise cash or reducedebt.  Accordingly, the Company fromtime to time has explored and may explore possible asset sales by seekingexpressions of interest from potential bidders.  However, the Company has not entered into any binding agreementsor agreements in principle to sell any assets and there can be no assurancethat any such asset sales will occur or, if they occur, as to the timing oramount of proceeds that such assets sales may generate.

 

**NewCredit Facility.**TheCompany has a $60 million revolving credit facility (the “New Facility”)provided by Heller Financial, Inc. (“Heller”), which will mature on May 30,2006.  The New Facility issecured by substantially all the assets of the Company, subject to thelimitations on liens contained in the Company’s existing Senior Notes.  Funds availability under the New Facility isdetermined by a borrowing base formula equal to a specified percentage of thevalue of the Company’s eligible accounts receivable and inventory.  On November 27, 2002, the Company and Hellerentered into an amendment to the New Facility that increased the sub-limitrelated to letter of credit availability to $30.0 million, and added pledgedcash to the borrowing base.  At December31, 2002, the Company had no outstanding balance under the New Facility and anoutstanding balance on letters of credit totaling $19.7 million.  The balance remaining under the New Facilitythat the Company could draw was $9.4 million at December 31, 2002.  A commitment fee of 0.5% per annum on theunused portion of the New Facility is payable quarterly.

 

The interest rate on loans under the New Facility is generally, at theCompany’s option, either (1) 1.25% over prime or (2) 2.75% over LIBOR.  At December 31, 2002, the Company’s weightedaverage rate on the New Facility was 5.50%.

 

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, which may be re-borrowedsubject to availability in accordance with the borrowing base formula. The NewFacility contains restrictions on the use of cash for dividend payments ornon-scheduled principal payments on certain indebtedness.  Restricted cash at December 31, 2002 of$88,000 represents lockbox cash receipts to be applied to the outstandingborrowings under the New Facility.  TheNew Facility contains various representations, warranties and covenants,including financial covenants as to maximum capital expenditures, minimum fixedcharge coverage ratio and minimum average borrowing availability.  On July30, 2002, the Company and Heller amended the New Facility, which reduced theCompany’s fixed charge coverage ratio covenant during the first, second andthird quarters of 2002, and reduced the minimum undrawn availabilityrequirement from $10.0 million to $4.0 million.  At December 31, 2002, the Company was in compliance withall covenants under the New Facility.

 

**Senior Notes**. In August 1998, the Company exchanged the public Senior Notes (the“Senior Notes”) for the notes sold in a May 1998 Rule 144A private offering.Interest is fixed at 7.5% and is due and payable in semi-annual installments,which began December 1, 1998. The Senior Notes contain covenants placinglimitations on the Company’s ability to permit subsidiaries to incur certaindebts, incur certain loans, and engage in certain sale and leasebacktransactions. During the year ended December 31, 2002, the Company repurchasedSenior Notes with a face amount of $13.1 million. The Company wrote off aproportionate share of deferred financing fees, resulting in a gain ofapproximately $6.8 million, which was reported as sundry (other) income in thecondensed consolidated statements of operations for 2002.

 

**SubordinatedUnsecured Sponsor Note.**The Company’s $160.0 million Sponsor Note bears interest at 10.0%, due andpayable quarterly.  The Sponsor Note issubordinate only upon bankruptcy or insolvency of the Company, or if uponmaturity of the Senior Notes, the Senior Notes remain unpaid.  The payments began September 30, 1999.  As provided under the agreement, however,the Sponsor Note holder, WCAS, elected to defer quarterly interest payments of$4.0 million for each of the June 2000 through September 2001 quarterly periodsresulting in an increase in the Sponsor Note totaling $33.8 million. Suchelection required a deferred financing fee of 30.0% of each of the interestpayments being deferred.  The Companyaccounts for the additional financing fees as a change in the effectiveinterest rate of the debt.  WCAS may, atits election, defer each future quarterly payment under similar terms. WCAS haselected not to defer the quarterly payments since September 2001 and currentlydoes not intend to elect deferral of the quarterly payments in the nearfuture.  In accordance with the terms ofthe Sponsor Vote, on December 6, 2002, the Company made a $90 million principalpayment on the Sponsor Note.  A holderof the Senior Notes is contesting this payment.  See discussion under Item 3, Legal Proceedings.  The Company wrote off a proportionate shareof deferred financing fees totaling $3.8 million.

 

**Preferred Stock – Series A.**TheCompany allocated the proceeds from its Series A preferred stock issuance basedupon the relative fair value of the preferred stock and warrants issued. Therelated discount is being accreted such that the carrying amount of themandatory redeemable preferred stock will equal the mandatory redemption amountat September 22, 2008. For the year ended December 31, 2002, accretion of the related discount andaccrued but unpaid dividends totaled $1.6 

 

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million, increasing the carrying amount to $14.9million. As of December 31, 2002,the stated value of the Series A preferred stock, including accumulated butunpaid dividends, was $175.38 per share.

 

**Preferred Stock – Series B.**For theyear ended December 31, 2002, theCompany accrued additional unpaid dividends for its Series B preferred stocktotaling $1.8 million, increasing the carrying amount to $8.3 million.  As of December 31, 2002, the stated value of the Series B preferredstock, including accumulated but unpaid dividends, was $234.88 per share.

 

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

 

### **ContractualObligations and Commercial Commitments**

In the normal course of business, the Company enters into variouscontractual and other commercial commitments that impact, or could impact, theliquidity of operations. The following table outlines the commitments atDecember 31, 2002:

 
|                              |   | **Total  Amounts** |   | **Less than****1 Year** |   | **1-3****Years** |   | **4-5****Years** |   | **Over 5  Years** |   |
|-----------------------------------|--------|--------------------|--------|-------------------------|--------|------------------|--------|------------------|--------|-------------------|--------|
| **(In Millions)**                 |   |
| Long-term debt                    |   | $                  | 201.7  |                    | $      | —           |   | $                | — |              | $      | — |   | $ | 201.7 |   |
| Operating leases (non-cancelable) |   | 21.0               |   | 6.4                     |   | 7.4              |   | 5.0              |   | 2.2               |   |
| Total Contractual                 |   | 222.7              |   | 6.4                     |   | 7.4              |   | 5.0              |   | 203.9             |   |
|                              |   |               |   |                    |   |             |   |             |   |              |   |
| Unused lines of credit            |   | $                  | 13.4   |                    | $      | 13.4             |   | $                | — |              | $      | — |   | $ | — |   |
| Standby letters of credit         |   | 19.7               |   | 19.7                    |   | —           |   | —           |   | —            |   |
| Total Commercial                  |   | $                  | 33.1   |                    | $      | 33.1             |   | $                | — |              | $      | — |   | $ | — |   |

 

**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. 142requires that goodwill and intangible assets with indefinite useful lives nolonger 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 periodically.

 

The Company adopted the provisions of SFAS No.141 and SFAS No. 142.  The adoption ofSFAS No. 141 had no impact on the consolidated financial statements.  The adoption of SFAS No. 142 resulted in agoodwill impairment of $6.9 million that was recorded in 2002 as a cumulativeeffect of a change in accounting principle.

 

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 is currently evaluating the impact SFAS No. 143 will have on itsfinancial position and 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 adopted the provisions of  SFAS No. 144, without effect, on January 1,2002. Under the provisions of SFAS No. 144, the Company has reported thedisposition of the sale of its wholly-owned subsidiary, BancTec Japan, as adiscontinued operation (See Note B – Discontinued Operations, Restructuring andImpairment).

 

InMay 2002, the FASB issued SFAS No. 145 , “Rescission of SFAS Nos. 4,44, and 64, Amendment of SFAS No. 13, and Technical Corrections”.  Among other things, SFAS 145 rescindsvarious pronouncements regarding early extinguishment of debt and allowsextraordinary accounting treatment for early extinguishment only when theprovisions of Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransaction”, are met. The Company adopted the provisions SFAS 145regarding early extinguishment of debt during the second quarter of 2002 andsuch gains are 

 

16

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recordedin the Statement of Income under Sundry, net.  In addition, prior-year gains for early extinguishment of debt have alsobeen reclassified to Sundry, net.

 

InJuly 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities”.  This statement requires companies torecognize costs associated with exit or disposal activities when they areincurred rather than at the date of a commitment to an exit or disposal plan.  SFAS No. 146 nullifies EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring),” and will be applied prospectively to exit or disposalactivities initiated after December 31, 2002. The Company will adopt SFAS No. 146 on January 1, 2003.  The adoption is not anticipated to have amaterial effect on the Company’s financial statements.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of SFAS No. 123.”  This statement provides alternative methodsof transition for a voluntary change to the fair-value-based method ofaccounting for stock-based employee compensation.  This statement also amends the disclosure requirements of SFASNo. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The Company will implement SFAS No. 148 effective January 1, 2003,regarding disclosure requirements for condensed financial statements forinterim periods.  The Company has notyet determined whether it will voluntarily change to the fair-value-basedmethod of accounting for stock-based employee compensation.  The following table illustrates the effecton net income had compensation for the Company’s stock option plans beendetermined consistent with SFAS No. 123:

 
|                                                                                                                             |   | **Years Ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                             |   | **2002**                     |   | **2001** |   | **2000** |   |
| Net Income (loss)  as reported                                                                                                   |   | $                            | 59,126 |   | $ | (45,826 | ) | $ | (144,850 | ) |
| Total stock-based  employee compensation benefit (expense) determined under fair-value-based  method for all rewards, net of tax |   | 1,318                        |   | 1,021 |   | (3,392 | ) |
| Pro Forma net  income (loss)                                                                                                     |   | $                            | 60,444 |   | $ | (44,805 | ) | $ | (148,242 | ) |

 

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (“FIN 45”). It clarifies that a guarantoris required to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee, including itsongoing obligation to stand ready to perform over the term of the guarantee inthe event that the specified triggering events or conditions occur. Theobjective of the initial measurement of the liability is the fair value of theguarantee at its inception. The initial recognition and initial measurementprovisions of FIN 45 are effective on a prospective basis to guarantees issuedafter December 31, 2002. The Company will record the fair value of futurematerial guarantees, if any.

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”). FIN46 requires that unconsolidated variable-interest entities be consolidated bytheir primary beneficiaries. A primary beneficiary is the party that absorbs amajority of the entity’s expected losses or residual benefits. FIN 46 appliesimmediately to variable-interest entities created after January 31, 2003 and toexisting variable-interest entities in the periods beginning after June 15,2003.  Based on preliminary evaluation ,Fin 46 is not anticipated to have a material effect on the Company’s results ofoperations or financial position.

 

In November 2002, the FASB's Emerging Issues Task Force("EITF") reached a consensus on Issue 00-21, "Accounting forRevenue Arrangements with Multiple Deliverables," which must be applied toall revenue arrangements entered into no later than June 30, 2003. However, theEITF is continuing discussion of the applicability of this Issue toarrangements having one or more elements within the scope of higher levelaccounting literature, including SOP 81-1. EITF 00-21 governs how to identify whethergoods or services or both that are to be delivered separately in a bundledsales arrangement should be accounted for separately. If EITF 00-21 wereapplicable to all of the Company's contracts, the Company would be required toapply its segmentation criteria, which are different from those contained inexisting contract accounting literature. Such application could result in moresegmentation of multiple-element IT services arrangements into separateaccounting units. The appropriate accounting literature for revenue recognitionwould then be applied to each unit. Assuming the segmentation criteria are met,the accounting for system design and development elements of multiple-elementIT service contracts similar to those the Company typically enters into couldcontinue to use the percentage-of-completion method of revenue recognition. Theaccounting for this element, which usually occurs in the early stages of thesecontracts, might not change as a result of the EITF. Revenue recognition forthe segmented processing elements would likely occur on an as-billed orstraight-line basis. The Company cannot determine the ultimate impact of EITF00-21 on its business until the EITF resolves uncertainties regarding itsscope.

 

 

**FACTORSAFFECTING THE COMPANY’S BUSINESS AND PROSPECTS**

 

Information provided by the Company in this Annual Report on Form 10-Kand other documents filed with the Securities and Exchange Commission include“forward-looking” information, as that term is defined in the PrivateSecurities Litigation Reform Act of 1995 (the “PSLRA”). All statements other than statements of historical fact are statementsthat could be deemed forward-looking statements.  The Company cautions investors that there canbe no assurance that actual results or business conditions will not differmaterially from those projected or suggested in such forward-lookingstatements as a result of numerous factors beyond the Company’s control. TheCompany undertakes no obligation to update or revise forward-looking statementsto reflect changes in assumptions, the occurrence of unanticipated results orchanges to future operating results over time. The following is a descriptionof some of the important factors that may cause the actual results of theCompany’s operations in future periods to differ materially from thosecurrently expected or desired.

 

17

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***General Economic Conditions***

 

The Company’s business partially depends on general economic andbusiness conditions. The Company’s sales are to businesses in a wide variety ofindustries, including banking, financial services, insurance, health care andhigh technology, and to governmental agencies. General economic conditions that cause customers to reduce or delaytheir investments in products and solutions, such as those offered by theCompany, could have a material adverse effect on the Company, including itsbusiness, operating results, financial condition and prospects.

 

Delays or reductions in technology spending could have a materialadverse effect on demand for the Company’s products and services, andconsequently on the Company.

 

***Dependence on Suppliers***

 

The Company’s solutions products depend on the quality of 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 reliable suppliescould result in delays and a possible loss of sales, which could affectoperating results adversely.

 

***Declining Financial Operating Results andIndebtedness***

 

As a result of increased borrowing and reduced performance over thelast few years, certain negative consequences of the Company’s indebtednesscould occur, 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.

 

***International Activities***

 

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 in Operating 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,competition and other factors. The Company’s business is sensitive to thespending patterns of its customers, which in turn are subject to prevailingeconomic conditions and other factors beyond the Company’s control. Anyunfavorable change in one or more of these factors could have a materialadverse effect on the Company.

 

***Technological Changes and ProductTransitions***

 

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 that technologicalchanges impact the future volume of paper transactions, the Company’straditional business may be adversely impacted.

 

18

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***Product Development Activities***

 

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 will beavailable to the Company, that the Company will be able to deliver commercialquantities of new products in a timely manner, that those products will adhereto generally accepted industry standards or that products will achieve marketacceptance. The Company believes that it is necessary for its products toadhere to generally accepted industry standards, which are subject to change inways that are beyond the control of the Company.

 

19

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**ITEM 7A.****                    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKETRISK.**

 

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 Rate Risk**

 

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, 2002 and 2001, the Company hadoutstanding Senior Notes, due in 2008, of $97.9 million and $111.0 million,respectively, with a fixed interest rate of 7.5%. At December 31, 2002 and2001, the Company also had the Sponsor Note, due 2009, with a balance of $103.8million and $193.8 million, respectively. The Sponsor Note bears 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, 2002 bore interest at the bank’s prime rate plus 1.25% or LIBORplus 2.75%, at the Company’s option.  Noborrowings were outstanding under the New Facility at December 31, 2002.

 

The estimated fair values of the outstandingSenior Notes and the Sponsor Note, based upon recently completed market trades,comparable borrowing rates and the relative seniority preference of theinstruments, were $62.6 million and $41.7 million, respectively, at December31, 2002 and 2001 for the Senior Notes, and $59.2 million and $67.8 million,respectively, at December 31, 2002 and 2001 for the Sponsor Note. The increasein fair value of the Senior Notes includes the effect of increases in thetraded values of the Senior Notes, partially offset by the repurchase ofapproximately $13.1 million face value of the Senior Notes during 2002.  The decrease in fair value of the SponsorNote includes the effect of a payment of $90.0 million during the year endedDecember 31, 2002. The Company does not expect changes in fair value of theSenior Notes or the Sponsor Note to have a significant effect on the Company’soperations, cash flow or financial position.

 

**Foreign Currency Risk**

 

The Company’s international subsidiaries operatein approximately 11 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 $96.7 million or 25.5% 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 forwardcurrency-exchange rate contracts to minimize the adverse earnings impact fromthe effect of exchange rate fluctuations. No hedging activities existed atyear-end 2002. At year-end 2000, the Company had three yen-denominated forwardcurrency-exchange contracts outstanding of $10.8 million to buy U.S. dollarsfor the Company’s subsidiary in Japan’s anticipated intercompany payables’settlements in U.S. dollars. These contracts were settled in the fourth quarterof 2001.

 

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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, 2002 and 2001, and the related consolidatedstatements of operations, comprehensive loss, stockholders’ deficit and cashflows for the years then ended. In connection with our audit of theconsolidated financial statements, we have also audited the accompanyingfinancial statement schedule as of December 31, 2002 and 2001 and for the yearsthen ended. These consolidated financial statements and financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these consolidated 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, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of BancTec, Inc. andsubsidiaries as of December 31, 2002 and 2001 and the results of theiroperations and their cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, the related financial statement schedule as of December 31,2002 and 2001 and for the years then ended, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly, inall material respects, the information set forth therein.

 

Asexplained in Note A to the consolidated financial statements, effective January1, 2002, the Company adopted the provisions of Statement of FinancialAccounting Standards No. 142 “Goodwill and Other Intangible Assets”.

 

**KPMG LLP**

 

Dallas,Texas

March 26, 2003

 

21

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**INDEPENDENTAUDITORS’ 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 (loss), stockholders’(deficit) and cash flows for the year then ended. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these 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, 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.

 

Wehave not audited any financial statements of the Company for any periodsubsequent to December 31, 2000, nor have we performed a review of interimfinancial statements in conformity with the standards set forth by the AmericanInsititute of Certified Public Accountants. However, as discussed in Note B tothe financial statements, on November 27, 2002, the Company completed the saleof its wholly owned subsidiary, BancTec Japan to JAFCO MBO Co., Ltd. The salewas treated as a discontinued operation and operating results have beensegregated and reported as discontinued operations in the accompanyingconsolidated statements of operations and cash flows and in related notes.

 

**DELOITTE & TOUCHE LLP**

 

Dallas,Texas

May15, 2001 (except with respect to the matters discussed in Notes B and D, as towhich the dates are 

November27, 2002 and May 31, 2001, respectively)

 

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**BANCTEC, INC.**

**CONSOLIDATED BALANCE SHEETS**

**ASSETS**

(In thousands)

 
|                                                                                                            |   | **December 31,** |    |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
|                                                                                                            |   | **2002**         |    | **2001** |   |
| CURRENT ASSETS:                                                                                                 |   |             |    |   |   |
| Cash and cash equivalents, including restricted cash  of $88 and $2,050 at December 31, 2002 and 2001           |   | $                | 31,595  |   | $ | 22,384 |   |
| Accounts receivable, less allowance for doubtful  accounts of  $2,216 and $7,636 at  December 31, 2002 and 2001 |   | 60,891           |    | 75,268 |   |
| Inventories, net                                                                                                |   | 25,528           |    | 38,497 |   |
| Prepaid expenses                                                                                                |   | 5,177            |    | 5,173 |   |
| Other current assets                                                                                            |   | 334              |    | 209 |   |
| Current assets of discontinued operations                                                                       |   | —           |    | 27,884 |   |
| Total current assets                                                                                            |   | 123,525          |    | 169,415 |   |
|                                                                                                            |   |             |    |   |   |
| PROPERTY, PLANT AND EQUIPMENT, AT COST:                                                                         |   |             |    |   |   |
| Land                                                                                                            |   | 2,860            |    | 2,860 |   |
| Field support spare parts                                                                                       |   | 58,339           |    | 71,863 |   |
| Systems and software                                                                                            |   | 64,604           |    | 64,294 |   |
| Machinery and equipment                                                                                         |   | 50,053           |    | 50,481 |   |
| Furniture, fixtures and other                                                                                   |   | 22,953           |    | 22,295 |   |
| Buildings                                                                                                       |   | 29,006           |    | 28,358 |   |
|                                                                                                            |   | 227,815          |    | 240,151 |   |
| Less accumulated depreciation and amortization                                                                  |   | 173,033          |    | 168,183 |   |
| Property, plant and equipment, net                                                                              |   | 54,782           |    | 71,968 |   |
|                                                                                                            |   |             |    |   |   |
| OTHER ASSETS:                                                                                                   |   |             |    |   |   |
| Goodwill, less accumulated amortization of $30,001 and  $33,974 at December 31, 2002 and 2001                   |   | 41,476           |    | 48,281 |   |
| Other assets                                                                                                    |   | 11,612           |    | 14,907 |   |
| Non-current assets of discontinued operations                                                                   |   | —           |    | 10,478 |   |
| Total other assets                                                                                              |   | 53,088           |    | 73,666 |   |
| TOTAL ASSETS                                                                                                    |   | $                | 231,395 |   | $ | 315,049 |   |

 

See notes to consolidated financial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**LIABILITIES ANDSTOCKHOLDERS’ DEFICIT**

(In thousands, except share data)

 
|                                                                                                                                   |   | **December 31,** |    |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
|                                                                                                                                   |   | **2002**         |    | **2001** |   |
| CURRENT  LIABILITIES:                                                                                                                  |   |             |    |   |   |
| Revolving credit  facilities                                                                                                           |   | $                | —  |   | $ | 25,040 |   |
| Trade accounts  payable                                                                                                                |   | 12,891           |    | 17,068 |   |
| Other accrued  expenses and liabilities                                                                                                |   | 46,883           |    | 59,630 |   |
| Deferred revenue                                                                                                                       |   | 24,107           |    | 30,088 |   |
| Maintenance  contract deposits                                                                                                         |   | 47,685           |    | 29,125 |   |
| Income taxes                                                                                                                           |   | 836              |    | 445 |   |
| Current liabilities  of discontinued operations                                                                                        |   | —           |    | 16,989 |   |
| Total current  liabilities                                                                                                             |   | 132,402          |    | 178,385 |   |
|                                                                                                                                   |   |             |    |   |   |
| OTHER LIABILITIES:                                                                                                                     |   |             |    |   |   |
| Long-term debt,  less current maturities                                                                                               |   | 201,723          |    | 304,798 |   |
| Non-current  maintenance contracts deposits                                                                                            |   | 25,933           |    | 17,764 |   |
| Other liabilities                                                                                                                      |   | 9,881            |    | 8,348 |   |
| Non-current  liabilities of discontinued operations                                                                                    |   | —           |    | 5,120 |   |
| Total other  liabilities                                                                                                               |   | 237,537          |    | 336,030 |   |
|                                                                                                                                   |   |             |    |   |   |
| COMMITMENTS AND  CONTINGENCIES (Note K)                                                                                                |   |             |    |   |   |
|                                                                                                                                   |   |             |    |   |   |
| MANDATORY  REDEEMABLE PREFERRED STOCK                                                                                                  |   | 14,856           |    | 13,151 |   |
|                                                                                                                                   |   |             |    |   |   |
| STOCKHOLDERS’  DEFICIT:                                                                                                           |   |             |    |   |   |
| Cumulative  convertible preferred stock - authorized,1,000,000  shares of $0.01 par value  at December 31, 2002 and December 31, 2001: |   |             |    |   |   |
| Series B preferred  stock - issued and outstanding,35,520 shares at December 31, 2002  and  December 31, 2001                          |   | 8,324            |    | 6,532 |   |
| Common stock  authorized, 32,000,000 shares of $0.01 par valueat December  31, 2002 and 2001:                                          |   |             |    |   |   |
| Common stock-issued  and outstanding17,003,838 shares at December 31, 2002 and 2001                                                    |   | 170              |    | 170 |   |
| Class A common  stock-issued and outstanding 1,181,946 sharesat December  31, 2002 and 2001                                            |   | 12               |    | 12 |   |
| Subscription stock  warrants                                                                                                           |   | 3,726            |    | 3,726 |   |
| Additional paid-in  capital                                                                                                            |   | 131,035          |    | 134,432 |   |
| Accumulated deficit                                                                                                                    |   | (286,846         | )       | (345,972 | ) |
| Accumulated other  comprehensive loss                                                                                                  |   | (9,821           | )       | (11,417 | ) |
| Total stockholders’  deficit                                                                                                      |   | (153,400         | )       | (212,517 | ) |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ DEFICIT                                                                                      |   | $                | 231,395 |   | $ | 315,049 |   |

 

See notes to consolidated financial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(In thousands)

 
|                                                                                                                    |   | **Years Ended December 31,** |    |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                    |   | **2002**                     |    | **2001** |   | **2000** |   |
| REVENUE                                                                                                                 |   |                         |    |   |   |   |   |
| Equipment and  software                                                                                                 |   | $                            | 139,843 |   | $ | 171,529 |   | $ | 151,701 |   |
| Maintenance and  other services                                                                                         |   | 239,590                      |    | 255,735 |   | 260,919 |   |
|                                                                                                                    |   | 379,433                      |    | 427,264 |   | 412,620 |   |
| COST OF SALES                                                                                                           |   |                         |    |   |   |   |   |
| Equipment and  software                                                                                                 |   | 105,448                      |    | 152,444 |   | 147,371 |   |
| Maintenance and  other services                                                                                         |   | 177,780                      |    | 218,935 |   | 240,018 |   |
|                                                                                                                    |   | 283,228                      |    | 371,379 |   | 387,389 |   |
| Gross profit                                                                                                            |   | 96,205                       |    | 55,885 |   | 25,231 |   |
|                                                                                                                    |   |                         |    |   |   |   |   |
| OPERATING EXPENSES                                                                                                      |   |                         |    |   |   |   |   |
| Product development                                                                                                     |   | 15,984                       |    | 15,926 |   | 20,141 |   |
| Selling, general and  administrative                                                                                    |   | 54,984                       |    | 75,223 |   | 79,129 |   |
| Goodwill  amortization                                                                                                  |   | —                       |    | 3,215 |   | 3,217 |   |
|                                                                                                                    |   | 70,968                       |    | 94,364 |   | 102,487 |   |
| Income (loss) from  operations                                                                                          |   | 25,237                       |    | (38,479 | ) | (77,256 | ) |
|                                                                                                                    |   |                         |    |   |   |   |   |
| OTHER INCOME  (EXPENSE):                                                                                                |   |                         |    |   |   |   |   |
| Interest income                                                                                                         |   | 272                          |    | 820 |   | 688 |   |
| Interest expense                                                                                                        |   | (33,080                      | )       | (35,527 | ) | (37,239 | ) |
| Sundry, net                                                                                                             |   | 8,271                        |    | 20,928 |   | 306 |   |
|                                                                                                                    |   | (24,537                      | )       | (13,779 | ) | (36,245 | ) |
| INCOME (LOSS) FROM  CONTINUING OPERATIONSBEFORE INCOME TAXES                                                            |   | 700                          |    | (52,258 | ) | (113,501 | ) |
| INCOME TAX EXPENSE  (BENEFIT)                                                                                           |   | 344                          |    | 445 |   | 34,236 |   |
| INCOME (LOSS) FROM  CONTINUING OPERATIONS                                                                               |   | 356                          |    | (52,703 | ) | (147,737 | ) |
| INCOME FROM  DISCONTINUED OPERATIONS,NET OF TAX EXPENSE $2,726, $6,294 AND  $5,772  at DECEMBER 31, 2002, 2001 AND 2000 |   | 2,725                        |    | 6,877 |   | 2,887 |   |
| GAIN ON DISPOSAL OF  DISCONTINUED OPERATIONS, NET OFTAX PROVISION OF $0                                                 |   | 63,005                       |    | — |   | — |   |
| INCOME (LOSS)  BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                            |   | 66,086                       |    | (45,826 | ) | (144,850 | ) |
| CUMULATIVE EFFECT  OF ACCOUNTING CHANGE                                                                                 |   | (6,960                       | )       | — |   | — |   |
| NET INCOME (LOSS)                                                                                                       |   | 59,126                       |    | (45,826 | ) | (144,850 | ) |
| PREFERRED STOCK  DIVIDENDSAND ACCRETION OF DISCOUNT                                                                     |   | (3,397                       | )       | (2,717 | ) | (364 | ) |
| NET INCOME (LOSS)  APPLICABLE TO COMMON STOCK                                                                           |   | $                            | 55,729  |   | (48,543 | ) | (145,214 | ) |
|                                                                                                                         |        |                              |         |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

25

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**BANCTEC, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                            |   | **Years Ended December 31,** |   |
|---------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                            |   | **2002**                     |   | **2001** |   | **2000** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                            |   |                         |   |   |   |   |   |
| Net income (loss)                                                               |   | $                            | 59,126 |   | $ | (45,826 | ) | $ | (144,850 | ) |
| Income from discontinued operations                                             |   | 2,725                        |   | 6,877 |   | 2,887 |   |
| Gain on sale of discontinued operations                                         |   | 63,005                       |   | — |   | — |   |
| Loss from continuing operations                                                 |   | (6,604                       | )      | (52,703 | ) | (147,737 | ) |
| Adjustments to reconcile to cash flows provided by  operations:                 |   |                         |   |   |   |   |   |
| Cumulative effect of accounting change                                          |   | 6,960                        |   | — |   | — |   |
| Depreciation and amortization                                                   |   | 23,970                       |   | 35,192 |   | 43,881 |   |
| Provision for doubtful accounts                                                 |   | (5,215                       | )      | 3,891 |   | 2,631 |   |
| Interest paid in-kind                                                           |   | —                       |   | 14,264 |   | 12,498 |   |
| Deferred income tax expense                                                     |   | —                       |   | — |   | 33,474 |   |
| Loss on disposition of property, plant and equipment                            |   | 1,210                        |   | 1,854 |   | 3,677 |   |
| Gain on extinguishment of long-term debt                                        |   | (6,798                       | )      | (23,958 | ) | — |   |
| Other non-cash items                                                            |   | 10                           |   | 3,540 |   | 490 |   |
| Changes in operating assets and liabilities                                     |   |                         |   |   |   |   |   |
| Decrease in accounts receivable                                                 |   | 19,592                       |   | 23,189 |   | 34,104 |   |
| (Increase) decrease in inventories                                              |   | 12,856                       |   | 32,163 |   | (17,634 | ) |
| Decrease in other assets                                                        |   | 3,373                        |   | 4,998 |   | 1,160 |   |
| Increase (decrease) in trade accounts payable                                   |   | (4,177                       | )      | (6,604 | ) | 7,459 |   |
| Increase in deferred revenue & maintenance  contracts deposits              |   | 12,579                       |   | 19,473 |   | (8,617 | ) |
| Increase in other accrued expenses and liabilities                              |   | 734                          |   | 5,078 |   | 41,730 |   |
| Cash flows provided by continuing operations                                    |   | 58,490                       |   | 60,377 |   | 7,116 |   |
| Cash flows provided by (used in) discontinued  operations                       |   | 1,040                        |   | 2,209 |   | 2,337 |   |
| Cash flows provided by operating activities                                     |   | 59,530                       |   | 62,586 |   | 9,453 |   |
|                                                                            |   |                         |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                            |   |                         |   |   |   |   |   |
| Purchases of property, plant and equipment                                      |   | (7,205                       | )      | (11,411 | ) | (20,339 | ) |
| Proceeds from disposal of discontinued operations                               |   | 82,538                       |   | — |   | — |   |
| Investment in unconsolidated subsidiary                                         |   | —                       |   | — |   | 1,189 |   |
| Cash flows provided by (used in) continuing operations                          |   | 75,333                       |   | (11,411 | ) | (19,150 | ) |
| Cash flows provided by (used in) discontinued operations                        |   | (288                         | )      | (196 | ) | (409 | ) |
| Cash flows provided by (used in) investing activities                           |   | 75,045                       |   | (11,607 | ) | (19,559 | ) |
|                                                                            |   |                         |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                            |   |                         |   |   |   |   |   |
| Payments of current maturities of long-term debt and  capital lease obligations |   | —                       |   | (2,500 | ) | (354 | ) |
| Proceeds from long-term borrowings                                              |   | —                       |   | 8,000 |   | — |   |
| Payments on long-term borrowing                                                 |   | (96,277                      | )      | (82,592 | ) | — |   |
| Proceeds from (payments on) short-term borrowings, net                          |   | (25,040                      | )      | 25,040 |   | 8,059 |   |
| Debt issuance costs                                                             |   | (207                         | )      | (2,358 | ) | — |   |
| Net proceeds from sales and issuances of preferred  stock                       |   | 100                          |   | 5,328 |   | 15,000 |   |
| Other                                                                           |   | —                       |   | — |   | 333 |   |
| Cash flows provided by (used in) continuing operations                          |   | (121,424                     | )      | (49,082 | ) | 23,038 |   |
| Cash flows provided by (used in) discontinued  operations                       |   | (3,798                       | )      | 3,798 |   | (1,469 | ) |
| Cash flows provided by (used in) financing activities                           |   | (125,222                     | )      | (45,284 | ) | 21,569 |   |
|                                                                            |   |                         |   |   |   |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                         |   | (142                         | )      | (1,500 | ) | (3,246 | ) |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                       |   | 9,211                        |   | 4,195 |   | 8,217 |   |
| CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR                                |   | 22,384                       |   | 18,189 |   | 9,972 |   |
|                                                                            |   |                         |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS—END OF YEAR                                      |   | $                            | 31,595 |   | 22,384 |   | 18,189 |   |
|                                                                            |   |                         |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:                                 |   |                         |   |   |   |   |   |
| DEFERRAL OF SPONSOR NOTE QUARTERLY INTEREST PAYMENTS                            |   | $                            | — |   | 17,735 |   | 16,112 |   |
|                                                                                 |        |                              |        |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

26

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**BANCTEC, INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ DEFICIT**

# **For the yearsended December 31, 2002, 2001 and 2000**

(In thousands, except share data)

 
|                                     |   | **Common  Stock** | ** ** | **Class A  Common  Stock** | ** ** | **Series B  Preferred** | ** ** | **Subscription  Warrants** | ** ** | **Additional  Paid in  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive   Loss** | ** ** | **Total** |   |
|------------------------------------------|--------|-------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|----------------------------------|------------|-----------------------------------|------------|----------------------------------------------|------------|-----------|--------|
| 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  | )      |
|                                     |   |              |       |                       |       |                    |       |                       |       |                             |       |                              |       |                                         |       |      |   |
| Foreign currency translation adjustments |   | —            |       | —                     |       | —                  |       | —                     |       | —                           |       | —                            |       | 2,753                                        |       | 2,753     |   |
| Net income                               |   | —            |       | —                     |       | —                  |       | —                     |       | —                           |       | 59,126                            |       | —                                       |       | 59,126    |   |
| Minimum pension liability, net of tax    |   | —            |       | —                     |       | —                  |       | —                     |       | —                           |       | —                            |       | (1,157                                       | )          | (1,157    | )      |
| Series A preferred stock dividends       |   | —            |       | —                     |       | —                  |       | —                     |       | (1,177                           | )          | —                            |       | —                                       |       | (1,177    | )      |
| Series B preferred stock dividends       |   | —            |       | —                     |       | 1,792                   |       | —                     |       | (1,792                           | )          | —                            |       | —                                       |       | —    |   |
| Accretion of discount                    |   | —            |       | —                     |       | —                  |       | —                     |       | (428                             | )          | —                            |       | —                                       |       | (428      | )      |
| Balance at December 31, 2002             |   | $                 | 170        |                       | $          | 12                      |       | $                          | 8,324      |                             | $          | 3,726                             |       | $                                            | 131,035    |      | $      | (286,846 | ) | $ | (9,821 | ) | $ | (153,400 | ) |

                

See notes to consolidated financial statements.

 

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**BANTEC, INC.**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE LOSS**

(In thousands)

** **
|                                      |   | **Years Ended December 31,** |   |
|-------------------------------------------|--------|------------------------------|--------|
|                                      |   | **2002**                     |   | **2001** |   | **2000** |   |
| Net Income (Loss)                         |   | $                            | 59,126 |   | $ | (45,826 | ) | $ | (144,850 | ) |
| Foreign currency  translation adjustments |   | 2,753                        |   | (1,934 | ) | (4,449 | ) |
| Minimum pension  liability                |   | (1,157                       | )      | (1,230 | ) | — |   |
| Total comprehensive  income (loss)        |   | $                            | 60,722 |   | $ | (48,990 | ) | $ | (149,299 | ) |

 

See notes to Consolidated Financial Statements.

 

28

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**BANCTEC, INC.**

**NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS**

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

 

**NOTE A—SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**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 30-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 processingsystems and services, workflow and image management software products, andcomputer and network support services. See Note K for 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, 2002, retained earnings included $2.78million of undistributed earnings for investments accounted for under theequity method.  During 2002, the Companyrecorded $0.4 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, 2002 of $88,000 represents lockbox cash receipts to beapplied 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**

 

Inventoriesare valued at the lower of cost or market and include the cost of rawmaterials, labor, factory overhead, and purchased subassemblies. Cost isdetermined using the first-in, first-out and weighted average methods. TheCompany revised its standard costs for manufacturing inventory to effectivelyeliminate the purchasing burden component as of October 1, 2002. TheCompany periodically evaluates the carrying amount of inventory based on theidentification of excess and obsolete inventory. The Company’s evaluationinvolves a multi-element approach incorporating the stratification of inventoryby time held 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, 2002, 2001, and 2000 were $16.3 million, $25.7million, and $26.4 million, respectively. Inventory reserves establish a new cost basis for inventory and are notreversed in future periods.

 

29

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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, 2002, 2001, and 2000 was $24.0 million, $32.0million, and $40.7 million, respectively.

 

**Intangible Assets**

 

BeginningJanuary 1, 2002, the Company adopted Statement of Financial Accounting Standard(“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (See “New AccountingPronouncements”).  SFAS No. 142 requiresthat goodwill and intangible assets with indefinite useful lives no longer beamortized but instead be tested for impairment at least annually.  SFAS No. 142 also requires that intangibleassets with definite useful lives be amortized over their respective estimateduseful lives to their estimated residual values.

 

SFAS No. 142 requires atwo-step process for testing impairment. First, the fair value of eachreporting unit is compared to its carrying value to determine whether anindication of impairment exists. If impairment is indicated, then under thesecond step the fair value of the reporting unit’s goodwill is determined byallocating the unit’s fair value to its assets and liabilities (including anyunrecognized intangible assets) as if the reporting unit had been acquired in abusiness combination. The amount of impairment for goodwill is measured as theexcess of its carrying value over its fair value.  During 2002, the Company recorded as a cumulative effect of achange in accounting principle, a non-cash charge of $6.9 million, afterapplicable income taxes, to write off a portion of the carrying value ofgoodwill.

 

Components of theCompany’s goodwill include amounts that are foreign currency denominated.  These goodwill amounts are subject totranslation at each balance sheet date. The Company records the change to its Accumulated Other ComprehensiveLoss on the balance sheet.  Goodwillpreviously classified as unallocated has been allocated to the reporting unitsas required by SFAS No. 142. The followingis a summary of changes in the carrying amount of goodwill by segment for theyear ended December 31, 2002:

 
|                                           |   | **US  Solutions**  |   | **Computer****& Network  Services** |   | **International** |   | **Unallocated** |   | **Total** |   |
|------------------------------------------------|--------|--------------------|--------|-----------------------------------------|--------|-------------------|--------|-----------------|--------|-----------|--------|
|                                           |   | **(In thousands)** |   |
| Balance at  December 31, 2001                  |   | $                  | 40,211 |                                    | $      | —            |   | $               | 2,229  |      | $      | 5,841 |   | $ | 48,281 |   |
| Allocation of  previously unallocated goodwill |   | 1,025              |   | —                                  |   | 4,816             |   | (5,841          | )      | —    |   |
| Goodwill  impairment                           |   | —             |   | —                                  |   | (6,960            | )      | —          |   | (6,960    | )      |
| Changes due to  foreign currency translation   |   | —             |   | —                                  |   | 155               |   | —          |   | 155       |   |
| Balance at  December 31, 2002                  |   | $                  | 41,236 |                                    | $      | —            |   | $               | 240    |      | $      | — |   | $ | 41,476 |   |

 

 

The following is a summary comparison of net income (loss) for theyears ended December 31, 2002, 2001, and 2000, as adjusted to remove theamortization of goodwill with indefinite useful lives:

 
|                                                                          |   | **Year Ended December 31,** |   |
|-------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                          |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                                          |   | **(In thousands)**          |   | **(In thousands)** |   |
| Net income  (loss) before cumulative effect of accounting change, as reported |   | $                           | 66,086 |   | $ | (45,826 | ) | $ | (144,850 | ) |
| Goodwill  amortization                                                        |   | —                      |   | 3,215 |   | 3,217 |   |
| Net income  (loss) before cumulative effect of accounting change, as adjusted |   | $                           | 66,086 |   | $ | (42,611 | ) | $ | (141,633 | ) |

 

30

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|                            |   | **Year Ended December 31,** |   |
|---------------------------------|--------|-----------------------------|--------|
|                            |   | **2002**                    |   | **2001** |   | **2000** |   |
|                            |   | **(In thousands)**          |   | **(In thousands**) |   |
| Net income  (loss), as reported |   | $                           | 59,126 |   | $ | (45,826 | ) | $ | (144,850 | ) |
| Goodwill  amortization          |   | —                      |   | 3,215 |   | 3,217 |   |
| Net income  (loss), as adjusted |   | $                           | 59,126 |   | $ | (42,611 | ) | $ | (141,633 | ) |

 

 

**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 had been recorded for $0.6 million in gain from discontinuedoperations.

 

OnJanuary 1, 2001, the Company adopted Statement of Financial AccountingStandards No. 133 Accounting for Derivatives Instruments and Hedging Activities(“SFAS 133”), which requires that all derivatives be recognized as assets andliabilities on the balance sheet and measured at fair value. The correspondingderivative gains or losses are reported based on the hedge relationship thatexists. Changes in fair value derivative instruments that are not designated ashedges or that do not meet the hedge accounting criteria in SFAS 133 arerequired to be reported in earnings. At the time of adoption of SFAS No. 133,the Company determined that the derivative did not qualify as a hedge andmarked the contracts to market, reflecting the changes in the statement ofoperations in gain from discontinued operations. The Company recognized animmaterial transition adjustment at adoption. In the fourth quarter of 2001, the Company settled all remainingyen-denominated foreign-currency forward contracts. The Company realized a gainof approximately $1.7 million in gain from discontinued operations from thethree 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.  At December 31, 2002,the Company was not a party 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,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 delivery andtransfer 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 feesare collected. The Company assesses collectibility based on a 

 

31

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number of factors, including past transaction history with the customerand the credit-worthiness of the customer. The Company does not requestcollateral from customers. If the Company determines that collection of the feeis not reasonably assured, the Company defers the revenue and recognizes revenueat the time collection becomes reasonably assured, which is generally uponreceipt of cash. For all sales, the Company generally uses either a bindingpurchase order or signed sales 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.  These current and non-current portions ofthese advances are shown as Deferred Revenue or Maintenance Contract Depositson the Consolidated Balance Sheets.

 

**Research and Development**

 

Researchand development costs are expensed as incurred. Research and development costsfor the year ended December 31, 2002 and 2001 were $16.0 and $16.0 million.

 

**Income Taxes**

 

The Company and its domestic subsidiaries file aconsolidated Federal income tax return. The Company’s foreign subsidiaries fileseparate income tax returns in the countries in which their operations arebased.

 

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 gains (losses) for the years ended December 31, 2002,2001, and 2000 were $1.4 million, $(1.8) million, and $(1.0) million,respectively.

 

**Concentration of Risk**

 

Financialinstruments that 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’ businesses can generally beclassified as banking, personal computer manufacturers, financial services,insurance, healthcare, government agencies, utilities and telecommunications.During 2002, 2001, and 2000, the Company derived 16.2%, 14.5%, and 10.6%,respectively, of revenues from a single source. The loss of this revenue couldhave a material adverse effect on the Company. The Company currently receivesfunds in advance for a significant portion of the Company’s services prior tothe performance of the services they relate to and management does notcurrently consider this source to be a credit risk.  Due to the diversity of the Company’s customers, management doesnot consider there to be a concentration of risk within any singleclassification. However, general economic conditions that cause customers insuch industries to reduce or delay their investments in products and solutions suchas those offered by the Company could have a material adverse effect on theCompany.

 

TheCompany’s hardware and systems solutions are assembled using various purchasedcomponents such as PC monitors, minicomputers, encoders, communicationsequipment and other electronic devices. Certain products are purchased fromsole-source suppliers. The Company generally has contracts with these suppliersthat are renewed periodically. The Company has not experienced, nor does itforesee, any significant difficulty in obtaining necessary components orsubassemblies; however, if the supply of certain components or subassemblieswas interrupted without sufficient notice, the result could be an interruptionof product deliveries.

 

32

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**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 for 2002 based on an average value ofrecently completed market trades, resulting in a yield-to-maturity ofapproximately 18%.  The number of actualtrades is limited, therefore the result may vary if a widely-traded marketenvironment existed.

 

SponsorNote: The Company estimated fair value using a yield-to-maturity at December31, 2002, of approximately 23%, based on the terms of the Sponsor Note.

 

Mandatory redeemablepreferred stock: The Company estimated fair value at December 31, 2002, using ayield-to-maturity of approximately 25%.

 

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

 
|                                 |   | **2002**                   |   | **2001**              |   |
|--------------------------------------|--------|----------------------------|--------|-----------------------|--------|
|                                 |   | **(In thousands)**         |   |
|                                 |   | **Carrying********Amount** |   | **Fair********Value** |   | **Carrying********Amount** |   | **Fair********Value** |   |
| Cash and short-term investments      |   | $                          | 31,595 |                  | $      | 31,595 |   | $ | 22,384 |   | 22,384 |   |
| Short-term borrowings                |   | —                     |   | —                |   | 25,040 |   | 25,040 |   |
| Senior Notes                         |   | 97,875                     |   | 62,570                |   | 110,950 |   | 41,662 |   |
| Sponsor Note                         |   | 103,848                    |   | 59,193                |   | 193,848 |   | 67,847 |   |
| Mandatory redeemable preferred stock |   | 14,856                     |   | 6,685                 |   | 13,151 |   | 3,419 |   |
|                                      |        |                            |        |                       |        |  |  |  |  |  |  |  |

 

**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.

 

2000 Stock Plan:

 

Effective July 1, 2000,the Company adopted the 2000 Stock Plan (the Plan), which provides for thegrant to employees of incentive options, non-qualified stock options, andrestricted stock awards.

 

Incentive Options.  During the year ended December 31, 2000,1,303,460 incentive options were granted by the Company. During 2001 and 2002,no additional incentive options were granted. Under the Plan, incentive optionsare granted at a fixed exercise price not less than 100% of the fair marketvalue of the shares of stock on the date of grant (or 110% of the fair marketvalue in certain circumstances). A portion of the incentive options vest over afour-year period at 25% per year beginning January 2, 2001; the remainder vestbased on the performance of the Company. As a part of an employee retentionprogram, vesting of 20.0% of the performance-based incentive options was acceleratedin October 2000.

 

Non-qualified stockoptions.  During the year ended December31, 2000, 377,040 non-qualified stock options were granted by the Company.During 2001 and 2002, no additional non-qualified options were granted. Under thePlan, non-qualified options are granted at a fixed exercise price equal to,more than, or less than 100% of the fair market value of the shares of stock onthe date of grant. A portion of the non-qualified options vest over a four-yearperiod at 25% per year beginning January 2, 2001; the remainder vest based onthe performance of the Company. As a part of an employee retention program,vesting of 20.0% of the performance-based incentive options was accelerated inOctober 2000.

 

Restricted stockawards.  The amount, if any, to be paidby the award recipients to acquire the shares of stock pursuant to a restrictedstock-award is a fixed exercise price equal to, more than, or less than 100% ofthe fair market value of the shares of stock subject to the award on the dateof grant. The restricted stock awards are subject to vesting provisionsdetermined by the Company's Board of Directors. At December 31, 2002, norestricted stock-awards had been granted.

 
|                                        |   | **Incentive  Shares** |   | **Non-qualified  Shares** |   | **Weighted  Average Exercise Price** |   |
|---------------------------------------------|--------|-----------------------|--------|---------------------------|--------|--------------------------------------|--------|
| 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                                 |   |
| Forfeited                                   |   | (135,000              | )      | —                    |   | 9.25                                 |   |
| Options  outstanding—December 31, 2002 |   | 497,240               |   | 31,760                    |   | $                                    | 9.25   |   |

 

Options and awards expireand terminate the earlier of ten years from the date of grant or the date theemployee ceases to be employed by the Company.

 

At December 31, 2002,options to purchase 529,000 shares were outstanding, of which 185,150 werevested. All options outstanding have an exercise price of $9.25. No optionshave been exercised.

 

Under the intrinsic-valuemethod, compensation expense is recorded only to the extent that the strikeprice is less than market price on the measurement date. There were no stockoptions granted in 2002 or 2001, and all options granted in 2000 were issued ator above market price, and therefore no stock-based compensation was recorded.

 

The following tableillustrates the effect on net income had compensation for the Company's stockoption plans been determined consistent with SFAS No. 123:

 
|                                                                                                                             |   | **Years Ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                             |   | **2002**                     |   | **2001** |   | **2000** |   |
| Net Income (loss)  as reported                                                                                                   |   | $                            | 59,126 |   | $ | (45,826 | ) | $ | (144,850 | ) |
| Total stock-based employee compensation  benefit (expense) determined under fair-value-based method for all rewards,  net of tax |   | 1,318                        |   | 1,021 |   | (3,392 | ) |
| Pro Forma net  income (loss)                                                                                                     |   | $                            | 60,444 |   | $ | (44,805 | ) | $ | (148,242 | ) |

 

The fair value of eachstock option grant under the stock-option plans was estimated on the date ofgrant using the Black-Scholes option-pricing model with the followingweighted-average assumptions and results:

 
|                           |   | **Years  Ended December 31,** |   |
|--------------------------------|--------|-------------------------------|--------|
| **Weighted  Average**          |   | **2002**                      |   | **2001** |   | **2000** |   |
| Risk free  interest rate       |   | N/A                           |   | N/A |   | 5.9 | % |
| Expected life                  |   | N/A                           |   | N/A |   | 10 years |   |
| Expected  volatility           |   | N/A                           |   | N/A |   | 0 |   |
| Fair value of  options granted |   | N/A                           |   | N/A |   | $ | 4.06 |   |
|                                |        |                               |        |  |  |  |  |  |

 

**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. 142requires that goodwill and intangible assets with indefinite useful lives nolonger 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 periodically.

 

The Company adopted the provisions of SFAS No.141 and SFAS No. 142.  The adoption ofSFAS No. 141 had no impact on the consolidated financial statements.  The adoption of SFAS No. 142 resulted in agoodwill impairment of $6.9 million that was recorded in 2002 as a cumulativeeffect of a change in accounting principle.

 

33

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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 is currently evaluating the impact SFAS No. 143 will have on itsfinancial position and results of operations, if any.

 

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 adopted the provisions of  SFAS No. 144, without effect, on January 1,2002.  Under the provision of SFAS No.144, the Company has reported the disposition of the sale of its wholly-ownedsubsidiary, BancTec Japan, as a discontinued operation (See Note B -DiscontinuedOperations, Restructuring and Impairment).

 

InMay 2002, the FASB issued SFAS No. 145 , “Rescission of SFAS Nos. 4,44, and 64, Amendment of SFAS No. 13, and Technical Corrections”.  Among other things, SFAS 145 rescindsvarious pronouncements regarding early extinguishment of debt and allowsextraordinary accounting treatment for early extinguishment only when theprovisions of Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransaction”, are met. The Company adopted the provisions SFAS 145regarding early extinguishment of debt during the second quarter of 2002 and suchgains are recorded in the Statement of Income under Sundry, net.   In addition, prior-year gains for earlyextinguishment of debt have also been reclassified to Sundry, net.

 

InJuly 2002, the FASB issued SFAS No. 146, “Accounting for Exit or DisposalActivities”.  This statement requirescompanies to recognize costs associated with exit or disposal activities whenthey are incurred rather than at the date of a commitment to an exit ordisposal plan.  SFAS No. 146 nullifiesEITF Issue No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring),” and will be applied prospectively to exit or disposalactivities initiated after December 31, 2002. The Company will adopt SFAS No. 146 on January 1, 2003.  The adoption is not anticipated to have amaterial effect on the Company’s financial statements.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of SFAS No. 123.”  This statement provides alternative methodsof transition for a voluntary change to the fair-value based method ofaccounting for stock-based employee compensation.  This statement also amends the disclosure requirements of SFASNo. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The Company will implement SFAS No. 148 effective January 1, 2003,regarding disclosure requirements for condensed financial statements forinterim periods.  The Company has notyet determined whether it will voluntarily change to the fair-value basedmethod of accounting for stock-based employee compensation.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (“FIN 45”). It clarifies that a guarantoris required to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee, including itsongoing obligation to stand ready to perform over the term of the guarantee inthe event that the specified triggering events or conditions occur. Theobjective of the initial measurement of the liability is the fair value of theguarantee at its inception. The initial recognition and initial measurement provisionsof FIN 45 are effective on a prospective basis to guarantees issued afterDecember 31, 2002.  However, thedisclosure requirements are effective for interim and annualfinancial-statement periods ending after December 15, 2002. The Company hasadopted the disclosure provisions and management does not expect the fulladoption of FIN 45 to have a material impact on the Company’s results ofoperations or financial position.

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”). FIN46 requires that unconsolidated variable-interest entities be consolidated bytheir primary beneficiaries. A primary beneficiary is the party that absorbs amajority of the entity’s expected losses or residual benefits. FIN 46 appliesimmediately to variable-interest entities created after January 31, 2003 and toexisting variable-interest entities in the periods beginning after June 15,2003.  Based on preliminary evaluation ,Fin 46 is not anticipated to have a material effect on the Company’s results ofoperations or financial position.

 

In November 2002, the FASB's Emerging Issues Task Force("EITF") reached a consensus on Issue 00-21, "Accounting forRevenue Arrangements with Multiple Deliverables," which must be applied toall revenue arrangements entered into no later than June 30, 2003. However, theEITF is continuing discussion of the applicability of this Issue toarrangements having one or more elements within the scope of higher levelaccounting literature, including SOP 81-1. EITF 00-21 governs how to identifywhether goods or services or both that are to be delivered separately in abundled sales arrangement should be accounted for separately. If EITF 00-21were applicable to all of the Company's contracts, the Company would berequired to apply its segmentation criteria, which are different from thosecontained in existing contract accounting literature. Such application couldresult in more segmentation of multiple-element IT services arrangements intoseparate accounting units. The appropriate accounting literature for revenuerecognition would then be applied to each unit. Assuming the segmentationcriteria are met, the accounting for system design and development elements ofmultiple-element IT service contracts similar to those the Company typicallyenters into could continue to use the percentage-of-completion method ofrevenue recognition. The accounting for this element, which usually occurs inthe early stages of these contracts, might not change as a result of the EITF.Revenue recognition for the segmented processing elements would likely occur onan as-billed or straight-line basis. The Company cannot determine the ultimateimpact of EITF 00-21 on its business until the EITF resolves uncertaintiesregarding its scope.

 

**Reclassification**

 

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

 

34

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**NOTE B — DISCONTINUED OPERATIONS,RESTRUCTURING AND IMPAIRMENT**

 

*Discontinued Operations.*

1.               In 1999, the Company 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 $0.7 million and $1.7 million,respectively, was accrued representing changes in estimate for additionalexpenses related to the Company’s obligation to complete certain developmentactivities.  For financial statementpurposes, the Company treated the sale as a discontinued operation, andaccordingly, financial statement presentation was made in accordance with APBOpinion No. 30, “Reporting the Results of Operations - Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions”.

 

2.               On November 27, 2002, the Company completed thesale of its wholly-owned subsidiary, BancTec Japan (“BTJ”), to JAFCO MBO Co.,Ltd. (“JAFCO”) pursuant to a Stock Purchase Agreement dated as of November 27,2002, between the Company and JAFCO. The sale involved two separate transactions: (1) the purchase by JAFCOof 100% of the outstanding shares of BTJ for 6.5 billion yen, and (2) aone-time, up-front payment by BTJ to the Company of 4.0 billion yen undercertain distribution and licensing agreements. Under such agreements, BTJ will continue to operate under the name“BancTec Japan”.  After foreign currencyconversions and transaction costs, the Company received approximately US $82.5million in aggregate net proceeds.  Forfinancial statement purposes, the Company treated the sale as a discontinuedoperation under SFAS No. 144, and accordingly, financial statement presentationwas made in accordance with APB Opinion No. 30.  BTJ’s assets and liabilities have been segregated from continuingoperations in the fiscal 2001 consolidated balance sheet, and its operatingresults have been segregated and reported as discontinued operations in theaccompanying consolidated statements of income and cash flows, and relatednotes.  The Company recorded a gain onthe disposal of the business of $63.0 (net of income tax expense of $0).  Revenue from the discontinued operations ofBTJ for the fiscal years 2002, 2001, and 2000 was $63,213, $78,473, and$75,087, respectively.  Income from thediscontinued operations of BTJ for fiscal 2002, 2001, and 2000 was $5,451,$13,856 and $10,309, respectively. The assets related to BTJ were previouslyclassified in the International segment.

 

*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.  During 2002, the Company recordedadditional accruals of approximately $1.9 million and recorded payments ofapproximately $4.8 million against these accruals, resulting in a liabilitybalance of $1.6 million at December 31, 2002.  Approximately 470 employees have been terminated as of December 31,2002, including employees in production, product development, sales andmarketing and other administrative functions.

 

*Impairment.*Long-lived assets and certainidentifiable intangibles are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net operating cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell. During the fourthquarter of 2001, the Company determined that long-lived tangible assetstotaling approximately $4.1 million were impaired. Impairment charges areincluded in Cost of sales, Selling, general and administrative and Productdevelopment expenses in the Company’s Consolidated Statements ofOperations.  The impairments includedapproximately $1.9 million for capitalized spare parts, which were determinedto be obsolete, and approximately $2.2 million for property, plant andequipment (of which $1.5 million was from vacating an owned facility currentlybeing offered for sale).

 

**NOTE C—INVENTORIES**

 

Inventoryconsists of the following:

 
|             |   | **December 31,**   |   |
|------------------|--------|--------------------|--------|
|             |   | **2002**           |   | **2001** |   |
|             |   | **(In thousands)** |   |
| Raw materials    |   | $                  | 5,374  |   | $ | 9,053 |   |
| Work-in-progress |   | 9,995              |   | 15,772 |   |
| Finished goods   |   | 10,159             |   | 13,672 |   |
|             |   | $                  | 25,528 |   | $ | 38,497 |   |

 

35

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**NOTE D—DEBT AND OTHER OBLIGATIONS**

 

Debtand other obligations consist of the following:

 
|                                           |   | **December 31,**   |    |
|------------------------------------------------|--------|--------------------|---------|
|                                           |   | **2002**           |    | **2001** |   |
|                                           |   | **(In thousands)** |    |
| 7.5% Senior Notes, due 2008                    |   | $                  | 97,875  |   | $ | 110,950 |   |
| New Facility                                   |   | —             |    | 25,040 |   |
| Subordinated Sponsor Note, unsecured, due 2009 |   | 103,848            |    | 193,848 |   |
|                                           |   | 201,723            |    | 329,838 |   |
| Less:  Current  portion                   |   | —             |    | (25,040 | ) |
|                                           |   | $                  | 201,723 |   | $ | 304,798 |   |

 

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.  On November 27, 2002, the Company and Heller entered into an amendmentto the New Facility, which increased the sub-limit related to letter-of-creditavailability to $30.0 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 and inventory.  The Company had an outstanding balance on letters of credittotaling $19.7 million at December 31, 2002. At December 31, 2002, the Company’s borrowing base was approximately$33.8 million, of which $19.7 million had been utilized.

 

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, 2002, the Company’sweighted-average rate on the New Facility was 5.5%. Beginning August 1, 2002,the interest-rate margins over prime and LIBOR may be increased by 0.25%increments when available borrowing availability falls below (1) $17.5 millionand (2) $12.5 million (total rate increase of 0.5%) or decreased by 0.25%increments when borrowing capacity exceeds (1) $22.5 million and (2) $27.5million (total rate decrease of 0.5%). A commitment fee of 0.5% per annum onthe unused portion 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, which may be re-borrowedsubject to availability in accordance with the borrowing-base formula.  Restricted cash at December 31, 2002 of$88,000 represents lockbox cash receipts to be applied to the outstandingborrowings under the New Facility.

 

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, 2002, 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, 2002, the Company is in compliance with all covenants. During 2001, the Company repurchased Senior Noteswith a face amount of $39.0 million. The Company wrote off a proportionateshare of deferred financing-fees, resulting in a gain of approximately $23.9million.  During 2002, theCompany repurchased Senior Notes with a face amount of $13.1 million.  The Company wrote off a proportionate shareof deferred financing-fees, resulting in a gain of approximately $6.8 million.

 

36

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Revolving Line of Credit. Prior toMay 31, 2001, the Company had a $50.0 million Revolving Line of Credit(“Revolver”) under which maximum borrowings allowed, including letters ofcredit, was $43.6 million.  Inconnection with the pay-off of the Revolver on May 31, 2001, the Companyrecorded an extraordinary loss of $1.8 million, as a result of the write-off ofunamortized deferred financing-costs.

 

Subordinated Unsecured Sponsor Note.The Company’s $160.0 million Sponsor Note is issued in U.S. dollars, withinterest at 10.0% due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency ofthe Company, or if upon maturity of the Senior Notes, the Senior Notes remainunpaid. The payments began September 30, 1999. However, as provided under theagreement, the Sponsor Note holder, WCAS, elected to defer quarterly interestpayments of $4.0 million for each of the June 2000 through September 2001quarterly periods. Such election required a deferred financing fee of 30.0% ofeach of the interest payments being deferred. The Company accounts for the additional financing fees as a change inthe effective interest rate of the debt. For the years ended December 31, 2001 and 2000, the Company increasedthe outstanding deferred-interest notes by $17.7 million and $16.1 million,respectively.   These increases werecomprised of the $4.0 million quarterly deferrals, plus financing fees andinterest thereon. At December 31, 2001, the Company had $33.8 millionoutstanding in WCAS notes representing deferred interest. WCAS may, at itselection, defer each future quarterly payment under similar terms.  WCAS did not elect to defer quarterlypayments due since September 2001.  Inaccordance with the terms of the Sponsor Note, on December 6, 2002, the Companymade a $90 million principal payment on the Sponsor Note.  The Company wrote off a proportionate shareof deferred financing-fees totaling $3.8 million.

 

The outstanding balance on foreign creditagreements as of December 31, 2001 was $3.8 million, payable in yen.  This balance has been reclassified ascurrent liabilities of discontinued operations.  The terms on the agreements ranged from 30 to 60 days at interestrates up to 1.4%. The Company had no outstanding foreign-credit balances as ofDecember 31, 2002.

 

Asof December 31, 2002, the future maturities of debt are as follows:

 
| **Year**   |   | **(In thousands)** |    |
|------------|--------|--------------------|---------|
| 2003       |   | $                  | —  |   |
| 2004       |   | —             |    |
| 2005       |   | —             |    |
| 2006       |   | —             |    |
| 2007       |   | —             |    |
| Thereafter |   | 201,723            |    |
|       |   | $                  | 201,723 |   |

 

TheCompany paid cash totaling $28.5 million, $15.9 million, and $22.4 million, forinterest during the twelve months ended December 31, 2002, 2001, and 2000,respectively. During the years ended December 31, 2002, 2001 and 2000, theCompany capitalized no interest costs.

 

**NOTE E— 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 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. The Company has the option to redeem the SeriesA Preferred at any time by paying for each share the Stated Value per share asof the redemption date. Each share of Series A Preferred includes a warrant topurchase between 2.5 and 7.75 shares of Common Stock at $0.01 per share. Commonstock exercisable by the warrant totals 750,000 shares and may be exercised atany 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.

 

37

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On November 1, 2002, Intermediate Holdingcontributed $100,000 to the Company in exchange for 667 shares of Series Apreferred stock of the Company.  Theseshares do not include warrants.

 

For the years ended December 31, 2002 and 2001,accretion of the related discount and accrued but unpaid dividends totaled $1.6million and $1.5 million, respectively, increasing the carrying amount to $14.9million and $13.1 million, respectively. As of December 31, 2002, the statedvalue of the Series A Preferred, including accumulated but unpaid dividends,was $175.38.

 

**SERIES BPREFERRED STOCK**

 

In February 2001, the Companyissued 35,520 shares of  $0.01 par valueSeries B Preferred Stock (“Series B Preferred”) to its primary owners, WCAS. Inexchange, WCAS contributed an additional $5.3 million in cash to the Company. Dividends on the Series B Preferred accruequarterly at an annual dividend rate of 25.0% of the then “StatedValue.” The Stated Value equals $150.00 per share, plus accumulated and unpaiddividends. Dividends are paid when declared by the Company’s Board ofDirectors. The aggregate liquidation preference/redemption value at December31, 2002, is $8.3 million, including accumulated and unpaid dividends. TheCompany has the right to redeem the Series B Preferred at any time by paying for each share the Stated Value pershare as of the redemption date. In addition, upon the occurrence ofcertain events, as defined, and upon the approval of a majority of the holdersof the 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 (for anti-dilution).  The Company is required to keep availableapproximately 640,000 common shares for issuance upon conversion of alloutstanding shares of Series B Preferred.

 

For the years ended December 31, 2002 and 2001,accrued but unpaid dividends totaled $1.8 million and $1.2 million,respectively.  As of December 31, 2002,the stated value of the Series B Preferred, including accumulated but unpaiddividends, was $234.88.

 

**NOTE F — OTHER ACCRUED EXPENSES ANDLIABILITIES**

 

Otheraccrued expenses and liabilities consist of the following:

 
|                                   |   | **December 31,**   |   |
|----------------------------------------|--------|--------------------|--------|
|                                   |   | **2002**           |   | **2001** |   |
|                                   |   | **(In thousands)** |   |
| Salaries, wages and other compensation |   | $                  | 12,169 |   | $ | 16,657 |   |
| Accrued taxes, other than income taxes |   | 8,794              |   | 7,898 |   |
| Advances from customers                |   | 586                |   | 1,854 |   |
| Accrued interest payable               |   | 4,951              |   | 5,939 |   |
| Accrued invoices and costs             |   | 2,395              |   | 5,533 |   |
| Other                                  |   | 17,988             |   | 21,749 |   |
|                                   |   | $                  | 46,883 |   | $ | 59,630 |   |

 

**NOTE G — TAXES**

 

Theincome tax expense (benefit) on income (loss) from continuing operationsconsists of the following:

 
|           |   | **Years Ended December 31,** |   |
|----------------|--------|------------------------------|--------|
|           |   | **2002**                     |   | **2001** |   | **2000** |   |
| Current:       |   |                         |   |   |   |   |   |
| Federal        |   | $                            | (629   | ) | $ | — |   | $ | — |   |
| State          |   | 641                          |   | — |   | — |   |
| Foreign        |   | 332                          |   | 445 |   | 3 |   |
| Total current  |   | 344                          |   | 445 |   | 3 |   |
| Deferred:      |   |                         |   |   |   |   |   |
| Federal        |   | —                       |   | — |   | 33,449 |   |
| Foreign        |   | —                       |   | — |   | 784 |   |
| Total deferred |   | —                       |   | — |   | 34,233 |   |
|           |   | $                            | 344    |   | $ | 445 |   | $ | 34,236 |   |

 

38

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Thedifference between the income tax provision on income (loss) from continuingoperations computed at the statutory federal income tax rate and the financialstatement provision for taxes is summarized as follows:

 
|                                                               |   | **Years Ended December 31,** |   |
|--------------------------------------------------------------------|--------|------------------------------|--------|
|                                                               |   | **2002**                     |   | **2001** |   | **2000** |   |
| Provision (benefit)  at U.S. statutory rate of 35% for all periods |   | $                            | 343    |   | $ | (18,290 | ) | $ | (39,725 | ) |
| Increase in tax  expense resulting from:                           |   |                         |   |   |   |   |   |
| Impact of foreign  and Puerto Rico income tax rate                 |   | 450                          |   | 51 |   | 476 |   |
| State income tax,  net of federal income tax benefit               |   | 457                          |   | — |   | — |   |
| Expiration of net  operating losses                                |   | —                       |   | 400 |   | — |   |
| Goodwill  amortization                                             |   | —                       |   | 774 |   | 962 |   |
| Change in valuation  allowance                                     |   | (304                         | )      | 17,799 |   | 78,604 |   |
| Other                                                              |   | (602                         | )      | (289 | ) | (6,081 | ) |
|                                                               |   | $                            | 344    |   | $ | 445 |   | $ | 34,236 |   |

 

TheCompany paid cash totaling $0.3 million for income taxes on continuingoperations during the year ended December 31, 2002.  The Company received net cash refunds of $0.1 million and $0.5million for income taxes on continuing operations during the years endedDecember 31, 2001 and 2000, respectively.

 

Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and liabilities at December 31, 2002 and 2001 arepresented below (dollars in thousands):

 
|                                  |   | **December 31,**   |   |
|---------------------------------------|--------|--------------------|--------|
|                                  |   | **2002**           |   | **2001** |   |
|                                  |   | **(In thousands)** |   |
| Gross deferred tax assets:            |   |               |   |   |   |
| Net operating losses                  |   | $                  | 34,857 |   | $ | 75,903 |   |
| Inventory reserves                    |   | 5,742              |   | 9,493 |   |
| Receivable allowance                  |   | 557                |   | 3,041 |   |
| Intangible assets previously deducted |   | 1,777              |   | 2,213 |   |
| Deferred revenues                     |   | 20,129             |   | 2,177 |   |
| Deferred compensation                 |   | 2,503              |   | 3,515 |   |
| Foreign timing differences, net       |   | 2,505              |   | 2,683 |   |
| Taxes paid on intercompany profits    |   | 953                |   | 902 |   |
| Other                                 |   | 9,539              |   | 8,738 |   |
| Total gross deferred tax asset        |   | 78,562             |   | 108,665 |   |
| Gross deferred tax liabilities:       |   |               |   |   |   |
| Depreciation                          |   | (2,520             | )      | (3,272 | ) |
| Other                                 |   | (307               | )      | — |   |
| Total gross deferred tax liability    |   | (2,827             | )      | (3,272 | ) |
| Deferred tax asset valuation reserve  |   | (75,735            | )      | (105,393 | ) |
| Net deferred tax asset                |   | $                  | — |   | $ | — |   |

 

39

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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 temporarydifferences.  The valuationallowance for deferred tax assets as of December 31, 2001 and December 31, 2002was $105,393,000 and $75,735,000, respectively. The net change in the totalvaluation allowance was a decrease of $29,658,000 for the year ended December31, 2002, of which $29,354,000 related to the gain on disposal of discontinuedoperations and $304,000 related to income from continuing operations.

 

Company’seffective tax rate was 5.1%, (17.2%), and (38.2%) for the years ended December31, 2002, 2001, and 2000, respectively.

 

TheCompany’s net operating loss carryforwards of $92.5 million expire as follows:$20.0 million in the period from 2003 through 2007, $66.0 million in the periodfrom 2020 through 2025, and $6.5 million with no expiration.

 

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

 
|                |   | **Years Ended December 31,** |   |
|---------------------|--------|------------------------------|--------|
|                |   | **2002**                     |   | **2001** |   | **2000** |   |
| United States       |   | $                            | (3,384 | ) | $ | (49,105 | ) | $ | (96,602 | ) |
| Foreign             |   | 4,084                        |   | (3,153 | ) | (16,899 | ) |
| Total income (loss) |   | $                            | 700    |   | $ | (52,258 | ) | $ | (113,501 | ) |

 

Undistributedearnings of foreign subsidiaries included in continuing operations wereapproximately $17.5 million, $18.0 million, and $22.4 million, at December 31,2002, 2001 and 2000, respectively. No taxes have been provided on theseundistributed earnings as they are considered to be permanently reinvested.

 

 

40

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**NOTE H — 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 that is tied to the Company’s achievement ofcertain financial objectives.  Duringthe year ended December 31, 2000 the Company contributed 50.0% of theparticipants’ qualifying total pre-tax contributions. Amounts expensed underthe plan for the years ended December 31, 2002, 2001 and 2000 were $0.0million, $0.5 million and $2.7 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. The Company accrues thecost of these benefits over the service lives of the covered employees based onan 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, 2002 and 2001 includes actuarial information for a pensionplan in the United Kingdom.  Thisinformation was not historically provided for the year ended December 31, 2000,and prior-year amounts have not been restated.

 
|                                                      |   | **Years Ended December 31,** |   |
|-----------------------------------------------------------|--------|------------------------------|--------|
|                                                      |   | **2002**                     |   | **2001** |   | **2000** |   |
| Change in Benefit  Obligation                             |   |                         |   |   |   |   |   |
| Benefit obligation  at beginning of year                  |   | $                            | 14,768 |   | $ | 13,199 |   | $ | — |   |
| Service cost                                              |   | 682                          |   | 704 |   | — |   |
| Interest cost                                             |   | 933                          |   | 785 |   | — |   |
| Participant’s  contributions                         |   | 456                          |   | 417 |   | — |   |
| Actuarial loss                                            |   | (4,224                       | )      | — |   | — |   |
| Amendments                                                |   | 141                          |   | — |   | — |   |
| Benefits paid                                             |   | (134                         | )      | (26 | ) | — |   |
| Foreign-exchange  rate changes                            |   | 1,410                        |   | (311 | ) | — |   |
| Benefit Obligation  at end of year                        |   | 14,032                       |   | 14,768 |   | — |   |
|                                                      |   |                         |   |   |   |   |   |
| Change in Plan  Assets                                    |   |                         |   |   |   |   |   |
| Estimated fair  value of plan assets at beginning of year |   | 8,700                        |   | 9,244 |   | — |   |
| Actual return on plan  assets                             |   | (2,199                       | )      | (1,474 | ) | — |   |
| Employer  contribution                                    |   | 998                          |   | 771 |   | — |   |
| Employee  contribution                                    |   | 456                          |   | 417 |   | — |   |
| Benefits paid                                             |   | (134                         | )      | (26 | ) | — |   |
| Foreign-exchange  rate changes                            |   | 857                          |   | (232 | ) | — |   |
| Estimated fair  value of plan assets at end of year       |   | 8,678                        |   | 8,700 |   | — |   |
|                                                      |   |                         |   |   |   |   |   |
| Funded status                                             |   | (5,354                       | )      | (6,068 | ) | — |   |
| Unrecognized  actuarial loss                              |   | 831                          |   | 2,131 |   | — |   |
| Unrecognized  transition cost                             |   | 275                          |   | 507 |   | — |   |
| Accrued benefit  cost                                     |   | $                            | (4,248 | ) | $ | (3,430 | ) | $ | — |   |
| Weighted-average  assumptions as of December 31, 2002     |   |                         |   |   |   |   |   |
| Discount Rate                                             |   | 6.3                          | %      | 5.8 | % |   |   |
| Expected asset  return                                    |   | 7.0                          | %      | 6.8 | % |   |   |
| Rate of  compensation increase                            |   | 1.2                          | %      | 2.5 | % |   |   |

 

41

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The components of the net periodic benefit cost are as follows:

 
|                                |   | **Years Ended December 31,** | ** ** |
|-------------------------------------|--------|------------------------------|------------|
|                                |   | **2002**                     |       | **2001** |   | **2000** | ** ** |
| Service Cost                        |   | $                            | 682        |   | $ | 704 |   | $ | — |   |
| Interest Cost                       |   | 933                          |       | 785 |   | — |   |
| Expected return on  plan assets     |   | (644                         | )          | (640 | ) | — |   |
| Amortization of  transition amount  |   | 266                          |       | 256 |   | — |   |
| Amortization of  prior service cost |   | 141                          |       | — |   | — |   |
| Recognized  actuarial loss          |   | 45                           |       | — |   | — |   |
| Net periodic  benefit cost          |   | $                            | 1,423      |   | $ | 1,105 |   | $ | — |   |

 

**NOTE I — 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 31,2002, 2001, and 2000 was $8.9 million, $11.5 million, and $11.8 million,respectively.

 

Futureminimum payments under non-cancelable operating leases, net of expectedsublease income of $0.7 million and $0.2 million in calendar years 2003 and2004, respectively, are as follows:

 

| **Calendar Year** |   | **(In thousands)** |   |
|-------------------|--------|--------------------|--------|
| 2003              |   | $                  | 6,437  |   |
| 2004              |   | 4,196              |   |
| 2005              |   | 3,151              |   |
| 2006              |   | 2,468              |   |
| 2007              |   | 2,509              |   |
| Thereafter        |   | 2,202              |   |
|              |   | $                  | 20,963 |   |

 

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

 

*Litigation.*  A lawsuit captioned Cerberus International, Ltd., et al. vs.BancTec, Inc., et al. (Case No. 03600287) was filed on January 28, 2003 inthe Supreme Court of the State of New York for the County of New York naming asdefendants the Company and certain of its affiliates.  The complaint alleges that the Company improperly made a paymentto the holder of the Sponsor Note.  Thecomplaint seeks damages of not less than $89 million as a result of the allegedimproper payment and the imposition of a constructive trust on monies paid bythe Company to the holder of the Sponsor Note. The Company’s $90 million payment to the holder of the Sponsor Note, wasdisclosed in the Company’s Current Report on Form 8-K dated November 27,2002.  This action is in its earlieststages.  The Company believes that theallegations are without merit and intends to defend against them vigorously.

 

If the lawsuit results in a determination that the payment to reducethe principal amount of the Sponsor Note was in contravention of the terms ofthe Sponsor Note, a position strongly opposed by the Company, under its terms,such payment shall be held in trust to be paid over to the holders of theSenior Notes, to the extent they remain unpaid.  Therefore, in the event of an unfavorable outcome in thislitigation, there will be no adverse effect on the Company’s financialstatements. 

 

The Company and its subsidiaries are parties tovarious legal proceedings. Although the ultimate disposition of

 

42

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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 J – BUSINESS SEGMENT DATA**

 

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

 

In2000, 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 was renamed U.S. Solutions (“USS”), and excluded Canadianoperations and Plexus® products(“Plexus”). Plexus and Advanced Enterprise Solutions (“AES”), which developsand sells the Company’s OpenARCHIVEÔand other archive solutions, were grouped as “Other”. International Solutions(“INTL”) reporting included the Canadian operations. Canadian operations arenot material to USS or to INTL operations. Under the new structure, thecomposition of Computer and Network Services remained unchanged.  In 2002, the Company again realigned its reporting. Under this new structure, USS includes the operations of AdvancedEnterprise Solutions (“AES”) and INTLreporting includes both the U.S. and international operations of Plexus® products (“Plexus”). The operations of AES and Plexus are not material to USS or toINTL operations. Under the new structure, the composition of CNS remainsunchanged.  Prior-period information hasbeen 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.  USS 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.

 

*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 warranty fulfillment services andrelated support to manufacturers of desktop/enterprise products. Another focus isthe support of desktop/enterprise applications.

 

Datafor the USS, CNS, and INTL segments is restated on a comparative basis for allyears.   In addition, data for all yearsexcludes the impact of discontinued operations.

 

Wheneverpossible, the Company uses market prices to determine inter-segment pricing.Other products are transferred at cost or cost plus an agreed upon mark-up.

 

Table1 — New Segments

 
|                                  |   | **US  Solutions** |    | **Computer  & Network  Services** |   | **International** |   | **Corp/Elims** |    | **Total** |   |
|---------------------------------------|--------|-------------------|---------|---------------------------------------|--------|-------------------|--------|----------------|---------|-----------|--------|
|                                  |   |              |    |                                  |   |              |   |           |    |      |   |
| For the year ended  December 31, 2002 |   |              |    |                                  |   |              |   |           |    |      |   |
|                                  |   |              |    |                                  |   |              |   |           |    |      |   |
| Revenue from  external customers      |   | $                 | 145,652 |                                  | $      | 137,062           |   | $              | 96,719  |      | $      | — |   | $ | 379,433 |   |
| Intersegment  revenues                |   | 2,320             |    | —                                |   | 13,940            |   | (16,260        | )       | —    |   |
| Segment gross  profits                |   | 31,482            |    | 33,692                                |   | 29,187            |   | 1,844          |    | 96,205    |   |
| Segment operating  income (loss)      |   | (563              | )       | 23,559                                |   | 6,987             |   | (4,746         | )       | 25,237    |   |
| Segment  identifiable assets          |   | 101,076           |    | 33,818                                |   | 41,212            |   | 55,289         |    | 231,395   |   |
| Capital  appropriations               |   | 3,500             |    | 1,757                                 |   | 1,635             |   | 313            |    | 7,205     |   |
|                                  |   |              |    |                                  |   |              |   |           |    |      |   |
| For the year ended  December 31, 2001 |   |              |    |                                  |   |              |   |           |    |      |   |
|                                  |   |              |    |                                  |   |              |   |           |    |      |   |
| Revenue from  external customers      |   | $                 | 164,162 |                                  | $      | 147,016           |   | $              | 116,086 |      | $      | — |   | $ | 427,264 |   |
| Intersegment  revenues                |   | 13,740            |    | —                                |   | 21,942            |   | (35,682        | )       | —    |   |
| Segment gross  profits                |   | 3,130             |    | 21,830                                |   | 30,117            |   | 808            |    | 55,885    |   |
| Segment operating  income (loss)      |   | (35,198           | )       | 1,260                                 |   | (1,694            | )      | (2,847         | )       | (38,479   | )      |
| Segment  identifiable assets          |   | 126,961           |    | 40,258                                |   | 58,033            |   | 51,435         |    | 276,687   |   |
| Capital  appropriations               |   | 5,264             |    | 1,779                                 |   | 2,993             |   | 1,375          |    | 11,411    |   |
|                                  |   |              |    |                                  |   |              |   |           |    |      |   |
| For the year ended  December 31, 2000 |   |              |    |                                  |   |              |   |           |    |      |   |
|                                  |   |              |    |                                  |   |              |   |           |    |      |   |
| Revenue from  external customers      |   | $                 | 185,881 |                                  | $      | 141,460           |   | $              | 85,279  |      | $      | — |   | $ | 412,620 |   |
| Intersegment  revenues                |   | 25,586            |    | —                                |   | 14,062            |   | (39,648        | )       | —    |   |
| Segment gross profits                 |   | 16,311            |    | (2,479                                | )      | 10,403            |   | 996            |    | 25,231    |   |
| Segment operating  income (loss)      |   | (26,251           | )       | (14,436                               | )      | (25,101           | )      | (11,468        | )       | (77,256   | )      |

 

43

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**NOTE K — GEOGRAPHIC OPERATIONS**

 

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

 

Salesto unaffiliated customers and affiliates for the years ended December 31, 2002,2001 and 2000, and long-lived assets, other than deferred taxes, at the end ofeach of those periods, classified by geographic area, are as follows:

 
|                                         |   | **United  States** |    | **United  Kingdom** |   | **Other  International** |   | **Eliminations** |   | **Consolidated** |   |
|----------------------------------------------|--------|--------------------|---------|---------------------|--------|--------------------------|--------|------------------|--------|------------------|--------|
| Year ended December  31, 2002                |   |               |    |                |   |                     |   |             |   |             |   |
| Sales to  unaffiliated customers             |   | $                  | 289,865 |                | $      | 39,214                   |   | $                | 50,354 |             | $      | — |   | $ | 379,433 |   |
| Inter-area sales to  affiliates              |   | 13,096             |    | 1,819               |   | 1,345                    |   | (16,260          | )      | —           |   |
| Long-lived assets  other than deferred taxes |   | 129,744            |    | 2,355               |   | 3,351                    |   | (27,580          | )      | 107,870          |   |
|                                         |   |               |    |                |   |                     |   |             |   |             |   |
| Year ended December  31, 2001                |   |               |    |                |   |                     |   |             |   |             |   |
| Sales to  unaffiliated customers             |   | $                  | 323,122 |                | $      | 49,198                   |   | $                | 54,944 |             | $      | — |   | $ | 427,264 |   |
| Inter-area sales to  affiliates              |   | 32,145             |    | 1,997               |   | 1,540                    |   | (35,682          | )      | —           |   |
| Long-lived assets  other than deferred taxes |   | 152,347            |    | 3,566               |   | 5,442                    |   | (24,286          | )      | 137,069          |   |
|                                         |   |               |    |                |   |                     |   |             |   |             |   |
| Year ended December  31, 2000                |   |               |    |                |   |                     |   |             |   |             |   |
| Sales to  unaffiliated customers             |   | $                  | 339,619 |                | $      | 30,574                   |   | $                | 42,427 |             | $      | — |   | $ | 412,620 |   |
| Inter-area sales to  affiliates              |   | 37,457             |    | 1,850               |   | 341                      |   | (39,648          | )      | —           |   |
| Long-lived assets  other than deferred taxes |   | 178,777            |    | 4,698               |   | 5,792                    |   | (27,179          | )      | 162,088          |   |

 

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

** **

AS RESTATED

** **
|                                      |   | **Year Ended December 31, 2002** |   |
|-------------------------------------------|--------|----------------------------------|--------|
|                                      |   | **Q1(3)**                        |   | **Q2(3)** |   | **Q3(3)** |   | **Q4(4)** |   | **Total** |   |
| Revenue                                   |   | $                                | 97,281 |   | $ | 95,574 |   | $ | 93,658 |   | $ | 92,920 |   | $ | 379,433 |   |
| Gross profit (loss)                       |   | 22,970                           |   | 20,880 |   | 27,442 |   | 24,913 |   | 96,205 |   |
| Income (loss) from  continuing operations |   | (3,973                           | )      | 75 |   | 945 |   | 3,309 |   | 356 |   |
| Net income (loss)                         |   | (9,962                           | )      | 955 |   | 1,501 |   | 66,632 |   | 59,126 |   |
|                                           |        |                                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                      |   | **Year Ended December 31, 2001** |   |
|-------------------------------------------|--------|----------------------------------|--------|
|                                      |   | **Q1(1)**                        |   | **Q2(1)** |   | **Q3(1)** |   | **Q4(2)** |   | **Total** |   |
| Revenue                                   |   | $                                | 97,334 |   | $ | 112,360 |   | 105,422 |   | 112,148 |   | 427,264 |   |
| Gross profit (loss)                       |   | 12,916                           |   | 20,211 |   | 14,223 |   | 8,535 |   | 55,885 |   |
| Income (loss) from  continuing operations |   | (19,172                          | )      | (13,731 | ) | (16,769 | ) | (3,031 | ) | (52,703 | ) |
| Net income (loss)                         |   | (15,840                          | )      | (12,098 | ) | (17,217 | ) | (671 | ) | (45,826 | ) |
|                                           |        |                                  |        |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Subsequentto the issuance of the Company’s financial statements as of and for thequarters ended March 31, June 30 and September 30, 2001 and the filing of Form10-Q for the respective quarters of 2001, management determined that certainrevenue items totaling $10.6 million, cost of sales of $6.4 million and expenseitems of $0.3 million recorded in the

 

44

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statementof operations as Sundry, net were not accrued in the proper period.  Accordingly, the summarized quarterly datafor the first, second and third quarters of 2001 has been restated from amountsreported in the 2001 Form 10-Q’s to appropriately report such revenues, costsand expenses.

 

(2)          Duringthe fourth quarter of 2001, the Company determined that long-lived tangibleassets totaling approximately $4.1 million were impaired. The impairmentsincluded approximately $1.9 million for capitalized spare parts, which weredetermined to be obsolete, and approximately $2.2 million for property, plantand equipment (of which $1.5 million was from vacating an owned facilitycurrently being offered for sale).  Alsoduring the fourth quarter of 2001, the Company accrued approximately $2.4million of costs related to contracts deemed to be in a loss position andrecorded reserves of approximately $6.1 million from the Company’s periodicevaluation of the carrying amount of inventory.  The Company also recognized a gain of $23.9 million from therepurchase of a portion of the Senior Notes.

 

(3)          Subsequentto the issuance of the Company’s financial statements as of and for thequarters ended March 31, June 30 and September 30, 2002 and the filing of Form10-Q for the respective quarters of 2002, management determined that certainrevenue items totaling $1.6 million were not recorded in the proper period.  Accordingly, the summarized quarterly datafor the first, second and third quarters of 2002 has been restated from amountsreported in the 2002 Form 10-Q’s to appropriately report such revenues.  Also, during 2002, the Company recorded as acumulative effect of a change in accounting principle, a non-cash charge of$6.7 million related to the write off of a portion of the carrying value ofgoodwill.   Net income for the quarterended March 31, 2002 has been restated to reflect this write off.

 

(4)          Duringthe fourth quarter of 2002, the Company recognized a gain of $63.0 million fromthe disposal of its wholly-owned subsidiary, BancTec Japan.

 

(5)          Allquarters for 2001 and 2002 have been restated to reflect the sale of theCompany’s wholly-owned subsidiary, BancTec Japan, as a discontinued operation.

 

**NOTE M — ACCUMULATED OTHERCOMPREHENSIVE LOSS**

 

The components of accumulated other comprehensive loss at December 31,2002 consist of foreign-currency translation adjustments related to theCompany’s international operations and minimum pension liability related to theCompany’s subsidiary in the United Kingdom of $2.4 million.  The minimum pension liability is net of taxbenefit of $0.2 million with a corresponding valuation allowance of $0.2million, for an effective tax of zero.

 

 

**NOTE N — SUBSEQUENT EVENTS**

 

During the first quarter of 2003, the Companyrepurchased Senior Notes with a face amount of $3.4 million. The Company wroteoff a proportionate share of deferred financing-fees, resulting in a gain ofapproximately $1.0 million.

 

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, 2002 and December 31, 2001                                               |
|                                                                                                                  |   |
| Consolidated  Statements of Operations for the years ended December 31, 2002, 2001 and 2000                           |
|                                                                                                                  |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000                           |
|                                                                                                                  |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit) for the years ended December 31,  2002, 2001 and 2000 |
|                                                                                                                  |   |
| Consolidated  Statements of Comprehensive Income (Loss)                                                               |
|                                                                                                                  |   |
| Notes to  Consolidated Financial Statements                                                                           |
|                                                                                                                  |   |
| Supplemental  Schedules                                                                                               |
|                                                                                                                  |   |
| Schedule II—Valuation  and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000              |

 

 

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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**ITEM 9.****                             CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None.

 

47

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**PART III**

 

**ITEM 10.****                      Directorsand Executive Officers of BancTec, Inc.**

 

The following table sets forth the names, ages,and positions of each of the directors and executive officers of the Company asof March 15, 2003.

 

The Board of Directors elects executive officersannually. No family relationships exist among the executive officers of theCompany.

 
| **Name**             |   | **Age** |   | **Position**                                       |
|----------------------|--------|---------|--------|----------------------------------------------------|
| Craig  D. Crisman    |   | 62      |   | President  and Chief Executive Officer             |
| Brian  R. Stone      |   | 43      |   | Senior  Vice President and Chief Financial Officer |
| Robert  A. Minicucci |   | 50      |   | Chairman  of the Board and Director                |
| Eric  J. Lee         |   | 31      |   | Director                                           |
| Gary  J. Fernandes   |   | 59      |   | Director                                           |
| Sanjay  Swani        |   | 36      |   | Director                                           |

 

Mr. Crisman has been President and Chief ExecutiveOfficer since May 2001.  FromAugust 1994 through April 2001, Mr. Crismanserved as Chief Executive Officer of Applied Magnetics Corporation and fromNovember 1995 through April 2001,also served as Chairman of the Board. In January 2000, Applied Magnetics Corporation filed for protection underChapter 11 of the United States Bankruptcy Code, from which it was dischargedin November 2001.

 

Mr. Stone has been Senior Vice President andChief Financial Officer since May 2001. From September 1999 through May 2001, Mr. Stone provided managementconsulting services to several U.S. companies. From March 1996 through August1999, Mr. Stone served as Chief Executive Officer of Magnetic DataTechnologies, LLC.

 

Mr. Minicucci has been a director of the Companysince July 1999. Mr. Minicucci also serves as a Managing Member of WCAS VIIIAssociates LLC, the general partner of Welsh, Carson, Anderson & StoweVIII, L.P. (a private investment company) and as a director of Amdocs Limited(a telecom customer care and billing software and services company). Mr.Minicucci has served as a General Partner of Welsh, Carson, Anderson &Stowe since 1993.

 

Mr. Lee has been a director of the Company sinceJanuary 2002.  He joined WCAS as anAssociate in July 1999 and focuses on investments in the information servicesand healthcare industries.  From July1995 to June 1999, Mr. Lee was employed by Goldman, Sachs & Company wherehe worked in the High Technology and Mergers & Acquisitions groups.

 

Mr. Fernandes retired as Vice Chairman of Electronic Data Systems Corporation (EDS), aglobal services company, in 1998, after serving on the Board of Directors ofEDS since 1981.  After retiring fromEDS, Mr. Fernandes founded Convergent Partners, a venture-capital fund focusingon buyouts of technology-related companies. He also served as Chairman and CEO of GroceryWorks, Inc, an internetgrocery-fulfillment company until 2001. He currently serves on the Boards of Directors of 7-Eleven, Inc., aworldwide operator, franchisor and licensor of convenience stores, webMethods,Inc., a software-integration company listed on NASDAQ, and Anacomp, Inc.  Mr. Fernandes is currently the Chairman andPresident of FLF Real Estate Ventures.

 

Mr. Swani has been a director of the Companysince December 2000. Mr. Swani joined Welsh, Carson, Anderson & Stowe inJuly 1999 and became a General Partner in October 2001. Mr. Swani also servedas a principal of Fox Paine & Company (a San Francisco-based buyout firm)from June 1998 to June 1999 and worked in the mergers and acquisitionsdepartment of Morgan Stanley & Co. (a global financial services firm) fromAugust 1994 to June 1998. Mr. Swani is also a director of Global KnowledgeNetworks, Inc. and Valor Telecommunications, LLC.

 

*AuditCommittee*

 

On March 15, 2002, the Audit Committee consistedof Sanjay Swani, Eric J. Lee, and Gary J. Fernandes.  No member of the Audit Committee was an officer of theCompany.  No member of the Audit Committeewas formerly an officer of the Company.

 

*Section 16(a)Beneficial Ownership Reporting Compliance*

 

Not applicable.

 

48

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**ITEM 11.****                      Executive Compensation**

 

**Summary Compensation Table**

 

Thefollowing table sets forth certain information regarding compensation earnedduring the fiscal years ended December 31, 2002, 2001 and 2000, by theCompany’s Chief Executive Officer and each of the Company’s four other mosthighly compensated executive officers (based upon salary and bonus earnedduring the fiscal year ended December 31, 2002).

 
|                                |   |             |   | **Annual Compensation** |   | **Long Term Compensation Awards**   |   |
|-------------------------------------|--------|------------------|--------|-------------------------|--------|-------------------------------------|--------|
| **Name  and Principal Position(s)** |   | **Fiscal  Year** |   | **Salary ($)**          |   | **Bonus  ($)   (1)** |   | **Restricted  Stock  Awards ($)** |   | **Options  (#) (2)** |   | **All Other********Compensation********($)(3)** |   |
| Craig D. Crisman                    |   | 2002             |   | 432,675                 |   | 357,563                             |   | 0 |   | 0 |   | 0 |   |
| President and Chief                 |   | 2001             |   | 294,219                 |   | 267,750                             |   | 0 |   | 0 |   | 0 |   |
| Executive Officer                   |   | 2000             |   | 0                       |   | 0                                   |   | 0 |   | 0 |   | 0 |   |
|                                |   |             |   |                    |   |                                |   |   |   |   |   |   |   |
| Brian R. Stone (6)                  |   | 2002             |   | 310,831                 |   | 255,612                             |   | 0 |   | 0 |   | 0 |   |
| Senior Vice  President and          |   | 2001             |   | 214,583                 |   | 193,460                             |   | 0 |   | 0 |   | 0 |   |
| Chief Financial  Officer            |   | 2000             |   | 0                       |   | 0                                   |   | 0 |   | 0 |   | 0 |   |
|                                |   |             |   |                    |   |                                |   |   |   |   |   |   |   |
| John D. Staedke (4)                 |   | 2002             |   | 23,889                  |   | 0                                   |   | 0 |   | 0 |   | 287,321 |   |
| Former Chairman of  the             |   | 2001             |   | 300,014                 |   | 150,000                             |   | 0 |   | 0 |   | 0 |   |
| Board of Directors                  |   | 2000             |   | 300,014                 |   | 150,000                             |   | 0 |   | 400,000 |   | 274,233 |   |
|                                |   |             |   |                    |   |                                |   |   |   |   |   |   |   |
| James S. Kildebeck  (5)             |   | 2002             |   | 35,398                  |   | 79,130                              |   | 0 |   | 0 |   | 241,153 |   |
| Former Senior Vice                  |   | 2001             |   | 200,400                 |   | 98,220                              |   | 0 |   | 60,000 |   | 0 |   |
| President                           |   | 2000             |   | 106,366                 |   | 19,090                              |   | 0 |   | 0 |   | 0 |   |

 

----

(1) Reflects bonus earnedduring each fiscal year.

 

(2)Options to acquire shares of Common Stock.

 

(3) Includes cash compensation received for: relocationexpense reimbursement to Mr. Staedke (2000); and severance payments to Mr.Staedke and Mr. Kildebeck (2002).

 

(4)Mr. Staedke served as president and Chief Executive Officer from December 1999to May 2001, Director from December 2000 toMay 2001 and Chairman of the Board of Directors from May 2001 to December2001.  Mr. Staedke terminated employmenteffective December 31, 2001.

 

(5) Mr. Kildebeck terminated employment effectiveJanuary 31, 2002.

 

(6) Salary and bonusincludes compensation paid to ACR/BI Limited Partnership.

 

**Option Grants in 2002**

 

TheCompany did not grant options during 2002.

 

**Aggregated Option Exercises in 2002 andFiscal Year-End Option Values**

 

Noneof the named executive officers hold options in the Company.

 

**Compensation of Directors**

 

Directorsof the Company are not compensated for their services.

 

**Employment Agreements**

 

During2002, Mr. Crisman was compensated at an annualized salary rate of$450,000.  Mr. Crisman also received abonus of

 

49

----

 

$357,563for his services during 2002. Effective July 1, 2002, the Company entered intoan employment agreement with Mr. Crisman which provides for the payment of anannual base salary of $450,000, subject to annual review by the Board ofDirectors, and a discretionary bonus. The agreement initially expired onDecember 31, 2002 and automatically renews for successive one-year periodsunless terminated by either party. The agreement provides for severance in anamount equal to the sum of the then-current salary and the bonus awarded in thepreceding 12-month period, in the case of termination for reasons other thancause 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. During2002, the Company paid to ACR/BI Limited Partnership a monthly fee of $27,083through July 2002.  The Company enteredinto an employment agreement with Mr. Stone, dated July 1, 2002, which providesfor the payment of an annual base salary of $325,000, subject to annual reviewby the Board of Directors, and a discretionary bonus.  Mr. Stone was compensated at an annualized rate of $325,000beginning August 2002 and a bonus of $255,612 for Mr. Stone’s services during2002.   The agreement initially expiredon December 31, 2002 and automatically renews for successive one-year periodsunless terminated by either party. The agreement provides for severance in anamount equal to the sum of the then-current salary and the bonus awarded in thepreceding 12-month period, in the case of termination for reasons other thancause or without good reason.

 

**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 (a former director of the Company). From January 1, 2002 through December 31, 2002, the CompensationCommittee was composed of Robert A. Minicucci.

 

FromJuly 1, 2000 through December 3, 2000, the Option Committee was composed ofRobert A. Minicucci, Anthony J. de Nicola, and Murray Holland (a formerdirector of the Company) and from December 4, 2000 through December 31, 2001,the Option Committee was composed of Robert A. Minicucci and Anthony J. deNicola.  From January 1, 2002 throughDecember 31, 2002, the Option Committee was composed of Robert A. Minicucci.

 

Nomember of the Compensation Committee or the Option Committee was an officer ofthe Company. No member of the Compensation Committee or the Option Committeewas formerly an officer of the Company.

 

### **Report of the Compensation Committee**

 

### **Compensation Policy andExecutive Compensation.**  The CompensationCommittee is responsible for reviewing and making recommendations as to theannual compensation of the Company’s executive officers, including suchcomponents as annual cash compensation, short and long-term incentives, andsupplemental benefits.

 

The Company’s compensation policy is based on linking executivecompensation to the Company’s objectives of growth through increased earningsand maximizing long-term stockholder value. This policy traditionally has been carried out through a compensationprogram consisting of salaries and incentives. In determining the compensation of the executive officers, the Committeeconsidered compensation practices of similar companies and the relativeperformance of BancTec, Inc. to those companies.  The Committee also considered the contribution of each executiveofficer toward achieving the Company’s prior-year and long-term strategicobjectives.

 

In its considerations, the Committee did not assign quantitativerelative weights to different factors or follow mathematical formulae.  Rather, the Committee exercised itsdiscretion and made a judgment after considering the factors it deemedrelevant.  The Committee’s decisionsregarding 2002 executive compensation were designed to: (1) align the interestof executive officers with the interests of the stockholders by providingperformance-based awards; and (2) allow the Company to compete for and retainexecutive officers critical to the Company’s success by providing anopportunity for compensation that is comparable to the levels offered bysimilar companies.

 

The Company has entered into written employment agreements with each ofits executive officers.  See “EmploymentAgreements.”

 

**Base Salary.**  The base salary for each executive officeris determined at levels considered appropriate for comparable positions atsimilar companies.

 

**Variable Incentive-Awards.**  To reinforce the attainment of Companygoals, the committee believes that a substantial portion of the annualcompensation of each executive officer should be in the form of variableincentive-pay.   The Company maintainsan incentive plan under which the executive officers may earn an award as apercentage of their base compensation, if the Company meets the EBITDA profitobjective set by the Compensation Committee at the beginning of the fiscalyear.  During 2002, these objectiveswere determined on a quarterly basis, and as a result of the Company meeting aportion of those objectives, awards were paid to Messrs. Crisman and Stone inthe amounts discussed under “Employment Agreements.”

 

50

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**ITEM 12.****                      Security Ownership ofCertain Beneficial Owners and Management**

 

Thefollowing table sets forth certain information as of March 15, 2003 regardingthe ownership of Common Stock, Class A Common Stock, and Class A and Class BPreferred Stock of: (1) each person who is known by the Company to be thebeneficial owner of more than five percent of the outstanding shares of thenamed class of Stock; (2) each director of the Company; (3) each executiveofficer named in the Summary Compensation Table; and (4) all executive officersand directors of the Company as a group. Percentage of ownership is based on17,003,838 shares of Common Stock and 1,181,946 shares of Class A Common Stock(both issued and outstanding at March 15, 2003), 100,667 shares of Series APreferred Stock (Preferred A), and 35,520 shares of Series B Preferred Stock(Preferred B) outstanding as of March 15, 2003.   The assumed exercise of the Series A Preferred warrants (“SeriesA Warrants”) and the assumed conversion of the Series B Preferred (“Series BConversion Rights”) results in 750,000 and 640,000 additional shares,respectively, of Common Stock. Additionally, the assumed exercise of optionsresults in 185,150 additional shares of Common Stock. Included in the Number ofShares Beneficially Owned are shares attributable to stock options, stockwarrants, and conversion rights that are exercisable as of, or will beexercisable within 60 days after, March 15, 2003.

 
| **Name  of Beneficial Owner(1)**                  |   | **Class of********Shares Held (2)** |   | **Number********of Shares********Beneficially********Owned (3) (4)** |   | **Percent of********Outstanding********Class of Stock** |    |
|---------------------------------------------------|--------|-------------------------------------|--------|----------------------------------------------------------------------|--------|---------------------------------------------------------|---------|
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| BancTec Intermediate Holding, Inc.                |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 2701 E. Grauwyler                                 |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| Irving, TX 75061                                  |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| BancTec Upper-Tier Holding, LLC(5)                |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 2701 E. Grauwyler                                 |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| Irving, TX 75061                                  |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| Welsh, Carson, Anderson & Stowe VIII, L.P.(6) |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 320 Park Avenue, Suite 2500                       |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| New York, NY 10022                                |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| WCAS Capital Partners III, L.P.(7)                |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 320 Park Avenue, Suite 2500                       |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| New York, NY 10022                                |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| WCAS Information  Partners, L.P.(8)               |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 320 Park Avenue,  Suite 2500                      |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| New York, NY 10022                                |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| Robert A. Minicucci(9)                            |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 320 Park Avenue, Suite 2500                       |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| New York, NY 10022                                |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| Eric J. Lee(10)                                   |   | Common                              |   | 0                                                                    |   |                                                    | *  |
| 320 Park Avenue, Suite 2500                       |   | Preferred A                         |   | 0                                                                    |   |                                                    | *  |
| New York, NY 10022                                |   | Preferred B                         |   | 0                                                                    |   |                                                    | *  |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| Gary J. Fernandes(11)                             |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 100 Crescent Court, Suite 230                     |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| Dallas, TX 75201                                  |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| Sanjay Swani(12)                                  |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 320 Park Avenue, Suite 2500                       |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| New York, NY 10022                                |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| Craig D. Crisman(13)                              |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 2701 E. Grauwyler  Road                           |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| Irving, TX 75061                                  |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| Brian R. Stone(13)                                |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| 2701 E. Grauwyler  Road                           |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
| Irving, TX 75061                                  |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |
|                                              |   |                                |   |                                                                 |   |                                                    |    |
| All executive officers and directors as a group   |   | Common                              |   | 19,575,784                                                           |   | 100.0                                                   | %       |
| (6 persons)                                       |   | Preferred A                         |   | 100,667                                                              |   | 100.0                                                   | %       |
|                                              |   | Preferred B                         |   | 35,520                                                               |   | 100.0                                                   | %       |

 

----

*                 Lessthan one percent.

(1)          BancTecIntermediate Holding, Inc. has sole investment and sole voting power withrespect to the shares of Stock shown.

(2)          CommonStock includes 17,003,838 shares of Common Stock, 1,181,946 shares of Class ACommon Stock, 750,000 shares of Common Stock (Series A Warrants), and 640,000shares of Common Stock (Series B Conversion Rights).

(3)          100,000shares 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.

(4)          Eachshare of Series B Preferred Stock includes the right to convert into CommonStock. The number of shares of Common Stock is determined by multiplying thenumber of shares being converted by $150 and dividing the result by $8.325 pershare. The conversion rate is subject to various adjustments.

(5)          BancTecUpper-Tier Holding, LLC holds 100% of the outstanding capital stock of BancTecIntermediate Holding, Inc., which in turn holds 100% of all classes of capitalstock, including warrants, of the Company.

 

51

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(6)          Welsh,Carson, Anderson & Stowe VIII, L.P holds the majority interest in BancTecUpper-Tier Holding, LLC.

(7)          WCASCapital Partners III, L.P. holds a minority interest in BancTec Upper-TierHolding, LLC.

(8)          WCASInformation Partners, L.P. holds a minority interest in BancTec Upper-TierHolding, LLC.

(9)          Mr.Minicucci is a managing member of WCAS VIII Associates LLC, the general partnerof Welsh, Carson, Anderson & Stowe VIII, L.P. Mr. Minicucci disclaimsbeneficial ownership of such shares.

(10)    Mr. Lee is nota general partner of Welsh, Carson, Anderson & Stowe.

(11)    Mr. Fernandesholds a minority interest in BancTec Upper-Tier Holding, LLC.  Mr. Fernandes disclaims beneficial ownershipof such shares.

(12)    Mr. Swani is amanaging member of WCAS VIII Associates LLC, the general partner of Welsh,Carson, Anderson & Stowe VIII, L.P. Mr. Swani disclaims beneficialownership of such shares.

(13)    Mr. Crisman andMr. Stone hold minority interests in BancTec Upper-Tier Holding, LLC.  Mr. Crisman and Mr. Stone disclaimbeneficial ownership of such shares.

 

**ITEM 13.****                      Certain Relationshipsand Related Transactions**

 

None.

 

**ITEM 14.****                     ****CONTROLS AND PROCEDURES**

 

During the audit of the Company’s 2000 financial statements, theCompany’s certifying accountant, Deloitte & Touche LLP (D&T) noted whatD&T considered to be material weaknesses in internal-control design and inthe operation of internal controls.  SeeCurrent Report on Form 8-K filed with the Securities and Exchange Commission onNovember 13, 2001 for additional information regarding this item and the subsequentchange in the Company’s independent accountant.  The Company’s current independent accountant, KPMG, LLP (KPMG),also informally noted certain internal-control weaknesses as a result of the2001 audit, some of which are the same weaknesses as noted by D&T in theirreport.

 

The Company has addressed certain of the individual internal-controlweaknesses noted by D&T and KPMG, but correction of some control factorshas yet to be completed.  Steps thathave been implemented to address internal-control weaknesses include policiescovering loss contracts, inventory reserves, allowance for doubtful accounts,revenue recognition, and project costing. In addition, as a result of Exchange Act Rule 13a-14, the Company hasbegun to put in place procedures addressing the adequacy of disclosurecontrols, including obtaining certifications from each member of managementinvolved in the preparation and review of this Form 10-K.  The Company is continuing its efforts tocorrect the internal-control weaknesses noted by D&T and KPMG.  Although the Company believes that it hasimplemented adequate controls and procedures for the preparation of thisreport, the actions taken by the Company to correct certain of the previously identifiedweaknesses will not be fully tested by the Company’s independent accountantsuntil the next annual audit.

 

Within the 90 days prior to the filing date of this report, the ChiefExecutive Officer and the Chief Financial Officer of the Company, with theparticipation of the Company’s management, began an evaluation of theeffectiveness of the Company’s disclosure controls and procedures pursuant toExchange Act Rule 13a-14. Based upon the evaluation completed to date, and the new procedures putin place, the Chief Executive Officer and the Chief Financial Officer believethat the Company’s disclosure controls and procedures are effective in makingknown to them material information relating to the Company (including itsconsolidated subsidiaries) required to be included in this report.  The Company will continue to evaluatedisclosure controls on an ongoing basis.

 

Disclosure controls and procedures, no matter how well designed andimplemented, can provide only reasonable assurance of achieving an entity’sdisclosure objectives.  The likelihoodof achieving such objectives is affected by limitations inherent in disclosurecontrols and procedures.  These includethe fact that human judgment in decision-making can be faulty and thatbreakdowns in internal control can occur because of human failures such assimple errors or mistakes or intentional circumvention of the establishedprocess.

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect internal controls, known tothe Chief Executive Officer or the Chief Financial Officer, subsequent to thedate of the evaluation.

 

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**PART IV**

 

**ITEM 15.****                      Exhibits****, Financial Statement Schedules, andReports on Form 8-K**

 

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

 

(b)         Reports onForm 8-K:

 

The Company filed aCurrent Report on Form 8-K dated November 27, 2002, regarding (1) the sale ofits wholly-owned subsidiary, BancTec Japan; (2) the formation of a two-tierholding company structure; and (3) the pay down of $90 million on Sponsor Note.

 

(c)Exhibits:

 

3.1— Amended and Restated Certificate of Incorporation*

 

3.2— 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, incorporated by reference toExhibit 4.7 to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

10.1— Loan Documents dated July 22, 1999, among the Company, Chase Bank of Texas,as Agent, and Welsh, Carson, Anderson & Stowe, as amended, incorporated 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 10-Q for the period ended September 30,2000.

 

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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— Second Amendment to Loan and Security Agreement, dated as of February5, 2002, between Heller Financial, Inc. and BancTec, Inc., incorporated byreference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for theyear ended December 31, 2001.

 

10.10— Third Amendment to Loan and Security Agreement, dated as of July 30,2002, between Heller Financial, Inc. and BancTec, Inc., incorporated byreference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for theyear ended December 31, 2001.

 

10.11 — Fourth Amendmentto Loan and Security Agreement, dated as of November 27, 2002, between HellerFinancial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.3 tothe Company’s Current Report on Form 8-K filed as of November 27, 2002.

 

10.12 — Loan and SecurityAgreement—Waiver, Consent and Amendment Relating to BancTec Restructuring,dated as of November 1, 2002, between Heller Financial, Inc. and BancTec, Inc.,incorporated by reference to Exhibit 10.2 to the Company’s Current Report onForm 8-K filed as of November 27, 2002.

 

10.13 — Stock Purchase Agreement, dated as of November 27, 2002,between BancTec, Inc. and JAFCO MBO Co., Ltd., incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed as of November27, 2002.

 

21.1— Subsidiaries of Registrant*

 

99.1— Certificate of Chief Executive Officer*

 

99.2— Certificate of Chief Financial Officer*

 

**EXECUTIVECOMPENSATION PLANS AND ARRANGEMENTS**

 

10.13— 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.

 

10.14— Employment Agreement with Craig D. Crisman effective as of July 1, 2002, incorporatedby reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K forthe year ended December 31, 2001.

 

10.15— Employment Agreement with Brian R. Stone effective as of July 1, 2002, incorporatedby reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K forthe year ended December 31, 2001.

 

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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.**

 

| *B*y   | */s/*  | *Craig D. Crisman*                       |
|--------|--------|------------------------------------------|
|   |   | *Craig D. Crisma*                        |
|   |   | *President and Chief Executive  Officer* |

 

 

Dated:April 11, 2003

 

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    |   | April  11, 2003 |
| Craig  D. Crisman              |   | Officer  (Principal Executive     |   |            |
|                           |   | Officer);  and Director           |   |            |
|                           |   |                              |   |            |
| /s/   Brian R. Stone      |   | Senior  Vice President, Chief     |   | April  11, 2003 |
| Brian  R. Stone                |   | Financial  Officer, and Treasurer |   |            |
|                           |   | (Principal  Accounting Officer);  |   |            |
|                           |   | and  Director                     |   |            |
|                           |   |                              |   |            |
| /s/   Robert A. Minicucci |   | Chairman  of the Board and        |   | April  11, 2003 |
| Robert  A. Minicucci           |   | Director                          |   |            |
|                           |   |                              |   |            |
| /s/   Eric J. Lee         |   | Director                          |   | April  11, 2003 |
| Eric  J. Lee                   |   |                              |   |            |
|                           |   |                              |   |            |
| /s/   Gary J. Fernandes   |   | Director                          |   | April  11, 2003 |
| Gary  J. Fernandes             |   |                              |   |            |
|                           |   |                              |   |            |
| /s/   Sanjay Swani        |   | Director                          |   | April  11, 2003 |
| Sanjay  Swani                  |   |                              |   |            |

 

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**Certifications**

 

I,Craig D. Crisman, certify that:

 

1.                            I have reviewed this annual report on Form 10-K of BancTec, Inc;

 

2.                           Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;

 

3.                           Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report.

 

4.                           Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c.               presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing equivalent functions):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officer and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:   April 11, 2003 | /s/  Craig D. Crisman                    |   |
|-----------------------------|------------------------------------------|--------|
|                        | *Craig D. Crisman*                       |
|                        | *President and Chief Executive  Officer* |

 

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**Certifications**

 

 

I,Brian R. Stone, certify that:

 

1.                           I have reviewed this annual report on Form 10-K of BancTec, Inc;

 

2.                           Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;

 

3.                           Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report.

 

4.                           Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a.               designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c.               presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing equivalent functions):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officer and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:   April 11, 2003 | /s/  Brian R. Stone                                  |   |
|-----------------------------|------------------------------------------------------|--------|
|                        | *Brian R. Stone*                                     |
|                        | *Senior Vice President and Chief  Financial Officer* |

 

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**INDEPENDENTAUDITORS' REPORT**

** **

** **

To the Board of Directorsand Stockholders of BancTec, Inc.:

 

We have audited theconsolidated financial statements of BancTec, Inc. as of and for the year endedDecember 31, 2000, and have issued our report thereon dated May 15, 2001;(except with respect to the matters discussed in Notes B and D, as to which thedates are November 27, 2002 and May 31, 2001, respectively) which reportincludes an explanatory paragraph as to a discontinued operation as discussedin Note B; such consolidated financial statements and report are includedelsewhere in this Form 10-K. Our audit also included the financial statementschedule as of December 31, 2000, of BancTec, Inc., listed in Item 14. Thefinancial statement schedule is the responsibility of the Company's management.Our responsibility is to express an opinion based on our audit. In our opinion,such financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, present fairly in all material respectsthe information set forth therein.

 

**DELOITTE& TOUCHE LLP**

 

 

Dallas, TexasMay 15, 2001, (except with respect to the matters discussed in Notes B and D,as to which the dates are November 27, 2002 and 

May 31, 2001,respectively)

 

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**SCHEDULE II**

 

**BANCTEC, INC.**

 

**VALUATION ANDQUALIFYING ACCOUNTS**

 

Forthe Years Ended December 31, 2002, 2001 and 2000

 
| **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, 2002               |   | $                                    | 7,636  |                                           | $      | (5,215                      | )      | $                              | (205   | )(a) | $ | 2,216 |   |
| Year ended December 31, 2001               |   | 8,256                                |   | 3,891                                          |   | (4,511                      | )(a)   | 7,636                          |   |
| Year ended December 31, 2000               |   | 12,746                               |   | 2,609                                          |   | (7,099                      | )(a)   | 8,256                          |   |
|                                       |   |                                 |   |                                           |   |                        |   |                           |   |
| Reorganization Accrual                     |   |                                 |   |                                           |   |                        |   |                           |   |
| Year ended December 31, 2002               |   | $                                    | 48     |                                           | $      | —                      |   | $                              | (48    | )(b) | $ | — |   |
| Year ended December 31, 2001               |   | 115                                  |   | —                                         |   | (67                         | )(b)   | 48                             |   |
| Year ended December 31, 2000               |   | 215                                  |   | —                                         |   | (100                        | )(b)   | 115                            |   |
|                                       |   |                                 |   |                                           |   |                        |   |                           |   |
| Accrued Recapitalization Charges and Costs |   |                                 |   |                                           |   |                        |   |                           |   |
| Year ended December 31, 2002               |   | $                                    | — |                                           | $      | —                      |   | $                              | — | (c) | $ | — |   |
| Year ended December 31, 2001               |   | —                               |   | —                                         |   | —                      | (c)    | —                         |   |
| Year ended December 31, 2000               |   | —                               |   | 309                                            |   | (309                        | )(c)   | —                         |   |

 

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(a)          Write-offof uncollectible accounts.

(b)         Severanceand related payments.

(c)          Paymentof recapitalization charges.

 

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