**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

** **

**ý****  ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Fiscal Year EndedDecember 31, 2004**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

# **Commission FileNumber 0-9859**

 

**BANCTEC, INC.**

(Exact Name of Registrant asSpecified in its Charter) 

 
| **DELAWARE**                                                    | ** ** | ** ** | ** ** | **75-1559633**                        |
|-----------------------------------------------------------------|------------|------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       |       |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |       |       |                                  |
| **2701 East Grauwyler, Irving, Texas**                          |       | **75061**  |
| (Address of Principal Executive  Offices)                       |       | (Zip Code) |

 

**(972) 821-4000**

(Registrant’s telephone number,including area code)

 

Securities registered pursuant toSection 12(b) of the Act:

**None**

 

Securities registered pursuant toSection 12(g) of the Act:

**None**

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes:  ý     No:  o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this 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:  o     No:  ý

 

Indicate the number of shares outstanding ofeach of the Registrant’s classes of Common Stock, as of the latest practicabledate. 

 
| **Title of Each Class**                     | ** ** | **Number of Shares Outstanding at  March 15, 2005** |
|---------------------------------------------|------------|----------------------------------------------------------|
| Common Stock, $0.01 Par Value               |       | 17,003,838                                               |
| Class A common stock,  $0.01 Par Value |       | 1,181,946                                                |

 

Aggregate market value of common equity heldby non-affiliates:  Not applicable

 

 

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BancTec, Inc.

Annual Report

on

Form 10-K

Year Ended December 31, 2004

 

**FORWARD-LOOKING STATEMENTS**

 

*This Annual Report on Form 10-K,including Management’s Discussion and Analysis of Financial Condition andResults of Operations in Item 7 and Quantitative and Qualitative DisclosureAbout Market Risk in Item 7A, contains forward-looking statements as that termis defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”)that involve risks and uncertainties, as well as assumptions that, if theynever materialize or prove incorrect, could cause the results of BancTec, Inc.and its consolidated subsidiaries (the “Company”) to differ materially fromthose expressed or implied by such forward-looking statements. All statementsother than statements 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 objectives ofmanagement 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 OFCONTENTS

 
|     |   | 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           |   |
|     |   |                                                                                            |   |
| ITEM 9A. |   | Controls and Procedures                                                                         |   |
|     |   |                                                                                            |   |
|     |   | 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. |   | Principal Accountant Fees and Services                                                          |   |
|     |   |                                                                                            |   |
|     |   | 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),a Delaware corporation, is a worldwide provider of comprehensive enterprisecontent management, image capture devices, infrastructure support services andpayment processing solutions. The Company helps customers create businessefficiencies through innovative technology and services 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 3,000 people full-time and is headquartered in Irving,Texas.

 

Founded in 1972, the Company operatesworldwide serving approximately 2,000 customers in over 50 countries, withinternational revenue in 2004 representing approximately one-third of totalrevenues.

 

The Company markets its portfolio ofsolutions to specific target markets in which it believes it has extensivebusiness process expertise and certain competitive advantages and is able tomaintain or achieve a leadership position.

 

### **Ownership**

 

In July 1999, BancTec entered into arecapitalization transaction. Welsh, Carson, Anderson & Stowe (“WCAS”),a private investment partnership, and Convergent Equity Partners, L.P. (“Convergent”),a private investment partnership, formed Colonial Acquisition Corp. (“Colonial”),with WCAS owning 93.5% and Convergent owning 6.5%. Through the merger ofColonial into BancTec, WCAS acquired 17,003,838 shares of BancTec’s commonstock and Convergent acquired 1,181,946 shares of BancTec’s Class A commonstock. In connection with the recapitalization, each previously outstandingshare of BancTec common stock was converted into the right to receive $18.50 incash, totaling approximately $360.2 million, and simultaneously canceled.Funding for the distribution to the former BancTec stockholders was provided bya $145.0 million capital contribution from WCAS and Convergent, by the TrancheA Term Loan, the Sponsor Note, and the Revolving Credit Facility.  In addition to the funds that were paid forthe shares, cash payments were made for employee stock options of $9.3 millionand an employee stock purchase plan of $0.3 million. The options and the employeestock purchase plan payments were recorded as a reduction to stockholders’equity.  In subsequent transactionsoccurring in 2000 and 2001, Series A preferred stock (“Series APreferred”) which included warrants and Series B preferred stock (“Series BPreferred”) which included conversion rights were issued to WCAS.

 

In 2002, the Company and the owners of all the outstanding capitalstock of the Company consummated a series of transactions in order to create atwo-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 stock ofIntermediate 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.  As part of the restructuring, WCAS CapitalPartners III, L.P. contributed to Upper-Tier Holding the Senior SubordinatedNote Due 2009 originally issued to it by the Company, together with pay-in-kindinterest thereon, in an aggregate principal amount of approximately $193.8million (the “Sponsor Note”).  Inaddition, Intermediate Holding contributed $100,000 to the Company in exchangefor 667 shares of Series A Preferred Stock of the Company.

 

WCAS is one ofthe largest private equity investment firms in the U.S. focused exclusively oninvestments in three industries: information and business services, healthcare,and communications. Since its founding in 1979, WCAS has organized 13 limitedpartnerships with total capital of more than $12 billion. The firm currentlyinvests out of Welsh, Carson, Anderson & Stowe IX, L.P., a $3.8billion equity fund, and WCAS Capital Partners IV, L.P., a $1.3 billiondedicated subordinated debt fund.

 

**Products and Markets**

 

**Worldwide Solutions**. The worldwide solutions group is made up ofU.S. Solutions (“USS”) and International Solutions (“INTL”).  These two operations offer similar systemsintegration and business process solutions and services, and market to similartypes of customers. The solutions offered primarily involve high-volumetransaction processing using advanced technologies that capture, process andarchive paper and electronic documents. The Company’s powerful, high-volume integrated systems deliver importantbenefits to some of the world’s largest credit card companies and major banks.In

 

3

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addition, these segments provide theirproducts and services to other customers, including financial servicescompanies and insurance providers, telecommunications companies, utilitycompanies, governmental agencies, and retail companies.

 

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.  Key applications provided by USS and INTLfocus around the following process services and solutions:

 

**Enterprise Content Management (“ECM”)**.  TheCompany’s ECM business offers complete solutions to capture, process, andarchive information.  The Company’ssoftware products, marketed under the eFIRST brand, are highly scaleable,designed for high-volume, complex and distributed environments.  eFIRST Capture**providesa software solution to capture structured or unstructured documents from paperscanners, fax machines and e-mail and then extract key information needed tocategorize, index and distribute the data to the appropriate person ordepartment.  eFIRST Process is a BusinessProcess Management tool that enables business process automation throughanalysis, modeling, development and deployment. eFIRST Process provides intelligent workflow and routing of documentsand cases in complex environments based on business rules.  eFIRST Archive can store large volumes ofhighly complex documents and provide multiple indices for improved search andretrieval.  These software products canbe implemented on a stand-alone basis or incorporated with the Company’shardware.

 

The DocuScan 9000, introduced in 2004, is ahigh-speed mixed document scanner designed to provide the highest hourlythroughput in difficult paper handling applications.  The S-Series is a color page scanneroptimized for forms processing environments with standard or similar sizedocuments.

 

**Image Capture. **The Company provides a complete line of productsand services to address the high-volume check or mixed document imagingenvironment.  In addition to the DocuScan9000 and S-Series, the company offers the E-Series and X-Series transports.  The E-Series is a high-speed transportthat can read and sort between 10,000 and 1,000,000 check-size documents perday.  The X-Series offers amid-range transport for check and remittance processing which enables check anditem-based transactions to be digitally captured, processed and retained.  To help companies achieve optimal performancein day-to-day check imaging operations, the Company offers its advanced imagequality software, Image Sentry.

 

**Payment Processing. **The Company is focusedon helping customers move into the new era of remittance processing byaddressing current issues around check conversion with ACH, ARC and checktruncation with Check 21.  Thepassage of the Check Clearing for the 21st Century Act (“Check 21”),which facilitates check truncation by authorizing substitute checks, isexpected to result in decreased demand for payment and check clearingsolutions.  The Company’s suite of payments processingsolutions take advantage of new technology advances, such as automatic imagerecognition and internet accessibility, to offset labor costs, facilitatetimely research and handle complex transaction variations.  The payment processing suite includes eCap, adata capture application that automates check and list processing and theextraction of data from invoices or payment advices.  PayCourier Retail is a comprehensiveremittance solution for processing payment transactions, such as returndocuments, customer correspondences, customer envelopes and checks.  PayCourier Archive is a transaction archivesolution that provides long-term data and image storage for remittanceprocessing.

 

**Support and Managed Services**. The Company provides customers with worldwidesystem support for hardware and software products.  The Company provides expertise in theinstallation, repair and maintenance of large mission critical computer drivenelectromechanical devices, such as reader/sorters and scanners, which involveimaging and paper handling.  The Companyemploys 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 contracts are typicallyrenewed for five to seven years.  Inaddition, the Company markets a full range of consumable supplies thatcomplement the Company’s document processing systems.

 

Managed Services involves handling large volumes of mixed dailycorrespondence and transactions using advanced image, workflow, and documenttechnologies.  The Company focuses onstreamlining specific business critical processes to reduce costs, whilemaintaining consistently high standards and improving customer services.  The Company works closely with customers tohighlight areas where further efficiencies can be achieved.  Value-added solutions, using advancedtechnology, deliver process improvements in a structured and innovativeway.  The Company has offered and soldoutsourcing services for document management processes and payment processes inEurope, and plans to expand the offering of these services to customers in theUnited States in 2005.

 

**Computer and Network Services (“CNS”)**. CNS provides quality integrated supportservices to the evolving Information Technology industry, with focuseddeployment and ongoing support solutions for the original equipment manufacturer(“OEM”), Enterprise and Fortune marketplaces. CNS provides coverage in North America and Europe with OEM partners inproviding warranty and fulfillment services and related support tomanufacturers of desktop/enterprise products. In addition, CNS enters into strategic alliances with industryrecognized providers of outsourcing services and system integrators, as well asindividual corporate customers.  Thesecustomers include defense and aerospace companies, strategic outsourcingorganizations, and consumer electronics manufacturers.

 

4

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**Information About Industry Segments**

 

Operating segments are defined as components of a company about whichseparate financial information is available that is evaluated regularly by thecompany’s chief operating decision-maker, or decision-making group, in decidinghow to allocate resources and in assessing performance.  In 2002 through 2004, the Company reported its operations as threeprimary segments, US Solutions (“USS”), International Solutions (“INTL”), andCNS. The operations of USS and INTL include manufacturing and supplies,maintenance of Company-manufactured and related products, integrated systems,and BancTec software products sold through Plexus Software (“Plexus”), adivision of BancTec.  The CNS operationsinclude personal computer repair services and administration of third-partyextended-service contracts.  INTLreporting includes both US and International operations of Plexus.

 

On November 27, 2002, the Company soldits operations in Japan.  As a result,all segment reporting has been restated to reflect the Japanese operations asdiscontinued operations.  The details ofthis disposition are discussed in Notes to the Consolidated FinancialStatements.

 

Note L – Business Segment Data and Note M –Geographic Operations, contained in Notes to the Consolidated FinancialStatements, include detailed financial information concerning the Company’ssegments and geographic areas.

 

**Geographical Locations**

 

There are no significant risks associatedwith foreign operations other than the fluctuation of international currencies(in Europe), political environments and economic cycles.  Note L – Geographic Operations, contained inNotes to the Consolidated Financial Statements, includes detailed financialinformation concerning the Company’s geographic operations.

 

**Product Development**

 

The Company is engaged in ongoing softwareand hardware product development activities for both new and existing products,employing approximately 105 people for such activities as of December 31,2004.

 

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

 
| ** **                    | ** ** | **For the years ended  December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
|                          |       | **(dollars in thousands)**                 |       |
|                          |       |                                       |       |   |   |   |   |
| Product  Development Expenses |       | $                                          | 7,768      |   | $ | 12,548 |   | $ | 15,984 |   |
|                          |       |                                       |       |   |   |   |   |
| Percent of  Total Revenue     |       | 2.2                                        | %          | 3.3 | % | 4.2 | % |
|                               |            |                                            |            |  |  |  |  |  |  |  |

 

Current expenditures are concentrated ondeveloping new applications for the Company’s product lines and improving andexpanding existing products. The Company is currently focusing on EnterpriseContent Management (“ECM”) solutions and image capture solutions.  There can be no assurance that the Company’sdevelopment efforts will result in successful commercial products. Many risksexist in developing new product concepts, adapting new technology andintroducing new products to the market.

 

*Enterprise Content Management.* BancTec’s ECM business is organized around a setof high-level reusable components that form the basis of vertical solutions forspecific markets. The three core modules in the eFIRSTTM suite of solutions,generic capture system (eFIRST Capture), business process automation (eFIRSTProcess), and archiving (eFIRST Archive), can be integrated within the sameenvironment and expanded.  In addition, theCompany will add key managed services capabilities to these products.

 

5

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eFIRST Capture captures, sorts and processesdata from many types of documents, such as e-mail, web, scanned documents,faxes and web-forms, and provides real-time access to this data for subsequentuse.

 

eFIRST Process provides a technology platformand user tools to construct workflows, data views, user environments and accesspermission models that draw in existing systems and people to automate businessprocesses.

 

eFIRST Archive addresses the secure,structured storage and future retrieval of data.

 

*Image Capture.* In 2005, the Company plans to continuedeveloping options for the DocuScan 9000 system and make strategic market-basedinvestments in the E-Series and X-Series transports.  All other products are now effectively in asustaining mode only of development.

 

**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 variousrisks, including fluctuations in exchange rates, import controls and the needfor export licenses.

 

**Customer Diversification**

 

For the years ended December 31, 2004,2003 and 2002, Dell, accounted for 17.4%, 15.7%, and 16.2%, respectively, ofthe total revenue of the Company (as restated for discontinuedoperations).  The Company’s ten largestcustomers accounted for 44.3%, 42.7%, and 39.6%, of the Company’s revenues (asrestated for discontinued operations) for the years ended December 31,2004, 2003, and 2002 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 solutionsare assembled using various purchased components such as PC monitors,minicomputers, encoders, communications equipment and other electronic devices.Certain products are purchased from sole source suppliers. The 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.

 

6

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**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 thatmay be 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.

 

**Employees**

 

At December 31, 2004, the Companyemployed approximately 3,000 full-time employees. None of the Company’semployees is represented by a labor union. The Company has never experienced awork stoppage.

 

**ITEM 2. PROPERTIES.**

 

The principal executive offices of theCompany are located in its Irving, Texas facility.

 

The Company consolidated additional personnelat its Irving, Texas facility in January 2002, vacating substantially all(90%) of an owned facility in Dallas, Texas. The Company recorded an impairment charge of $1.5 million during thefourth quarter of 2001 and the facility is currently being offered forsale.  In addition, during February 2005,the Company consolidated personnel from another owned facility in Dallas, Texasto its facility in Irving, Texas.  Thisfacility is also being offered for sale.

 

As of December 31, 2004, the Companyowned or leased numerous facilities throughout the world to support itsoperations. The Company believes that these facilities are adequate to meet itsongoing needs. The loss of any of the Company’s principal facilities could havean adverse impact on operations in the short term. The Company has the optionto renew its facility leases or believes it can replace them with alternatefacilities at comparable cost. The Irving manufacturing facility, which theCompany owns, is the primary location for the Company’s administration,assembly and manufacturing activities.

 

**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 in theSupreme Court of the State of New York for the County of New York naming asdefendants the Company and certain of its affiliates.  The complaintalleges that the Company improperly made a payment to the holder of the SponsorNote and sought 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 millionpayment to the holder of the Sponsor Note was disclosed in the Company’sCurrent Report on Form 8-K dated November 27, 2002.

 

On May 5, 2004, the Supreme Court granted the Company’s motion forsummary judgment dismissing the plaintiffs’ complaint in its entirety.  On or about November 8, 2004, theplaintiffs/appellants filed their brief with the appellate division of the NewYork Supreme Court.  On March 3,2005, the Supreme Court of New York, Appellate Division affirmed the lowercourt’s decision in favor of BancTec.

 

The Company is a party to various other legalproceedings.  None of those currentproceedings is expected to have an outcome that is material to the financial conditionor operations of the Company.

 

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

 

None.

 

7

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**PART II**

 

**ITEM5. MARKET FOR 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 FinancialCondition and Results of Operations”  andthe Consolidated Financial Statements of the Company for the three years ended December 31,2004, 2003 and 2002, and the related notes thereto.

 
| ** **                                                    | ** ** | **Years Ended**             | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** | **December 31,  2001** | ** ** | **December 31,  2000** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**          | ** ** |
| Revenue                                                       |       | $                           | 360,726    |   | $ | 378,891 |   | $ | 379,433 |   | $ | 427,264 |   | $ | 412,620 |   |
| Gross profit                                                  |       | 80,422                      |       | 90,688 |   | 96,205 |   | 55,885 |   | 25,231 |   |
| Operating  expenses                                           |       | 64,614                      |       | 66,818 |   | 70,968 |   | 94,364 |   | 102,487 |   |
| Interest  expense                                             |       | 19,098                      |       | 19,473 |   | 33,080 |   | 35,527 |   | 37,239 |   |
| Income (loss)  from continuing operations before income taxes |       | (3,606                      | )          | 6,456 |   | 700 |   | (52,258 | ) | (113,501 | ) |
| Income tax  expense (benefit)                                 |       | 13,621                      |       | (11,370 | ) | 344 |   | 445 |   | 34,236 |   |
| Net income  (loss)                                            |       | (17,227                     | )          | 17,826 |   | 59,126 |   | (45,826 | ) | (144,850 | ) |
|                                                          |       |                        |       |   |   |   |   |   |   |   |   |
| Total assets                                                  |       | 216,065                     |       | 239,515 |   | 231,395 |   | 315,049 |   | 399,752 |   |
| Working  capital (deficit)                                    |       | 11,531                      |       | 12,337 |   | (8,877 | ) | (8,970 | ) | 84,718 |   |
| Long-term  debt, less current maturities                      |       | 197,823                     |       | 197,823 |   | 201,723 |   | 304,798 |   | 388,112 |   |
| Series A  preferred stock                                |       | 18,040                      |       | 16,568 |   | 14,856 |   | 13,151 |   | 11,638 |   |
| Series B  preferred stock                                |       | 13,520                      |       | 10,609 |   | 8,324 |   | 6,632 |   | — |   |
| Stockholders’  deficit                                   |       | (159,703                    | )          | (152,636 | ) | (161,724 | ) | (219,049 | ) | (167,342 | ) |
|                                                               |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In November 2002, the Company completedthe sale of 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 DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION 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.

 

The following discussioncontains forward-looking statements as that term is defined in the PSLRA.  See “Forward Looking Statements.” The Companycautions investors that there can be no assurance that actual results orbusiness conditions will not differ materially from those projected orsuggested in such forward-looking statements as a result of various factors,including those described below under the caption “Factors Affecting theCompany’s Business and Prospects.”  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.

 

8

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**Highlights**

 

The Company believes severalfactors continued to create a challenging and competitive sales andcost-containment environment during the year ended December 31, 2004.  These factors include: general economicconditions and reduced corporate customer technology spending; ongoingcompetitive pressures; an ongoing planned change in revenue mix within theCompany’s U.S. Solutions (“USS”) and International Solutions (“INTL”) segments;and a highly leveraged financial position. The change in revenue mix is partially a result of trends in paymentprocessing, including truncation, which impacts domestic and internationalmarkets.  Additionally, during 2004, theUSS and INTL segments experienced revenue declines in the maintenance business,the duration of which the Company cannot predict.

 

Expected economic and businessconditions into 2005 indicate a cautious outlook regarding the Company’snear-term revenue and earnings growth prospects.  Many of the Company’s product offeringsrepresent a significant capital expenditure for its customers.  General economic conditions and the impact ofcheck truncation have caused a continued weakening in demand for payment andcheck solutions products offered in North America. The Company continues tointroduce new product offerings in its Enterprise Content Management (“ECM”)solutions as well as expand its managed services business into NorthAmerica.  In addition, the Companycontinues to seek reductions in operating costs.  Product-development efforts are focused onECM solutions 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.

 

**Critical Accounting Policies**

 

The Company’s significantaccounting policies and methods used in the preparation of the ConsolidatedFinancial Statements are discussed in Note A of the Notes to ConsolidatedFinancial Statements. The following is a listing of the Company’s criticalaccounting policies and a brief discussion of each:

 

•                  Revenuerecognition

•                  Allowance fordoubtful accounts

•                  Inventoryvaluation

•                  Goodwill

•                  Income taxes

•                  Stock-basedcompensation

 

**Revenue Recognition**. The Company derivesrevenue primarily from two sources: (1) product sales - systemsintegration solutions which address complex data and paper-intensive workprocesses, including advanced web-enabled imaging and workflow technologieswith both BancTec-manufactured equipmentand third-party equipment, and (2) services- consist primarily of application design, development and maintenance, allaspects of desktop outsourcing, including field engineering, as well as helpdesk and LAN/WAN network outsourcing.

 

The Company applies the provisions of Statement of Position 97-2, “SoftwareRevenue Recognition,” as amended by Statement of Position 98-9 “Modificationof SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”to all transactions involving the sale of software products and sales ofhardware where the software is not incidental. For those transactions thatinvolve acceptance certificates, the Company recognizes revenue upon receipt ofthe acceptance certificate, or when it can be objectively demonstrated thatacceptance criteria have been met.  Forhardware transactions where software is considered incidental, or no softwareis included, revenue is recognized when the product has been delivered and allinitial obligations have been fulfilled.

 

The Company recognizes revenue from sales ofequipment and supplies upon delivery and transfer of title or upon customeracceptance.

 

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

 

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assured, which is generally upon receipt of cash. For all sales, theCompany generally uses either a binding purchase order or signed salesagreement as evidence of an arrangement.

 

Maintenance contracts are primarily one yearin duration and the revenue generated is generally recognized ratably over theterm of the contract.

 

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

 

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

 

**Goodwill.** Since January 1, 2002, when Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets” became effective, the Company has assessed the impairment ofgoodwill annually, or more frequently whenever events or changes incircumstances indicate that the carrying value may not be recoverable.  The Company assesses the recoverability ofthe goodwill by comparing the fair value of the intangible asset to thecarrying amount.  Any impairment ismeasured based on a projected discounted cash flow method using a discount ratereflecting the Company’s average cost of funds. Goodwill amounted to approximately $41.5 million as of December 31,2002.  Prior to January 1, 2002, theCompany amortized its goodwill.  Asrequired by SFAS No. 142, the Company performed an initial impairmentreview of goodwill in 2002 as a transition to the current method.  As a result of that review, during 2002, theCompany recorded as a cumulative effect of a change in accounting principle, anon-cash charge of $6.9 million, after applicable income taxes, to write off aportion of the carrying value of goodwill.

 

**Income Taxes**. The Company is required toestimate income taxes in each of the jurisdictions in which the Companyoperates. This process involves estimating the Company’s actual current taxexpense together with assessing temporary differences resulting from differingtreatment of items for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which would be included within the Company’sconsolidated balance sheet. The Company must then assess the likelihood thatthe deferred tax assets will be recovered from future taxable income and to theextent that the Company believes recovery is not likely, the Company mustestablish a valuation allowance. To the extent the Company establishes a valuationallowance in a period, the Company must include an expense within the taxprovision in the statement of operations. The Company has recorded a valuationallowance to reduce the carrying amount of recorded deferred tax assetsrepresenting future deductions to an amount that is more likely than not to berealizable. In the event the Company were to determine that it would be able torealize additional deferred tax assets in the future, an adjustment to thedeferred tax asset would increase income in the period such determination wasmade.

 

**Stock-Based Compensation. **The Company accounts for stock-based compensationusing the intrinsic value method prescribed in Accounting Principles Board (“APBNo. 25”), Accounting for Stock Issued to Employees. The Company hasadopted the disclosure requirements of Statement of Financial AccountingStandards (“SFAS No. 123”), Accounting for Stock-Based Compensation.

 

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**DISCONTINUED OPERATIONS**

 

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

 

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Company and JAFCO.  The saleinvolved two separate transactions: (1) the purchase by JAFCO of 100% ofthe outstanding shares of BTJ for 6.5 billion yen, and (2) a one-time,up-front payment by BTJ to the Company of 4.0 billion yen under certaindistribution and licensing agreements. Under such agreements, BTJ will continue to supply the Company productsand services in its markets, and will continue to operate under the name “BancTecJapan.”  After foreign-currencyconversions and transaction costs, the Company received approximately US $82.5million in aggregate net proceeds and recorded a pre-tax gain of approximately$63.0 million.  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-Lived Assets.”

 

**RESULTS OF OPERATIONS**

 

The operating results of BancTec Japan havebeen treated as a discontinued operation in the accompanying financial statements.

 

**Comparison of Years Ended December 31, 2004 and December 31,2003**

 

Consolidated revenue of $360.7 million forthe year ended December 31, 2004 decreased by $18.2 million or 4.8% fromthe comparable prior-year period. The USS revenue decrease of $28.1 million waspartially related to the decline in maintenance revenue due to the Company’sinstalled products reaching the end of their useful lives and from increasingcompetition.  The Company expects thesetrends to continue on these end of life products.  In addition, a decline in revenues related tothe sale and installation of hardware and software products was primarilyrelated to a weak market for payments solutions due to market trends, includingreduced check volume, check truncation, and the recent passage of Check 21. TheCNS decrease of $1.1 million resulted from pricing decreases, domesticcompetitive pressure, and decreased volumes under certain maintenance programs,partially offset by revenue increases resulting from the expansion by CNS ofoperations into Europe.  Increases inINTL of $13.5 million are the result of the impact of the weakening dollar onthe conversion of revenue stated in foreign currencies and the continued growthin the United Kingdom of managed services as well as increased sales in Europeof ECM solutions.  Factors expected toimpact future revenue include corporate-customer spending for largesystems-solutions, the continued impacts of check truncation, industryconsolidation reducing the volume of customers, on-going competitive pressures,and fluctuations in international currencies.

 

Consolidated gross profit of $80.4 milliondecreased by $10.3 million or 11.4% from the comparable prior-year period.Decreases in CNS of $7.7 million and USS of $6.4 million were partially offsetby increases in INTL of $4.7 million. The decrease in USS resulted fromdecreased revenues as well as a decrease in the USS gross margin percentagefrom 22.7% to 22.6%.  Increases in INTLgross profit resulted partially from increased revenue, including the impact ofcurrency conversion, as well as a higher gross profit percentage, increasingfrom 32.9% to 33.1%.  Continued effortsto provide proven deliverables as well as targeted new offerings, including ECMsolutions, image capture solutions and hardware enhancements, which, along with ongoingcost-containment efforts, contributed to the strengthening of INTL gross profit.  CNS’gross profit percentage decreased from 15.1% to 9.1% resulting primarily fromdecreased revenue, margin reduction caused by competition pricing pressure andvolume losses experienced under certain service contracts.  CNS is the major component in the maintenanceand other services category on the Consolidated Statements of Operations, andtherefore is the primary contributing factor in the decreased gross profit inthe maintenance and other services category.

 

Operating expenses of $64.6 millionrepresented a decrease of $2.2 million compared to the comparable prior-yearperiod. Operating expenses, by component, changed as follows: (1) Productdevelopment expenses decreased $4.7 million compared to the prior yearprimarily due to the focused realignment of research and developmentexpenditures against future product strategies and marketing plans.  (2) Selling, general, and administrativeexpenses increased by $2.5 million or 4.6%. The increase partially resulted from additional marketing expendituresaimed at new product strategies, increased IT-related expenditures andseverance obligations to former officers of the Company.

 

Interest expense for the yearended December 31, 2004 decreased to $19.1 million from $19.5 million inthe comparable prior-year period.

 

Sundry items resulted in a net loss of $1.0 million during the yearended December 31, 2004 ascompared to net income of $1.4 million during the comparable prior-year period. This decrease is primarily due to the $1.3 million loss on the sale of100% of the Company’s investment in the stock of Servibanca S.A. during thecurrent year period, compared to a gain of approximately $1.1 million from theCompany’s repurchase of Senior Notes during the prior-year period.

 

An income tax provisionof $13.6 million for the year ended December 31, 2004, is compared to acorresponding prior-year income tax benefit of $11.4 million.  The Company’s effective income tax rate wasapproximately (377.7%) as compared to (176.1%) for the corresponding prior-yearperiod.  During 2004, the Companyrecorded an additional valuation allowance of

 

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$10.5 million on thedeferred income tax asset to reduce that asset to a carrying amount that ismore likely than not to be realizable.

 

### **Comparisonof Years Ended December 31, 2003 and December 31, 2002**

 

Consolidated revenue of $378.9 million for theyear ended December 31, 2003 decreased by $0.5 million or 0.1% from thecomparable prior-year period. The CNS decrease of $8.8 million is primarily dueto pricing decreases resulting from competitive pressure, as well as decreasedvolumes under certain maintenance programs. The USS decrease of $6.8 million was principally related to a 13.3%decline in maintenance revenue due to the Company’s installed products reachingthe end of their useful lives and from increased competition.  The Company expects these trends to continuein the foreseeable future.

 

Declines in maintenance revenues weresomewhat offset by a 12.5% increase in revenues related to the sale andinstallation of hardware and software products. The INTL increase of $15.1 million primarily relates to the introductionin the United Kingdom of document processing services during 2003 and theimpact of the weakening dollar on the conversion of revenue stated in foreigncurrencies.  Factors impacting future revenueinclude lower corporate-customer spending for large systems solutions as aresult of economic weakness, customer and prospective customer mergers,on-going competitive pressures, fluctuations in international currencies, andthe impact of the reduction of volumes in check processing.

 

Consolidated gross profit of $90.7 milliondecreased by $5.5 million or 5.7% from the comparable prior-year period. Thedecrease in CNS of $14.4 million was partially offset by increases in USS of$0.5 million and INTL of $8.4 million. CNS’ gross profit decrease wasprimarily attributable to decreased revenue as well as margin pressure causedby pricing pressures, increased competition, increased labor costs, and achange in revenue mix.  The INTL increase resulted from increasedrevenues and improvements in the gross profit percentage resulting from costcontainment efforts.  USS gross profitincreased despite decreased revenues due to lower cost of sales resulting fromthe Company’s cost-containment efforts and changes in the Company’s revenuemix. The Company is in the process of transitioning its product-offeringfocus to proven deliverables and new targeted offerings, including EDMsolutions, its other archive solutions and hardware enhancements.  Incorporating more third-party products intothe Company’s solutions rather than developing the products has enabled theconcentration of efforts and expenditures on the targeted items which, alongwith the Company’s ongoing cost-containment efforts, allowed for costreductions to help offset revenue declines.

 

Operating expenses of $66.8 millionrepresented a decrease of $4.2 million compared to the comparable prior-yearperiod. Operating expenses, by component, changed as follows: (1) Productdevelopment expenses decreased $3.5 million compared to the prior year primarilydue to the focused realignment of research and development expenditures againstfuture product strategies and marketing plans and due to the use of outsourcedproduct-development.  (2) Selling,general, and administrative expenses decreased by $0.7 million dueprimarily to on-going efforts to realign the cost structure.

 

Interest expense for the yearended December 31, 2003 decreased to $19.5 million from $33.1 million inthe comparable prior-year period. The decrease was due mainly to thepayment of $90.0 million on the Sponsor Note in December 2002 and therepurchase of a portion of the Senior Notes.

 

Sundry items resulted in a net income of $1.4 million during the yearended December 31, 2003 ascompared to net income of $8.3 million during the comparable prior-year period. This decrease is primarily due to foreign exchange gains of $0.2 millionand a gain of approximately $1.1 million from the Company’s repurchase ofSenior Notes during the current year period, compared to foreign exchange gainsof $1.4 million and a gain of $6.8 million as a result of the repurchase ofSenior Notes during 2002.

 

The net tax benefit of$11.4 million for the year ended December 31, 2003, resulted from $2.4million of income tax expense attributable to current results, net of $13.8million of income tax benefit related to the release of valuation allowancecompared to a corresponding prior-year period income tax provision of $0.3million.  The Company’s effective taxrate was approximately (176.1%) for the year ended December 31, 2003 as compared to 5.1% for the correspondingprior-year period.

 

On November 27,2002, the Company completed the sale of its wholly-owned subsidiary, BancTecJapan (“BTJ”).  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 and its operating results have been segregated and reported asdiscontinued operations.  The Companyrecorded a gain on the disposal of the business of $63.0 million (net of incometax expense of $0).  Income from thediscontinued operations of BTJ for the year ended December 31, 2002 was$2.7 million.

 

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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, theCompany recorded as a cumulative effect of a change in accounting principle, anon-cash charge of $6.9 million, after applicable income taxes, to write off aportion of the carrying value of goodwill.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s working capitalrequirements are generally provided by cash and cash equivalents, fundsavailable under the Company’s revolving credit agreement, as discussed below,which matures May 30, 2006, and by internally generated funds fromoperations.  Funds availability under therevolving credit agreement is determined by a borrowing-base formula equal to aspecified percentage of the value of the Company’s eligible accountsreceivable, inventory and pledged cash. General economic conditions, decreased revenues from the Company’smaintenance contracts, and the requirement to obtain performance bonds orsimilar instruments could have a material impact on the Company’s futureliquidity.

 

The Company’s cash and cash equivalentstotaled $51.5 million at December 31, 2004, compared to $61.6 million at December 31,2003.  Working capital decreased $0.8million to working capital of $11.5 million at December 31, 2004.  The change in working capital included decreasesin deferred revenue, current maintenance contract deposits and customeradvances totaling $2.8 million, a decrease in other accrued liabilities of $1.6million, an increase in accounts payable of $1.4 million and an increase inaccrued income taxes of $1.4 million. Currentassets decreases of $2.7 million included the decrease in cash of $10.1million, partially offset by an increase in accounts receivable of $6.5 millionand a decrease in current deferred tax assets of $0.4 million.

 

During 2004, the Company relied primarily oncash reserves to fund operations. At December 31, 2004, the Company’sremaining availability under the Revolver, as hereinafter defined,was $20.7 million, of which the Company could draw $16.7 million.

 

Operating activities utilized $5.7 million ofcash in 2004 and provided $39.6 million of cash in 2003, a decrease of $45.3million.  This decrease primarilyresulted from a decrease in cash generated by changes in working capital assetsand liabilities of $32.2 million and a decrease in net income of $32.2 million.

 

Investing activities used net cash of $3.5million during 2004 compared to $6.3 million in 2003. The uses of cash for 2003consisted of purchases of property, plant and equipment.  The uses of cash for 2004 consisted ofpurchases of property, plant and equipment of $6.8 million, offset by cashreceived from the sale of the Company’s interest in Servibanca S.A. of $3.0million.

 

Financing activities used $1.2 million of netcash in 2004 compared to $3.9 million of net cash in 2003. Both uses of cashconsisted primarily of reductions to the Company’s debt.

 

At December 31, 2004, the Company’s principal outstanding debtinstruments consisted of (i) $0.001 million under the Revolving creditfacility maturing May 30, 2006 (which is more fully described below) (ii) $94.0million of 7.5% Senior Notes due 2008, and (iii) $103.8 million SponsorNotes due 2009.  As of December 31,2004, the Company’s foreign subsidiaries had no outstanding borrowings.  The Company or its affiliates may from timeto time purchase, redeem or pay deferred interest on some of its outstandingdebt or equity securities.  The Companywould only make these payments in compliance with the covenants of its debtinstruments.

 

The Company continually reviewsits various lines of business to assess their contribution to the Company’sbusiness plan and from time to time considers the sale of certain assets inorder to raise cash or reduce debt. Accordingly, the Company from time to time has explored and may explorepossible asset sales by seeking expressions of interest from potential bidders.  However, the Company has not entered into anybinding agreements or agreements in principle to sell any assets and there canbe no assurance that any such asset sales will occur or, if they occur, as tothe timing or amount of proceeds that such assets sales may generate.

 

**Revolving Credit Facility.**The Company has a revolving credit facility (the “Revolver”)provided by Heller Financial, Inc. (“Heller”), which will mature on May 30,2006.  Effective May 7, 2003,the Company and Heller entered into an amendment to the Revolver which reducedthe committed amount from $60 million to $40 million, while increasing theletter-of-credit sub-limit from $30 million to $40 million.  The Revolver is secured by substantially allthe assets of the Company, subject to the limitations on liens contained in theCompany’s existing Senior Notes.  Fundsavailability under the Revolver is determined by a borrowing-base formula equalto a specified percentage of the value of the Company’s eligible accountsreceivable, inventory and pledged cash. At December 31, 2004, the Company had $0.001 million outstandingunder the Revolver and an outstanding balance on letters-of-credit totaling$4.0 million.  The availability remainingunder

 

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the Revolver that the Company can draw was $16.7 million at December 31,2004 ($20.7 million in availability less a $4.0 million reserve).  A commitment fee of 0.5% per annum on theunused portion of the Revolver is payable quarterly.

 

The interest rate on loans under the Revolver is, at the Company’soption, either (1) 1.25% over prime or (2) 2.75% over LIBOR.  Under an amendment effective September 1,2003, the interest rate margins over prime and LIBOR may be increased by 0.25%increments when the fixed charge coverage ratio falls below (1) 1.5 to 1.0and (2) 1.25 to 1.0 and (total rate increase of 0.50%) or decreased by0.25% increments when the fixed charge coverage ratio is greater than (1) 1.75to 1.0, (2) 2.0 to 1.0, and (3) 2.25 to 1.0 (total rate decrease of0.75%).  The interest rate wasre-measured as of the effective date of September 1, 2003 under thisamendment.  At December 31, 2004,the Company’s weighted average rate on the Revolver was 6.50% under the primeoption.

 

Under the Revolver, substantially all of the Company’s domestic cashreceipts (including proceeds from accounts receivable and asset sales) must beapplied to repay the outstanding loans, which may be re-borrowed subject toavailability in accordance with the borrowing base formula. The Revolvercontains restrictions on the use of cash for dividend payments or non-scheduledprincipal payments on certain indebtedness. Restricted cash at December 31, 2004 of $4.1 million representscash pledged under the terms of the Revolver.

 

The Revolver contains various representations, warranties andcovenants, including financial covenants as to maximum capital expenditures,minimum fixed charge coverage ratio and minimum average borrowingavailability.  Effective December 31,2004, the Company and Heller amended the loan and security agreement todecrease the minimum fixed charge coverage ratio at December 31, 2004 from1.1 to 1.0. The Company has experienced recent decreases in its fixed chargecoverage ratio which has necessitated amendments to the Revolver agreement withHeller. It is anticipated that future amendments may be necessary should thefixed charge coverage ratio continue to decline.  At December 31, 2004, the Company was incompliance with all covenants under the Revolver.

 

**Senior Notes**. In August 1998, the Company exchanged thepublic Senior Notes (the “Senior Notes”) for the notes sold in a May 1998 Rule 144Aprivate offering. Interest is fixed at 7.5% and is due and payable insemi-annual installments, which began December 1, 1998. The Senior Notescontain covenants placing limitations on the Company’s ability to permitsubsidiaries to incur certain debts, incur certain loans and liens, and engagein certain sale and leaseback transactions. During the year ended December 31,2003, the Company repurchased Senior Notes with a face amount of $3.9 million.The Company wrote off a proportionate share of deferred financing fees,resulting in a gain of approximately $1.1 million, which was reported as sundry(other) income in the condensed consolidated statements of operationsfor 2003.

 

**Senior Subordinated Unsecured 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 paymentsbegan September 30, 1999.  TheSponsor Note matures on July 22, 2009. As provided under the agreement, however, the Sponsor Note holder, WCAS,elected to defer quarterly interest payments of $4.0 million for each of the June 2000through September 2001 quarterly periods resulting in an increase in theSponsor Note totaling $33.8 million. Such election required a deferredfinancing fee of 30.0% of each of the interest payments being deferred.  The Company accounts for the additionalfinancing fees as a change in the effective interest rate of the debt.  WCAS may, at its election, defer each futurequarterly payment under similar terms. WCAS has elected not to defer thequarterly payments since September 2001 and currently does not intend toelect deferral of the quarterly payments in the near future.  In accordance with the terms of the SponsorNote, on December 6, 2002, the Company made a $90 million principalpayment on the Sponsor Note.  A holder ofthe Senior Notes had sought to contest this payment.  See discussion under Item 3, LegalProceedings.  The Company wrote off aproportionate share of deferred financing fees totaling $3.8 million in 2002.

 

**Preferred Stock – Series A**.****The Companyallocated the proceeds from its Series A preferred stock issuance basedupon the relative fair value of the preferred stock and warrants issued. Therelated discount was being accreted over a period of 8 years though March 31,2004, when the agreement was amended to remove the mandatory redemptionprovision.  For the year ended December 31, 2004, accretion of the related discount andaccrued but unpaid dividends totaled $1.4 million, increased the carryingamount to $18.0 million. As of December 31, 2004, the stated value of the Series A preferredstock, including accumulated but unpaid dividends, was $201.32 per share.

 

**Preferred Stock – Series B**.****For the yearended December 31, 2004, theCompany accrued additional unpaid dividends for its Series B preferredstock totaling $2.9 million, increasing the carrying amount to $13.5million.  As of December 31, 2004, the stated value of the Series Bpreferred stock, including accumulated but unpaid dividends, was $380.63 pershare.

 

See Note A – Summary of SignificantAccounting Policies, under Reclassification, contained in Notes to theConsolidated Financial Statements, for a discussion of the reclassification ofthe Series B Preferred Stock out of permanent equity to the mezzanine section ofthe Consolidated Balance Sheets under the guidance of EITF Topic D-98, “Classificationand Measurement of Redeemable Securities.”

 

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### **Inflation**.  Inflationhas not had a material effect on the operating results of the Company.

 

**Off BalanceSheet Arrangements**

 

The Company currently does not have any off balance sheet arrangements.

 

### **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 at December 31,2004:

 
| ** **                         | ** ** | **Total  Amounts** | ** ** | **Less than****1 Year** | ** ** | **1-3****Years** | ** ** | **4-5****Years** | ** ** | **Over 5  Years** | ** ** |
|------------------------------------|------------|--------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ** **                         | ** ** | **(In Millions)**  | ** ** |
| Long-term debt                     |       | $                  | 197.8      |                    | $          | —           |       | $                | —     |              | $          | 197.8 |   | $ | — |   |
| Capital leases                     |       | 0.5                |       | 0.3                     |       | 0.2              |       | —           |       | —            |       |
| Purchase  obligations              |       | 2.0                |       | —                  |       | 1.3              |       | .7               |       | —            |       |
| Operating  leases (non-cancelable) |       | 22.5               |       | 7.1                     |       | 9.8              |       | 4.0              |       | 1.6               |       |
|                               |       |               |       |                    |       |             |       |             |       |              |       |
| Total  Contractual                 |       | $                  | 222.8      |                    | $          | 7.4              |       | $                | 11.3       |              | $          | 202.5 |   | $ | 1.6 |   |
|                               |       |               |       |                    |       |             |       |             |       |              |       |
| Unused lines  of credit            |       | $                  | 16.7       |                    | $          | 16.7             |       | $                | —     |              | $          | — |   | $ | — |   |
| Standby  letters of credit         |       | 4.0                |       | 4.0                     |       | —           |       | —           |       | —            |       |
|                               |       |               |       |                    |       |             |       |             |       |              |       |
| Total  Commercial                  |       | $                  | 20.7       |                    | $          | 20.7             |       | $                | —     |              | $          | — |   | $ | — |   |

 

*Purchase Obligations* —Purchase obligations are defined as contractual obligations to purchase goodsor services that are enforceable and legally binding on the Company and thatspecify all significant terms, including fixed or minimum quantities to bepurchased; fixed, minimum, or variable price provisions; and the approximatetiming of the transaction. Purchase obligations do not include contracts thatmay be cancelled without penalty.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment*.*” SFAS No. 123R addresses the accounting for share-based paymenttransactions in which an enterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123R eliminates theability to account for share-based compensation transactions using AccountingPrinciples Board Opinion No. 25 and generally requires that suchtransactions be accounted for using a fair-value-based method.  The Company is required to adopt SFAS No. 123(R)in the third quarter of fiscal 2005, beginning July 1, 2005.  The Company is currently assessing the finalimpact of this standard on the company’s consolidated results of operations,financial position, and cash flows. This assessment includes evaluating optionvaluation methodologies and assumptions as well as potential changes to theCompany’s compensation strategies.

 

In December 2004, the FASBissued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,”which will become effective for the Company beginning January 1, 2006. Thisstandard clarifies that abnormal amounts of idle facility expense, freight,handling costs and wasted material should be expensed as incurred and notincluded in overhead. In addition, this standard requires that the allocationof fixed production overhead costs to inventory be based on the normal capacityof the production facilities. The Company is currently evaluating the potentialimpact of this standard on its financial position and results of operations,but does not believe the impact of the change will be material.

 

On October 22, 2004, a new taxlaw was passed, the American Jobs Creation Act of 2004 (the “Jobs CreationAct”), which raised a number of issues with respect to accounting for incometaxes. In response, on December 21, 2004, the FASB issued two FASB StaffPositions (FSP), FSP 109-1 – “Application of FASB Statement No. 109, Accountingfor Income Taxes, to the Tax Deduction on Qualified Production ActivitiesProvided by the American Jobs Creation Act of 2004” and FSP 109-2 – “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004,” which became effective for the Companyupon issuance.

 

The Jobs Creation Act providesa deduction for income from qualified domestic production activities, to bephased in from 2005 through 2010, which is intended to replace the existingextra-territorial income exclusion for foreign sales. In FSP 109-1, the FASBdecided the deduction for qualified domestic production activities should beaccounted for as a special deduction under SFAS No. 109, rather than as a ratereduction. Accordingly, any benefit from the deduction will be reported in theperiod in which the deduction is claimed on the tax return and no adjustment todeferred taxes at December 31, 2004, is required.

 

The Jobs Creation Act alsocreates a temporary incentive for U.S. corporations to repatriate accumulatedincome earned abroad by providing an 85 percent dividends received deductionfor certain dividends from controlled foreign corporations. The deduction issubject to a number of limitations and uncertainty remains as to how tointerpret numerous provisions in the Act. FSP 109-2 addresses when to reflectin the financial statements the effects of the one-time tax benefit on therepatriation of foreign earnings. Under SFAS No. 109, companies are normallyrequired to reflect the effect of new tax law changes in the period ofenactment. FSP 109-2 provides companies additional time to determine the amountof earnings, if any, that they intend to repatriate under the Jobs CreationAct’s provisions.  (See Note H, containedin Notes to the Consolidated Financial Statements, for more discussion of theimpact of the Jobs Creation Act, including the Company’s status on therepatriation of foreign earnings.)

 

** FACTORS AFFECTING THE COMPANY’SBUSINESS 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 Private Securities LitigationReform Act of 1995 (the “PSLRA”). Allstatements other than statements of historical fact could be deemedforward-looking statements.  TheCompany cautions investors that actual results or business conditions maydiffer materially 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.

 

16

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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.

 

***Technological Changes and Product Transitions***

 

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

 

***Dependence on Suppliers***

 

The Company’s hardware 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 reliablesupplies could result in delays and a possible loss of sales, which could affectoperating results adversely.

 

*** Indebtedness and Impact on Operating Results***

 

As a result of theCompany’s high debt to equity ratio, the Company is required to devotesignificant cash to debt service.  Thislimits the Company’s future operating flexibility and could make the Companymore vulnerable to a downturn in its operating performance or a decline ingeneral economic conditions.  The Companyhas experienced recent decreases in its fixed charge coverage ratio which hasnecessitated amendments to the Revolver agreement with Heller.  It is anticipated that future amendments maybe necessary should the fixed charge coverage ratio continue to decline.

 

***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 the following: customer demand andmarket acceptance of the Company’s products and solutions, new productintroductions, product obsolescence, varying product mix, foreign-currencyexchange rates, competition and other factors. The Company’s business issensitive to the spending patterns of its customers, which in turn are subjectto prevailing economic conditions

 

17

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and other factors beyond the Company’s control. In addition, recentlaws governing check truncation could reduce the demand for the Company’spayment products.  Any unfavorable changein one or more of these factors could have a material adverse effect on the Company.

 

***Product Development Activities***

 

The strength of the Company’s overall business depends in part on theCompany’s ability to develop products and solutions based on new or evolvingtechnology and the market’s acceptance of those products.  There can be no assurance that the Company’sproduct development activities will be successful, that new technologies willbe available to the Company, that the Company will be able to delivercommercial quantities of new products in a timely manner, that those productswill adhere to generally accepted industry standards or that products willachieve market acceptance.  Many of theCompany’s customers use its products in highly regulated or technologicallydemanding industries.  As a result ofproducts introduced by the Company’s competitors, generally accepted industrystandards can change rapidly in ways that are beyond the control of theCompany.

 

18

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**ITEM 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK.**

 

The Company is subject to certain marketrisks arising from transactions in the normal course of its business, and fromobligations under its debt instruments. Such risk is principally associatedwith interest rate and foreign exchange 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, 2004 and 2003, the Companyhad outstanding Senior Notes, due in 2008, of $94.0 million, with a fixedinterest rate of 7.5%. At December 31, 2004 and 2003, the Company also hadthe Sponsor Note, due 2009, with a balance of $103.8 million. The Sponsor Notebears interest at a fixed rate of 10.0%.

 

The interest rate on loans under the Revolver is, at the Company’soption, either (1) 1.25% over prime or (2) 2.75% over LIBOR.  Under an amendment effectiveSeptember 1, 2003, the interest rate margins over prime and LIBOR may beincreased by 0.25% increments when the fixed charge coverage ratio falls below(1) 1.5 to 1.0 and (2) 1.25 to 1.0 and (total rate increase of 0.50%)or decreased by 0.25% increments when the fixed charge coverage ratio isgreater than (1) 1.75 to 1.0, (2) 2.0 to 1.0, and (3) 2.25 to1.0 (total rate decrease of 0.75%).  Theinterest rate was re-measured as of the effective date of September 1,2003 under this amendment.  AtDecember 31, 2004, the Company’s weighted average rate on the Revolver was6.50% under the prime option.  A balanceof $0.001 million was outstanding under theRevolver at December 31, 2004.

 

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 under certain circumstances, were $66.9 million atDecember 31, 2004 and 2003 for the Senior Notes, and $64.4 million atDecember 31, 2004 and 2003 for the Sponsor Note.  The Company does not expect changes in fairvalue of the Senior Notes or the Sponsor Note to have a significant effect onthe Company’s operations, cash flow or financial position.

 

**Foreign Currency Risk**

 

The Company’s international subsidiariesoperate in approximately 11 countries and use the local currencies as thefunctional currency and the U.S. dollar as the reporting currency. Transactionsbetween the Company and the international subsidiaries are denominated in U.S.dollars. As a result, the Company has certain exposures to foreign currencyrisk. However, management believes that such exposure does not present asignificant risk due to a relatively limited number of transactions andoperations denominated in foreign currency. Approximately $126.1 million or35.0% of the Company’s revenues are denominated in the internationalcurrencies. Transaction gains and losses on U.S. dollar denominatedtransactions are recorded within sundry expenses in the consolidated statementsof operations and were not material.

 

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 2004.

 

19

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**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA.**

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directors and Stockholders of BancTec, Inc.

 

We have audited the accompanying consolidated balance sheets ofBancTec, Inc. and subsidiaries as of December 31, 2004 and 2003, andthe related consolidated statements of operations, comprehensive (loss) income,stockholders’ deficit and cash flows for each of the years in the three-yearperiod ended December 31, 2004.  Inconnection with our audit of the consolidated financial statements, we havealso audited the accompanying Schedule II, Valuation and QualifyingAccounts (“financial statement schedule”) as of December 31, 2004 and 2003and for the years then ended.  Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States) . Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of BancTec, Inc. and subsidiaries as of December 31, 2004and 2003, and the results of their operations and their cash flows for each ofthe years in the three-year period ended December 31, 2004, in conformitywith U.S. generally accepted accounting principles .  Also, in our opinion, the related financialstatement schedule as of December 31, 2004 and 2003 and for the yearsthen ended, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.  Asdiscussed in note A to the consolidated financial statements, effective January1, 2002, the Company adopted the provisions of Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets.”

 

 
|                | /s/ KPMG LLP |   |
|---------------------|--------------|--------|
|                |
|                |
| Dallas, Texas       |
| March 31, 2005 |

 

20

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**BANCTEC, INC.**

**CONSOLIDATED BALANCE SHEETS**

**ASSETS**

(In thousands)

 
| ** **                                                                                                        | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
| CURRENT  ASSETS:                                                                                                  |       |                  |       |   |   |
| Cash and cash  equivalents, including restricted cash of $4,056 and $19,578 at  December 31, 2004 and 2003   |       | $                     | 51,487     |   | $ | 61,566 |   |
| Accounts  receivable, less allowance for doubtful accounts of $931 and $1,126 at  December 31, 2004 and 2003 |       | 45,772                |       | 39,193 |   |
| Inventories,  net                                                                                                 |       | 24,466                |       | 23,908 |   |
| Prepaid  expenses                                                                                                 |       | 4,950                 |       | 4,823 |   |
| Other current  assets                                                                                             |       | 1,984                 |       | 2,411 |   |
| Total current  assets                                                                                             |       | 128,659               |       | 131,901 |   |
|                                                                                                              |       |                  |       |   |   |
| PROPERTY,  PLANT AND EQUIPMENT, AT COST:                                                                          |       |                  |       |   |   |
| Land                                                                                                              |       | 2,860                 |       | 2,860 |   |
| Field support  spare parts                                                                                        |       | 38,057                |       | 59,789 |   |
| Systems and  software                                                                                             |       | 49,785                |       | 55,769 |   |
| Machinery and  equipment                                                                                          |       | 23,360                |       | 21,075 |   |
| Furniture,  fixtures and other                                                                                    |       | 12,098                |       | 22,672 |   |
| Buildings                                                                                                         |       | 26,529                |       | 27,653 |   |
|                                                                                                              |       | 152,689               |       | 189,818 |   |
| Less accumulated  depreciation and amortization                                                                   |       | 118,435               |       | 144,986 |   |
| Property,  plant and equipment, net                                                                               |       | 34,254                |       | 44,832 |   |
|                                                                                                              |       |                  |       |   |   |
| OTHER ASSETS:                                                                                                     |       |                  |       |   |   |
| Goodwill, less  accumulated amortization of $30,001 at December 31, 2004 and 2003                            |       | 41,476                |       | 41,476 |   |
| Deferred income  tax benefit                                                                                      |       | 6,874                 |       | 11,406 |   |
| Other assets                                                                                                      |       | 4,802                 |       | 9,900 |   |
| Total other  assets                                                                                               |       | 53,152                |       | 62,782 |   |
| TOTAL ASSETS                                                                                                      |       | $                     | 216,065    |   | $ | 239,515 |   |

 

See notes to consolidatedfinancial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATED BALANCE SHEETS**

**LIABILITIES AND STOCKHOLDERS’DEFICIT**

(In thousands, except share data)

 
| ** **                                                                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2004**              | ** ** | **2003** | ** ** |
| CURRENT  LIABILITIES:                                                                                                                   |       |                  |       |   |   |
| Current  obligations under capital leases and revolver                                                                                  |       | $                     | 299        |   | $ | 1,105 |   |
| Trade accounts  payable                                                                                                                 |       | 14,479                |       | 13,122 |   |
| Other accrued  expenses and liabilities                                                                                                 |       | 34,377                |       | 35,994 |   |
| Deferred  revenue                                                                                                                       |       | 23,778                |       | 23,086 |   |
| Maintenance  contract deposits                                                                                                          |       | 41,083                |       | 44,540 |   |
| Income taxes                                                                                                                            |       | 3,112                 |       | 1,717 |   |
| Total current  liabilities                                                                                                              |       | 117,128               |       | 119,564 |   |
|                                                                                                                                    |       |                  |       |   |   |
| OTHER  LIABILITIES:                                                                                                                     |       |                  |       |   |   |
| Long-term debt                                                                                                                          |       | 197,823               |       | 197,823 |   |
| Non-current  maintenance contracts deposits                                                                                             |       | 20,547                |       | 30,837 |   |
| Other  liabilities                                                                                                                      |       | 22,230                |       | 16,750 |   |
| Total other  liabilities                                                                                                                |       | 240,600               |       | 245,410 |   |
| Total  liabilities                                                                                                                      |       | 357,728               |       | 364,974 |   |
| COMMITMENTS  AND CONTINGENCIES (Note K)                                                                                                 |       |                  |       |   |   |
|                                                                                                                                    |       |                  |       |   |   |
| SERIES A  PREFERRED STOCK - issued and outstanding, 100,667 shares at December 31,  2004 and December 31, 2003                |       | 18,040                |       | 16,568 |   |
| SERIES B  PREFERRED STOCK                                                                                                               |       | —                |       | 10,609 |   |
|                                                                                                                                    |       |                  |       |   |   |
| STOCKHOLDERS’  DEFICIT:                                                                                                            |       |                  |       |   |   |
| Cumulative  preferred stock - authorized, 200,000 shares of  $0.01 par value at December 31, 2004 and  December 31, 2003 |       |                  |       |   |   |
| Series B  preferred stock - issued and outstanding,  35,520 shares at December 31, 2004 and  December 31, 2003      |       | 13,520                |       | — |   |
| Common stock  authorized, 21,800,000 shares of $0.01 par value at December 31, 2004  and 2003:                                     |       |                  |       |   |   |
| Common  stock-issued and outstanding  17,003,838 shares at December 31, 2004 and 2003                                         |       | 170                   |       | 170 |   |
| Class A  common stock-issued and outstanding 1,181,946 shares at December 31,  2004 and 2003                                  |       | 12                    |       | 12 |   |
| Subscription  stock warrants                                                                                                            |       | 3,726                 |       | 3,726 |   |
| Additional  paid-in capital                                                                                                             |       | 122,655               |       | 127,038 |   |
| Accumulated  deficit                                                                                                                    |       | (286,247              | )          | (269,020 | ) |
| Accumulated  other comprehensive loss                                                                                                   |       | (13,539               | )          | (14,562 | ) |
| Total stockholders’  deficit                                                                                                       |       | (159,703              | )          | (152,636 | ) |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                       |       | $                     | 216,065    |   | $ | 239,515 |   |

 

See notes to consolidatedfinancial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands)

 
| ** **                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                              |       |                              |       |   |   |   |   |
| REVENUE                                                                           |       |                              |       |   |   |   |   |
| Equipment and  software                                                           |       | $                                 | 137,842    |   | $ | 149,654 |   | $ | 139,843 |   |
| Maintenance  and other services                                                   |       | 222,884                           |       | 229,237 |   | 239,590 |   |
|                                                                              |       | 360,726                           |       | 378,891 |   | 379,433 |   |
| COST OF SALES                                                                     |       |                              |       |   |   |   |   |
| Equipment and  software                                                           |       | 90,148                            |       | 98,781 |   | 105,448 |   |
| Maintenance  and other services                                                   |       | 190,156                           |       | 189,422 |   | 177,780 |   |
|                                                                              |       | 280,304                           |       | 288,203 |   | 283,228 |   |
| Gross profit                                                                      |       | 80,422                            |       | 90,688 |   | 96,205 |   |
|                                                                              |       |                              |       |   |   |   |   |
| OPERATING  EXPENSES                                                               |       |                              |       |   |   |   |   |
| Product  development                                                              |       | 7,768                             |       | 12,548 |   | 15,984 |   |
| Selling,  general and administrative                                              |       | 56,846                            |       | 54,270 |   | 54,984 |   |
|                                                                              |       | 64,614                            |       | 66,818 |   | 70,968 |   |
| Income from  operations                                                           |       | 15,808                            |       | 23,870 |   | 25,237 |   |
|                                                                              |       |                              |       |   |   |   |   |
| OTHER INCOME  (EXPENSE):                                                          |       |                              |       |   |   |   |   |
| Interest income                                                                   |       | 718                               |       | 690 |   | 272 |   |
| Interest  expense                                                                 |       | (19,098                           | )          | (19,473 | ) | (33,080 | ) |
| Sundry, net                                                                       |       | (1,034                            | )          | 1,369 |   | 8,271 |   |
|                                                                              |       | (19,414                           | )          | (17,414 | ) | (24,537 | ) |
| (LOSS) INCOME  FROM CONTINUING OPERATIONS  BEFORE  INCOME TAXES              |       | (3,606                            | )          | 6,456 |   | 700 |   |
| INCOME TAX  EXPENSE (BENEFIT)                                                     |       | 13,621                            |       | (11,370 | ) | 344 |   |
| (LOSS) INCOME  FROM CONTINUING OPERATIONS                                         |       | (17,227                           | )          | 17,826 |   | 356 |   |
| INCOME FROM  DISCONTINUED OPERATIONS,  NET  OF TAX EXPENSE OF $2,726 IN 2002 |       | —                            |       | — |   | 2,725 |   |
| GAIN ON  DISPOSAL OF DISCONTINUED OPERATIONS, NET OF  TAX PROVISION OF $0    |       | —                            |       | — |   | 63,005 |   |
| (LOSS) INCOME  BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                      |       | (17,227                           | )          | 17,826 |   | 66,086 |   |
| CUMULATIVE  EFFECT OF ACCOUNTING CHANGE                                           |       | —                            |       | — |   | (6,960 | ) |
| NET (LOSS)  INCOME                                                                |       | (17,227                           | )          | 17,826 |   | 59,126 |   |
| PREFERRED  STOCK DIVIDENDS  AND ACCRETION  OF DISCOUNT                       |       | (4,383                            | )          | (3,997 | ) | (3,397 | ) |
| NET (LOSS)  INCOME APPLICABLE TO COMMON STOCK                                     |       | $                                 | (21,610    | ) | $ | 13,829 |   | $ | 55,729 |   |

 

See notes to consolidatedfinancial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(In thousands)

 
| ** **                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                            |       |                              |       |   |   |   |   |
| Net (loss)  income                                                               |       | $                                 | (17,227    | ) | $ | 17,826 |   | $ | 59,126 |   |
| Income from  discontinued operations                                             |       | —                            |       | — |   | 2,725 |   |
| Gain on sale  of discontinued operations                                         |       | —                            |       | — |   | 63,005 |   |
| (Loss) Income  from continuing operations                                        |       | (17,227                           | )          | 17,826 |   | (6,604 | ) |
| Adjustments to  reconcile to cash flows provided by operations:                  |       |                              |       |   |   |   |   |
| Cumulative  effect of accounting change                                          |       | —                            |       | — |   | 6,960 |   |
| Depreciation  and amortization                                                   |       | 15,913                            |       | 21,096 |   | 23,970 |   |
| Provision for  doubtful accounts                                                 |       | (229                              | )          | (999 | ) | (5,215 | ) |
| Deferred  income tax expense (benefit)                                           |       | 9,580                             |       | (13,796 | ) | — |   |
| Loss on  disposition of property, plant and equipment                            |       | 978                               |       | 176 |   | 1,210 |   |
| Loss on sale  of unconsolidated subsidiary                                       |       | 1,280                             |       | — |   | — |   |
| Gain on  extinguishment of long-term debt                                        |       | —                            |       | (1,129 | ) | (6,798 | ) |
| Other non-cash  items                                                            |       | 340                               |       | (75 | ) | 10 |   |
| Changes in  operating assets and liabilities:                                    |       |                              |       |   |   |   |   |
| (Increase)  decrease in accounts receivable                                      |       | (6,350                            | )          | 22,697 |   | 19,592 |   |
| Decrease  (Increase) in inventories                                              |       | 85                                |       | (509 | ) | 12,856 |   |
| Decrease in  other assets                                                        |       | 807                               |       | 2,847 |   | 3,373 |   |
| Increase  (decrease) in trade accounts payable                                   |       | 1,357                             |       | 231 |   | (4,177 | ) |
| Decrease  Increase in deferred revenue & maintenance contracts deposits |       | (13,055                           | )          | (1,006 | ) | 19,480 |   |
| Increase  (decrease) in other accrued expenses and liabilities                   |       | 818                               |       | (7,744 | ) | (6,167 | ) |
| Cash flows  (used in) provided by continuing operations                          |       | (5,703                            | )          | 39,615 |   | 58,490 |   |
| Cash flows  provided by discontinued operations                                  |       | —                            |       | — |   | 1,040 |   |
| Cash flows  (used in) provided by operating activities                           |       | (5,703                            | )          | 39,615 |   | 59,530 |   |
|                                                                             |       |                              |       |   |   |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                            |       |                              |       |   |   |   |   |
| Purchases of  property, plant and equipment                                      |       | (6,751                            | )          | (6,259 | ) | (7,205 | ) |
| Proceeds from  sale of property, plant and equipment                             |       | 297                               |       | — |   | — |   |
| Proceeds from  sale of unconsolidated subsidiary                                 |       | 2,955                             |       | — |   | — |   |
| Proceeds from  disposal of discontinued operations                               |       | —                            |       | — |   | 82,538 |   |
| Cash flows  (used in) provided by continuing operations                          |       | (3,499                            | )          | (6,259 | ) | 75,333 |   |
| Cash flows  used in discontinued operations                                      |       | —                            |       | — |   | (288 | ) |
| Cash flows  (used in) provided by investing activities                           |       | (3,499                            | )          | (6,259 | ) | 75,045 |   |
|                                                                             |       |                              |       |   |   |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                            |       |                              |       |   |   |   |   |
| Payments of  current maturities of capital lease obligations                     |       | (1,175                            | )          | (1,097 | ) | — |   |
| Payments on  long-term borrowing                                                 |       | —                            |       | (2,752 | ) | (96,277 | ) |
| Proceeds  (Payments) on short-term borrowings, net                               |       | 1                                 |       | — |   | (25,040 | ) |
| Debt issuance  costs                                                             |       | (50                               | )          | (95 | ) | (207 | ) |
| Net proceeds  from sales and issuances of preferred stock                        |       | —                            |       | — |   | 100 |   |
| Cash flows  used in continuing operations                                        |       | (1,224                            | )          | (3,944 | ) | (121,424 | ) |
| Cash flows  used in discontinued operations                                      |       | —                            |       | — |   | (3,798 | ) |
| Cash flows  used in financing activities                                         |       | (1,224                            | )          | (3,944 | ) | (125,222 | ) |
|                                                                             |       |                              |       |   |   |   |   |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                         |       | 347                               |       | 559 |   | (142 | ) |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                            |       | (10,079                           | )          | 29,971 |   | 9,211 |   |
| CASH AND CASH  EQUIVALENTS—BEGINNING OF YEAR                                |       | 61,566                            |       | 31,595 |   | 22,384 |   |
|                                                                             |       |                              |       |   |   |   |   |
| CASH AND CASH  EQUIVALENTS—END OF YEAR                                      |       | $                                 | 51,487     |   | 61,566 |   | 31,595 |   |
|                                                                             |       |                              |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURES OF INFORMATION:                                        |       |                              |       |   |   |   |   |
| Cash paid  during the period for:                                                |       |                              |       |   |   |   |   |
| Interest                                                                         |       | $                                 | 17,774     |   | 19,724 |   | 28,483 |   |
|                                                                             |       |                              |       |   |   |   |   |   |
| Taxes                                                                            |       | $                                 | 2,774      |   | 1,498 |   | 1,346 |   |
|                                                                                  |            |                                   |            |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

24

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ DEFICIT**

# **For the yearsended December 31, 2004, 2003 and 2002**

(In thousands, except share data)

 
| ** **                                       | ** ** | **Series**    | ** ** | ** ** | ** ** | **Class**  | ** ** | ** **       | ** ** | ** **     | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------|------------|------------|------------|------------|------------|------------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                       | ** ** | **B**         | ** ** | ** ** | ** ** | **A**      | ** ** | ** **       | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Common** | ** ** | **Subscription** | ** ** | **Paid in**    | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Stock**     | ** ** | **Stock**  | ** ** | **Stock**  | ** ** | **Warrants**     | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Loss**          | ** ** | **Total**  | ** ** |
| Balance at  December 31, 2001               |       | $             | —     |       | $          | 170        |       | $                | 12         |           | $          | 3,726           |       | $                 | 134,432    |       | $          | (345,972 | ) | $ | (11,417 | ) | $ | (219,049 | ) |
|                                             |       |          |       |       |       |       |       |             |       |           |       |            |       |              |       |       |       |
| 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         |       | 3,726            |       | 131,035        |       | (286,846        | )          | (9,821            | )          | (161,724   | )          |
|                                             |       |          |       |       |       |       |       |             |       |           |       |            |       |              |       |       |       |
| Foreign  currency translation adjustments        |       | —        |       | —     |       | —     |       | —           |       | —         |       | —          |       | 1,414             |       | 1,414      |       |
| Net income                                       |       | —        |       | —     |       | —     |       | —           |       | —         |       | 17,826          |       | —            |       | 17,826     |       |
| Minimum  pension liability, net of tax           |       | —        |       | —     |       | —     |       | —           |       | —         |       | —          |       | (6,155            | )          | (6,155     | )          |
| Series A  preferred stock dividends         |       | —        |       | —     |       | —     |       | —           |       | (1,268         | )          | —          |       | —            |       | (1,268     | )          |
| Series B  preferred stock dividends         |       | —        |       | —     |       | —     |       | —           |       | (2,285         | )          | —          |       | —            |       | (2,285     | )          |
| Accretion of  discount                           |       | —        |       | —     |       | —     |       | —           |       | (444           | )          | —          |       | —            |       | (444       | )          |
| Balance at  December 31, 2003               |       | —        |       | 170        |       | 12         |       | 3,726            |       | 127,038        |       | (269,020        | )          | (14,562           | )          | (152,636   | )          |
|                                             |       |          |       |       |       |       |       |             |       |           |       |            |       |              |       |       |       |
| Series B  Preferred Stock                   |       | 10,609        |       | —     |       | —     |       | —           |       | —         |       | —          |       | —            |       | 10,609     |       |
| Foreign  currency translation adjustments        |       | —        |       | —     |       | —     |       | —           |       | —         |       | —          |       | 1,577             |       | 1,577      |       |
| Net loss                                         |       | —        |       | —     |       | —     |       | —           |       | —         |       | (17,227         | )          | —            |       | (17,227    | )          |
| Minimum  pension liability, net of tax of $1,336 |       | —        |       | —     |       | —     |       | —           |       | —         |       | —          |       | (554              | )          | (554       | )          |
| Series A  preferred stock dividends         |       | —        |       | —     |       | —     |       | —           |       | (1,359         | )          | —          |       | —            |       | (1,359     | )          |
| Series B  preferred stock dividends         |       | 2,911         |       | —     |       | —     |       | —           |       | (2,911         | )          | —          |       | —            |       | —     |       |
| Accretion of  discount                           |       | —        |       | —     |       | —     |       | —           |       | (113           | )          | —          |       | —            |       | (113       | )          |
| Balance at  December 31, 2004               |       | $             | 13,520     |       | $          | 170        |       | $                | 12         |           | $          | 3,726           |       | $                 | 122,655    |       | $          | (286,247 | ) | $ | (13,539 | ) | $ | (159,703 | ) |

 

See notes to consolidatedfinancial statements.

 

25

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**BANTEC, INC.**

**CONSOLIDATED STATEMENTS OF********COMPREHENSIVE (LOSS) INCOME**

(In thousands)

 
| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|
| ** **                                | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net (Loss)  Income                        |       | $                                 | (17,227    | ) | $ | 17,826 |   | $ | 59,126 |   |
| Foreign  currency translation adjustments |       | 1,577                             |       | 1,414 |   | 2,753 |   |
| Minimum  pension liability                |       | (554                              | )          | (6,155 | ) | (1,157 | ) |
| Total  comprehensive (loss) income        |       | $                                 | (16,204    | ) | $ | 13,085 |   | $ | 60,722 |   |

 

See notes to ConsolidatedFinancial Statements.

 

26

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**BANCTEC, INC.**

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

# **For the yearsended December 31, 2004, 2003, and 2002**

# ** **

**NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**Description of Business**

 

BancTec, Inc. (BancTec or the Company),a Delaware corporation, is a worldwide provider of comprehensive enterprisecontent management, image capture devices, infrastructure support services andpayment processing solutions. The Company helps customers create businessefficiencies through innovative technology and services 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.  See Note L for further discussion of Companybusiness structure.

 

**Principles of Consolidation**

 

The consolidated financial statements includethe accounts of BancTec, Inc. and its wholly-owned subsidiaries. TheCompany accounts for investments in which it does not exercise control(generally ownership of 50% or less) under the equity method of accounting. AtDecember 31, 2003, retained earnings included $1.74 million ofundistributed earnings for investments accounted for under the equity method.  During 2003, the Company recorded $0.07million of earnings from these investments in the consolidated statement ofoperations and received a dividend payment of $0.35 million. During 2004, theCompany sold 100% of its investments accounted for under the equity method.  Inter-company accounts and transactions havebeen eliminated in consolidation.

 

**Use of Estimates**

 

The preparation of the Company’s consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities and the reported amounts ofrevenues, costs and expenses during the reporting period. Actual results coulddiffer from those estimates.

 

**Cash and Cash Equivalents and Short-TermInvestments**

 

Cash and cash equivalents include cash onhand and on deposit, including highly liquid investments with originalmaturities of three months or less. Short-term investments are similarinstruments with original maturities in excess of three months and are valuedat cost, which approximates market. Restricted cash atDecember 31, 2004 of $4.1 million represents the cash pledged under theterms of the revolver.

 

**Allowance for Doubtful Accounts**

 

The allowance for doubtfulaccounts is an estimate prepared by management based on evaluation of thecollectibility of specific accounts and the overall condition of the receivableportfolios. The Company analyzes trade receivables, and analyzes historical baddebts, customer credits, customer concentrations, customer credit-worthiness,current economic trends and changes in customer payment terms, when evaluatingthe adequacy of the allowance for doubtful accounts. The allowance for doubtfulaccounts is reviewed periodically and adjustments are recorded as deemednecessary.

 

**Inventories**

 

Inventories are valued at the lower of costor market and include the cost of raw materials, labor, factory overhead, andpurchased subassemblies. Cost is determined using the first-in, first-out andweighted average methods. The Company revised its standard costs formanufacturing inventory to effectively eliminate the purchasing burdencomponent as of October 1, 2002.  Atleast quarterly, the Company evaluates the carrying amount ofinventory based on the identification of excess and obsolete inventory. TheCompany’s evaluation involves a multi-element approach incorporating thestratification of inventory by time held and the stratification of inventory byrisk category, 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’sestimate were to deteriorate, additional write-downs may be required. Theinventory write-down calculations are reviewed periodically and additionalwrite-downs are recorded as

 

27

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deemed necessary.  Inventory reserves as of December 31, 2004,2003, and 2002 were $13.6 million, $15.0 million, and $16.3 million,respectively.  Inventory reserves establisha new cost basis for inventory and are not reversed in future periods.

 

**Property, Plant, and Equipment**

 

Property, plant, and equipment are recordedat cost and are depreciated or amortized principally on a straight-line basisover the estimated useful lives of the related assets. Estimated useful livesrange from two to five years for field support spare parts, three to eightyears for systems and software, five to seven years for machinery andequipment, leasehold improvements, and furniture and fixtures. Buildings aredepreciated over 40 years. Depreciation expense for the years endedDecember 31, 2004, 2003, and 2002 was $15.9 million, $21.1 million, and$24.0 million, respectively.

 

**Intangible Assets**

 

Beginning January 1, 2002, the Companyadopted Statement of Financial Accounting Standard (“SFAS”) No. 142,“Goodwill and Other Intangible Assets”. SFAS No. 142 requires that goodwill and intangible assets withindefinite useful lives no longer be amortized but instead be tested forimpairment at least annually.  SFASNo. 142 also requires that intangible assets with definite useful lives beamortized over their respective estimated useful lives to their estimatedresidual values.

 

SFAS No. 142 requires a two-step process for testing impairment.First, the fair value of each reporting unit is compared to its carrying valueto determine whether an indication of impairment exists. If impairment isindicated, then under the second step the fair value of the reporting unit’sgoodwill is determined by allocating the unit’s fair value to its assets andliabilities (including any unrecognized intangible assets) as if the reportingunit had been acquired in a business combination. The amount of impairment forgoodwill is measured as the excess of its carrying value over its fairvalue.  During 2002, the Company recordedas a cumulative effect of a change in accounting principle, a non-cash chargeof $6.9 million, after applicable income taxes, to write off a portion of thecarrying value of goodwill.

 

Components of the Company’s goodwill include amounts that are foreigncurrency denominated.  These goodwillamounts are subject to translation at each balance sheet date.  The Company records the change to itsAccumulated Other Comprehensive Loss on the balance sheet.  Goodwill previously classified as unallocatedhas been allocated to the reporting units as required by SFASNo. 142.  There were no changes in the carrying amount of goodwill bysegment for the year ended December 31, 2004.

 

**Derivative Financial Instruments**

 

Derivative financial instruments may beutilized by the Company to reduce interest rate or foreign-currency exchangerate risks. The Company has established policies and procedures for riskassessment and the approval, reporting and monitoring of derivative financialinstrument activities. The Company does not enter into financial instrumentsfor trading or speculative purposes.

 

The Company accounts for derivativeinstruments in accordance with Statement of Financial Accounting StandardsNo. 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.  AtDecember 31, 2004, and at December 31, 2003, the Company was not aparty to any derivative financial instruments.

 

**Revenue Recognition**

 

The Company derives revenue primarily from two sources: 1) productsales- hardware and software which address complex data and paper-intensivework processes, including advanced web-enabled imaging and workflowtechnologies 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

 

28

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acceptance certificate, or when it can be objectively demonstrated thatacceptance criteria have been met.  Forhardware transactions where software is considered incidental, or no softwareis included, revenue is recognized when the product has been delivered and allobligations have been fulfilled.

 

The Company recognizes revenue from sales ofequipment and supplies upon delivery and transfer of title or upon customeracceptance.

 

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 number offactors, including past transaction history with the customer and thecredit-worthiness of the customer. The Company does not request collateral fromcustomers. If the Company determines that collection of the fee is notreasonably assured, the Company defers the revenue and recognizes revenue atthe time collection becomes reasonably assured, which is generally upon receiptof cash. For all sales, the Company generally uses either a binding purchaseorder or signed sales agreement as evidence of an arrangement.

 

Maintenance contracts are primarily at leastone year in duration and the revenue generated is generally recognized ratablyover the term of the contract.

 

The Company’s services revenue is primarily billed based on contractualrates and terms.  The Company generallyrecognizes revenue as these services are performed which, in some cases isratably over the contract term. Certaincustomers advance funds prior to the performance of the services. TheCompany recognizes revenue related to these advances over time or as servicesare performed on a “per call” basis. These current and non-current portions of these advances are shown asDeferred Revenue or Maintenance Contract Deposits on the Consolidated BalanceSheets.

 

**Research and Development**

 

Research and development costs are expensedas incurred. Research and development costs for the year endedDecember 31, 2004 and 2003 were $7.8 and $12.5 million.

 

**Income Taxes**

 

The Company and its domestic subsidiariesfile a consolidated Federal income tax return. The Company’s foreignsubsidiaries file separate income tax returns in the countries in which theiroperations are based.

 

Income taxes are accounted for under theasset and liability method.  Deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards. The Company records valuation allowancesrelated to its deferred income tax assets when, in the opinion of management,it is more likely than not that some portion or all of the deferred income taxassets will not be realized. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.  (See Note H for details on the impact of taxlaws enacted during 2004.)

 

**Foreign Currency Translation**

 

Foreign assets and liabilities are translatedusing the exchange rate in effect at the balance sheet date, and results ofoperations are translated using an average rate for the period. Translationadjustments are accumulated and reported as a component of stockholders’deficit and comprehensive income. Transaction gains and losses are included inresults of operations in “Sundry, net”. Foreign currency transaction gains forthe years ended December 31, 2004, 2003, and 2002 were $0.2 million, $0.2million, and $1.4 million, respectively.

 

**Concentration of Risk**

 

Financial instruments that potentiallysubject the Company to concentrations of credit risk consist principally oftrade receivables. Concentrations of credit risk for these instruments arelimited due to the large number of customers comprising the Company’s customerbase, and their dispersion across different geographic areas.

 

29

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The Company sells its products to customersunder specified credit terms in the normal course of business. These customers’businesses can generally be classified as banking, personal computermanufacturers, financial services, insurance, healthcare, government agencies,utilities and telecommunications. During 2004, 2003, and 2002, the Companyderived 17.4%, 15.7%, and 16.2%, respectively, of revenues from a singlesource. The loss of this revenue could have a material adverse effect on theCompany.  The revenue from this singlesource is entirely in the CNS segment.

 

The Company currently receives funds inadvance for a significant portion of the Company’s services prior to theperformance of the services they relate to and management does not currentlyconsider this source to be a credit risk. Due to the diversity of the Company’s customers, management does notconsider there to be a concentration of risk within any single classification.However, general economic conditions that cause customers in such industries toreduce or delay their investments in products and solutions such as thoseoffered by the Company could have a material adverse effect on the Company.

 

The Company’s hardware and systems solutionsare assembled using various purchased components such as PC monitors,minicomputers, encoders, communications equipment and other electronic devices.Certain products are purchased from sole- source suppliers. The 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.

 

**Fair Value of Financial Instruments**

 

The following estimated fair values offinancial instruments have been determined by the Company using available marketinformation and valuation methodologies:

 

Cash and short-term investments: Carryingamount approximates fair value due to the short-term nature of the instruments.

 

Short term borrowings: Carrying amountapproximates fair value due to the short-term nature of the instruments.

 

Senior notes: The Company estimated fairvalue for 2004 based on an average value of recently completed market trades,resulting in a yield-to-maturity of approximately 19.5%.  The number of actual trades is limited,therefore the result may vary if a widely-traded market environment existed.

 

Sponsor Note: The Company estimated fairvalue at December 31, 2004, using a yield-to-maturity of approximately24.5%, based on the terms of the Sponsor Note.

 

The estimated fair values of the Company’sfinancial instruments at December 31 are as follows:

 
| ** **                       | ** ** | **2004**               | ** ** | **2003**          | ** ** |
|----------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                       | ** ** | **(In thousands)**     | ** ** |
| ** **                       | ** ** | **Carrying****Amount** | ** ** | **Fair****Value** | ** ** | **Carrying****Amount** | ** ** | **Fair****Value** | ** ** |
| Cash and  short-term investments |       | $                      | 51,487     |              | $          | 51,487 |   | $ | 61,566 |   | 61,566 |   |
| Senior Notes                     |       | 93,975                 |       | 66,924            |       | 93,975 |   | 66,924 |   |
| Sponsor Note                     |       | 103,848                |       | 64,386            |       | 103,848 |   | 64,386 |   |
|                                  |            |                        |            |                   |            |  |  |  |  |  |  |  |

 

**Stock-Based Compensation**

 

The Company accounts for stock-basedcompensation using the intrinsic value method prescribed in AccountingPrinciples Board (“APB No. 25”), Accounting for Stock Issued to Employees.The Company has adopted the disclosure requirements of Statement of FinancialAccounting Standards (“SFAS No. 123”), Accounting for Stock-BasedCompensation.

 

2000 Stock Plan:

 

Incentive Options. During the year endedDecember 31, 2003, the Company granted 45,000 incentive options.  During the year ended December 31, 2004,1,419,500 incentive options were granted. Under the Plan, incentive options are granted at a fixed exercise pricenot less than 100% of the fair market value of the shares of stock on the dateof grant (or 110% of the fair market value in certain circumstances). A portionof the incentive options vest over a four-year period at 25% per year beginningJanuary 2, 2001; the remainder vest based on the performance of theCompany. As a part of an employee retention program, vesting of 20.0% of theperformance-based incentive options was accelerated in October 2000.

 

30

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Non-qualified stock options. During the yearended December 31, 2003, no non-qualified options were granted.  During the year ended December 31, 2004,the Company granted 50,000 non-qualified stock options.  Under the Plan, non-qualified options aregranted at a fixed exercise price equal to, more than, or less than 100% of thefair market value of the shares of stock on the date of grant. Thenon-qualified options granted in 2000 vest partially over a four-year period at25% per year beginning January 2, 2001; the remainder vest based on the performanceof the Company. As a part of an employee retention program, vesting of 20.0% ofthe performance-based incentive options was accelerated in October 2000.

 
| ** **                                       | ** ** | **Incentive  Shares** | ** ** | **Non-qualified  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|----------------------------------------|------------|
| Options outstanding–December 31,  2002 |       | 497,240               |       | 31,760                    |       | 9.25                                   |       |
| Granted                                          |       | 45,000                |       | —                    |       | 9.25                                   |       |
| Forfeited                                        |       | (60,000               | )          | —                    |       | 9.25                                   |       |
| Options  outstanding–December 31, 2003 |       | 482,240               |       | 31,760                    |       | 9.25                                   |       |
| Granted                                          |       | 1,419,500             |       | 50,000                    |       | 9.25                                   |       |
| Forfeited                                        |       | (126,500              | )          | (50,000                   | )          | 9.25                                   |       |
| Options  outstanding–December 31, 2004 |       | 1,775,240             |       | 31,760                    |       | 9.25                                   |       |

 

Options and awards expire and terminate theearlier of 10 years from the date of grant or one month after the date theemployee ceases to be employed by the Company. The weighted average remaining contractual life of the outstandingoptions is 8.7 years.

 

At December 31, 2004, options topurchase 1,807,000 shares were outstanding, of which 228,750 were vested.  All options outstanding have an exerciseprice of $9.25.  No options have beenexercised.

 

Under the intrinsic-value method,compensation expense is recorded only to the extent that the strike price isless than market price on the measurement date. All options granted in 2003 and 2004 were issued at or above marketprice, and therefore no stock-based compensation was recorded.

 

The following table illustrates the effect onnet income as if compensation for the Company’s stock option plans had beendetermined in conformance with SFAS No. 123:

 
| ** **                                                                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net Income  (loss) as reported                                                                                                   |       | $                                 | (17,227    | ) | $ | 17,826 |   | $ | 59,126 |   |
| Total stock-based employee compensation  benefit (expense) determined under fair-value-based method for all rewards,  net of tax |       | (374                              | )          | 103 |   | 1,318 |   |
| Pro Forma net  income (loss)                                                                                                     |       | $                                 | (17,601    | ) | $ | 17,929 |   | $ | 60,444 |   |

 

The fair value of each stock-option grantunder the stock option plans was estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions and results:

 
| ** **                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| **Weighted Average**           | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Risk free  interest rate       |       | 4.09                              | %          | 5.8 | % | N/A |   |
| Expected life                  |       | 10 years                          |       | 10 years |   | N/A |   |
| Expected  volatility           |       | 0                                 |       | 0 |   | N/A |   |
| Fair value of  options granted |       | $                                 | 3.07       |   | $ | 4.03 |   | N/A |   |
|                                |            |                                   |            |  |  |  |  |  |  |

 

31

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**NEW ACCOUNTING PRONOUNCEMENTS**

 

On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment*.*” SFAS No. 123R addresses the accounting for share-based paymenttransactions in which an enterprise receives employee services in exchange for(a) equity instruments of the enterprise or (b) liabilities that arebased on the fair value of the enterprise’s equity instruments or that may besettled by the issuance of such equity instruments. SFAS No. 123Reliminates the ability to account for share-based compensation transactionsusing Accounting Principles Board Opinion No. 25 and generally requiresthat such transactions be accounted for using a fair-value-based method.  The Company is required to adopt SFASNo. 123(R) in the third quarter of fiscal 2005, beginning July 1,2005.  The Company is currently assessingthe final impact of this standard on the company’s consolidated results ofoperations, financial position, and cash flows. This assessment includes evaluatingoption valuation methodologies and assumptions as well as potential changes tothe Company’s compensation strategies.

 

In December 2004, the FASBissued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,”which will become effective for the Company beginning January 1, 2006. Thisstandard clarifies that abnormal amounts of idle facility expense, freight,handling costs and wasted material should be expensed as incurred and notincluded in overhead. In addition, this standard requires that the allocationof fixed production overhead costs to inventory be based on the normal capacityof the production facilities. The Company is currently evaluating the potentialimpact of this standard on its financial position and results of operations,but does not believe the impact of the change will be material.

 

On October 22, 2004, a new taxlaw was passed, the American Jobs Creation Act of 2004 (the “Jobs CreationAct”), which raised a number of issues with respect to accounting for incometaxes. In response, on December 21, 2004, the FASB issued two FASB StaffPositions (FSP), FSP 109-1 – “Application of FASB Statement No. 109, Accountingfor Income Taxes, to the Tax Deduction on Qualified Production ActivitiesProvided by the American Jobs Creation Act of 2004” and FSP 109-2 – “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004,” which became effective for the Companyupon issuance.

 

The Jobs Creation Act providesa deduction for income from qualified domestic production activities, to bephased in from 2005 through 2010, which is intended to replace the existingextra-territorial income exclusion for foreign sales. In FSP 109-1, the FASBdecided the deduction for qualified domestic production activities should beaccounted for as a special deduction under SFAS No. 109, rather than as a ratereduction. Accordingly, any benefit from the deduction will be reported in theperiod in which the deduction is claimed on the tax return and no adjustment todeferred taxes at December 31, 2004, is required.

 

The Jobs Creation Act alsocreates a temporary incentive for U.S. corporations to repatriate accumulatedincome earned abroad by providing an 85 percent dividends received deductionfor certain dividends from controlled foreign corporations. The deduction issubject to a number of limitations and uncertainty remains as to how tointerpret numerous provisions in the Act. FSP 109-2 addresses when to reflectin the financial statements the effects of the one-time tax benefit on therepatriation of foreign earnings. Under SFAS No. 109, companies are normallyrequired to reflect the effect of new tax law changes in the period ofenactment. FSP 109-2 provides companies additional time to determine the amountof earnings, if any, that they intend to repatriate under the Jobs CreationAct’s provisions.  (See Note H for morediscussion of the impact of the Jobs Creation Act, including the Company’s statuson the repatriation of foreign earnings.)

 

**Reclassification**

 

Certain amounts have been reclassified fromthe prior years to conform to the current year presentation.

 

**NOTE B – SUPPLEMENTAL SCHEDULE OFNONCASH INVESTING AND FINANCING TRANSACTIONS**

 

The Consolidated Statement of Cash Flows includedthe following noncash investing and financing transactions:

 
| ** **                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                        | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Capital lease  obligation incurred for lease of computer hardware |       | $                                 | 287        |   | $ | 2,396 |   | $ | — |   |
| Inventory put  in service as fixed assets                         |       | 105                               |       | 1,856 |   | — |   |
|                                                                   |            |                                   |            |  |  |  |  |  |  |  |

 

**NOTE C - DISCONTINUED OPERATIONS,RESTRUCTURING, IMPAIRMENT AND CHANGE IN ACCOUNTING ESTIMATE**

 

*Discontinued Operations.*

OnNovember 27, 2002, the Company completed the sale of its wholly-ownedsubsidiary, BancTec Japan (“BTJ”), to JAFCO MBO Co., Ltd. (“JAFCO”) pursuant toa Stock Purchase Agreement dated as of November 27, 2002, between theCompany and JAFCO.  The sale involved twoseparate transactions: (1) the purchase by JAFCO of 100% of theoutstanding shares of BTJ for 6.5 billion yen, and (2) a one-time,up-front payment by BTJ to the Company of 4.0 billion yen under certaindistribution 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 statementpresentation was made in accordance with APB Opinion No. 30.  BTJ’s operating results have been segregatedand reported as discontinued operations in the accompanying consolidatedstatements of income and cash flows, and related notes.  During 2002, 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 year 2002 was $63,213. Pretax income from the discontinued operations of BTJ for fiscal 2002was $5,451.  The assets related to BTJwere previously classified in the International segment (See Note L for thediscussion of segment data).

 

*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.  As of December 31, 2004, approximately720 employees have been terminated since 2001, including employees inproduction, product development, sales and marketing and other administrativefunctions.

 

32

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Changes to the Company’s accrued severanceliability during the years ended December 31, 2002, 2003 and 2004 aresummarized as follows:

 
| ** **                         | ** ** | **US Solutions** | ** ** | **CNS** | ** ** | **International** | ** ** | **Corp/Elims** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------------|------------|---------|------------|-------------------|------------|----------------|------------|-----------|------------|
| Balance at  December 31, 2001 |       | $                | 3,248      |    | $          | —            |       | $              | 1,226      |      | $          | — |   | $ | 4,474 |   |
|                               |       |             |       |    |       |              |       |           |       |      |       |
| Severance  expense                 |       | 903              |       | 380     |       | 202               |       | 438            |       | 1,923     |       |
| Severance paid                     |       | (3,204           | )          | (380    | )          | (804              | )          | (438           | )          | (4,826    | )          |
| Balance at  December 31, 2002 |       | 947              |       | —  |       | 624               |       | —         |       | 1,571     |       |
|                               |       |             |       |    |       |              |       |           |       |      |       |
| Severance  expense                 |       | 1,266            |       | 666     |       | 121               |       | 30             |       | 2,083     |       |
| Severance paid                     |       | (1,747           | )          | (666    | )          | (689              | )          | (30            | )          | (3,132    | )          |
| Balance at  December 31, 2003 |       | 466              |       | —  |       | 56                |       | —         |       | 522       |       |
|                               |       |             |       |    |       |              |       |           |       |      |       |
| Severance  expense                 |       | 1,310            |       | 949     |       | 393               |       | 829            |       | 3,481     |       |
| Severance paid                     |       | (1,130           | )          | (949    | )          | (444              | )          | (177           | )          | (2,700    | )          |
| Balance at  December 31, 2004 |       | $                | 646        |    | $          | —            |       | $              | 5          |      | $          | 652 |   | $ | 1,303 |   |

 

*Impairment.*Long-livedassets and certain identifiable intangibles are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held andused is measured by a comparison of the carrying amount of an asset to futurenet operating cash flows expected to be generated by the asset. If such assetsare considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the assets exceeds the fair value ofthe assets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell.  The Company’s investments in non-marketable equity securities aremonitored for impairment and are written down to fair value with a change toearnings if a decline in fair value is judged to be other than temporary.  During the second quarter of 2004, theCompany recorded a write down of approximately $1.5 million to reflect theestimated fair value of $2.7 million in its investment in the stock ofServibanca S.A. (43.4% interest), which was accounted for as an equityinvestment.  The sale of this stock, at anet sales price of $2.7 million was completed in August 2004.  The impairment charge of $1.5 million isreflected in Sundry, net in the Consolidated Statements of Operations for theyear ended December 31, 2004.

 

*Change in Accounting Estimate*

During the quarter ended June 30, 2004, the Company recordedrevenue of $4.3 million reflecting an adjustment arising out of a change inaccounting estimate related to deferred revenue.  The recording of deferred revenue requiresthe use of certain estimates, and new facts came to the attention of theCompany, which necessitated the change in these estimates.

 

**NOTE D - INVENTORIES**

 

Inventory consists of the following:

 
| ** **       | ** ** | **December 31,** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **       | ** ** | **(In thousands)**    | ** ** |
| Raw materials    |       | $                     | 6,686      |   | $ | 6,035 |   |
| Work-in-progress |       | 5,247                 |       | 7,168 |   |
| Finished goods   |       | 12,533                |       | 10,705 |   |
|             |       | $                     | 24,466     |   | $ | 23,908 |   |

 

33

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**NOTE E - DEBT AND OTHER OBLIGATIONS**

 

Debt and other obligations consist of thefollowing:

 
| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                             | ** ** | **(In thousands)**    | ** ** |
| 7.5% Senior  Notes, due 2008                           |       | $                     | 93,975     |   | $ | 93,975 |   |
| Revolver                                               |       | 1                     |       | — |   |
| Senior  Subordinated Sponsor Note, unsecured, due 2009 |       | 103,848               |       | 103,848 |   |
|                                                   |       | 197,824               |       | 197,823 |   |
| Less: Current  portion                                 |       | 1                     |       | — |   |
|                                                   |       | $                     | 197,823    |   | $ | 197,823 |   |

 

Revolving Credit Facility.  TheCompany has a revolving credit facility (the “Revolver”) provided by HellerFinancial, Inc. (“Heller”), which will mature on May 30, 2006.  Effective May 7, 2003, theCompany and Heller entered into an amendment to the Revolver which reduced thecommitted amount from $60 million to $40 million, while increasing theletter-of-credit sub-limit from $30 million to $40 million.  The Revolver is secured by substantially allthe assets of the Company, subject to the limitations on liens contained in theCompany’s existing Senior Notes.  Fundsavailability under the Revolver is determined by a borrowing-base formula equalto a specified percentage of the value of the Company’s eligible accountsreceivable, inventory and pledged cash. At December 31, 2004, the Company had $0.001 million outstandingunder the Revolver and an outstanding balance on letters-of-credit totaling$4.0 million.  The availability remainingunder the Revolver that the Company can draw was $16.7 million atDecember 31, 2004 ($20.7 million in availability less a $4.0 millionreserve).  A commitment fee of 0.5% perannum on the unused portion of the Revolver is payable quarterly.

 

The interest rate on loans under the Revolver is, at the Company’soption, either (1) 1.25% over prime or (2) 2.75% over LIBOR.  Under an amendment effective September 1,2003, the interest rate margins over prime and LIBOR may be increased by 0.25%increments when the fixed charge coverage ratio falls below (1) 1.5 to 1.0and (2) 1.25 to 1.0 and (total rate increase of 0.50%) or decreased by0.25% increments when the fixed charge coverage ratio is greater than(1) 1.75 to 1.0, (2) 2.0 to 1.0, and (3) 2.25 to 1.0 (total ratedecrease of 0.75%).  The interest ratewas re-measured as of the effective date of September 1, 2003 under thisamendment.  At December 31, 2004,the Company’s weighted average rate on the Revolver was 6.50% under the primeoption.

 

Under the Revolver, substantially all of the Company’s domestic cashreceipts (including proceeds from accounts receivable and asset sales) must beapplied to repay the outstanding loans, which may be re-borrowed subject toavailability in accordance with the borrowing base formula. The Revolvercontains restrictions on the use of cash for dividend payments or non-scheduledprincipal payments on certain indebtedness. Restricted cash at December 31, 2004 of $4.1 million representscash pledged under the terms of the Revolver.

 

The Revolver contains various representations, warranties andcovenants, including financial covenants as to maximum capital expenditures,minimum fixed charge coverage ratio and minimum average borrowingavailability.  EffectiveDecember 31, 2004, the Company and Heller amended the loan and securityagreement to decrease the minimum fixed charge coverage ratio atDecember 31, 2004 from 1.1 to 1.0.  TheCompany has experienced recent decreases in its fixed charge coverage ratiowhich has necessitated amendments to the Revolver agreement with Heller. It isanticipated that future amendments may be necessary should the fixed chargecoverage ratio continue to decline.  AtDecember 31, 2004, the Company was in compliance with all covenants underthe Revolver.

 

Senior Notes. In August 1998, the Company exchanged thepublic Senior Notes (the “Senior Notes”) for the notes sold in a May 1998Rule 144A private offering. Interest is fixed at 7.5% and is due andpayable in semi-annual installments, which began December 1, 1998. TheSenior Notes contain covenants placing limitations on the Company’s ability topermit subsidiaries to incur certain debts, incur certain loans and liens, andengage in certain sale and leaseback transactions. During the year endedDecember 31, 2003, the Company repurchased Senior Notes with a face amountof $3.9 million. The Company wrote off a proportionate share of deferred financingfees, resulting in a gain of approximately $1.1 million, which was reported assundry (other) income in the condensed consolidated statements ofoperations for 2003.

 

Senior Subordinated Unsecured Sponsor Note.The Company’s $160.0 million Sponsor Note is issued in U.S. dollars and bearsinterest 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.

 

34

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The Sponsor Note matures on July 22, 2009.  As provided under the agreement, however, theSponsor Note holder, WCAS, elected to defer quarterly interest payments of $4.0million for each of the June 2000 through September 2001 quarterlyperiods resulting in an increase in the Sponsor Note totaling $33.8 million.Such election required a deferred financing fee of 30.0% of each of theinterest payments being deferred.  TheCompany accounts 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 Note, on December 6, 2002, the Company made a $90 millionprincipal payment on the Sponsor Note.  Aholder of the Senior Notes had sought to contest this payment.  See discussion under Item 3, LegalProceedings.  The Company wrote off aproportionate share of deferred financing fees totaling $3.8 million in 2002.

 

Capital Leases.  During the first quarter of 2003, the Companyentered into a capital lease for $2.4 million that pertained to computerhardware.  During the second quarter of2004, the Company entered into a second capital lease for $0.2 million thatalso pertained to computer hardware. Amounts due under capital leases are recorded as liabilities.  The Company’s interest in assets acquiredunder capital leases is recorded as property and equipment on the ConsolidatedBalance Sheets.  Amortization of assetsrecorded under capital leases is included in depreciation expense.  The current obligations under capital leasesare classified in the Current Liabilities section of the ConsolidatedBalance Sheets and the non-current portion of capital leases are included inOther Liabilities.  At December 31,2004, the Company had capital lease balances outstanding of $0.5 million, ofwhich $0.3 million was classified as current and $0.2 million was classified aslong-term.

 

The Company had no outstanding foreign-creditbalances as of December 31, 2004.

 

As of December 31, 2004 the futurematurities of debt are as follows:

 

| **Year**   | ** ** | **(In thousands)** | ** ** |
|------------|------------|--------------------|------------|
| 2005       |       | $                  | 1          |   |
| 2006       |       | —             |       |
| 2007       |       | —             |       |
| 2008       |       | 93,975             |       |
| 2009       |       | 103,848            |       |
| Thereafter |       | —             |       |
|       |       | $                  | 197,824    |   |

 

The Company paid cash totaling $17.8 million,$19.7 million, and $28.5 million, for interest during the twelve months endedDecember 31, 2004, 2003, and 2002, respectively. During the years endedDecember 31, 2004, 2003 and 2002, the Company capitalized no interestcosts.

 

**NOTE F – REDEEMABLE PREFERRED STOCK**

 

**SERIES A PREFERRED STOCK**

 

In consideration for amending the Company’scredit agreements with its Lenders, in September 2000, the Company issued100,000 shares of $0.01 par value Series A Preferred Stock to WCAS, itsprimary owners. In exchange, WCAS contributed an additional $15.0 million incash to the Company. Dividends on the Series A Preferred accrue quarterlyat an annual dividend rate of 7.0% of the then Stated Value. The Stated Valueequals $150.00 per share, plus accumulated and unpaid dividends. Dividends arepaid when declared by the Company’s Board of Directors. The aggregateliquidation preference/redemption value is $15.0 million, plus accumulated andunpaid dividends.  TheCompany has the right to redeem the Series A 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 A Preferred, the Company would be required to redeem theshares.  Due to the redemption rights atthe option of the holder, the Series A Preferred Stock is classified astemporary equity.  An amendment to theagreement covering the Series Apreferred stock to remove the mandatory redemption date was approved by theBoard of Directors on March 31, 2004. Each share of Series A Preferred includes a warrant to purchasebetween 2.5 and 7.75 shares of Common Stock at $0.01 per share. Common stockexercisable by the warrant totals 750,000 shares and may be exercised at anytime from the date of purchase.

 

The Company allocated the proceeds from theSeries A preferred-stock issuance based upon the relative fair-value ofthe preferred stock and warrants which resulted in recording preferred stock of$11.3 million and warrants of $3.7 million. The related discount was beingaccreted over a period of 8 years through March 31, 2004, when themandatory redemption provision was removed from the Series A PreferredStock.

 

35

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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, 2004and 2003, accretion of the related discount and accrued but unpaid dividendstotaled $1.4 million and $1.7 million, respectively, increasing the carryingamount to $18.0 million and $16.6 million, respectively. As ofDecember 31, 2004, the stated value of the Series A Preferred,including accumulated but unpaid dividends, was $201.32.

 

**SERIES B PREFERRED STOCK**

 

In February 2001, the Company issued 35,520 shares of $0.01 parvalue Series B Preferred Stock (“Series B Preferred”) to its primaryowners, WCAS. In exchange, WCAS contributed an additional $5.3 million in cash tothe Company. Dividends on the Series BPreferred accrue quarterly at an annual dividend rate of 25.0% of thethen “Stated Value.” The Stated Value equals $150.00 per share, plusaccumulated and unpaid dividends. Dividends are paid when declared by the Company’sBoard of Directors. The aggregate liquidation preference/redemption value atDecember 31, 2004, is $13.5 million, including accumulated and unpaiddividends. The Company has the right to redeem the Series B Preferred atany time by paying for each share theStated Value per share as of the redemption date. At December 31,2003, the Series B Preferred Stock was classified as temporary equity asthe preferred security holders comprised fifty percent of the Board ofDirectors.  On March 31, 2004, a seventhmember was elected to the Board of Directors who is not a preferred securityholder.  As a result, the preferredsecurity holders no longer control the Board of Directors and the Series BPreferred Stock was then classified as part of permanent equity. Each share ofSeries B Preferred is convertible into shares of Common Stock at any time.The number of shares of Common Stock is determined by multiplying the number ofshares being converted by $150.00 and dividing the result by $8.325 per share.The conversion rate is subject to various adjustments (for anti-dilution).  TheCompany is required to keep available approximately 640,000 common shares forissuance upon conversion of all outstanding shares of Series B Preferred.

 

For the years ended December 31, 2004and 2003, accrued but unpaid dividends totaled $2.9 million and $2.3 million,respectively.  As of December 31,2004, the stated value of the Series B Preferred, including accumulatedbut unpaid dividends, was $380.63.

 

**NOTE G - OTHER ACCRUED EXPENSES ANDLIABILITIES**

 

Other accrued expenses and liabilitiesconsist of the following:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **(In thousands)**    | ** ** |
| Salaries,  wages and other compensation |       | $                     | 10,081     |   | $ | 12,843 |   |
| Accrued taxes,  other than income taxes |       | 4,868                 |       | 5,312 |   |
| Accrued  interest payable               |       | 3,204                 |       | 3,211 |   |
| Accrued  invoices and costs             |       | 1,191                 |       | 2,114 |   |
| Other                                   |       | 15,033                |       | 12,514 |   |
|                                    |       | $                     | 34,377     |   | $ | 35,994 |   |

 

36

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**NOTE H -TAXES**

 

In October 2004, the Jobs Creation Act was enacted. One of theprovisions of this act provides a deduction for income from qualified domesticproduction activities (“qualified production income” or QPI). The deduction,which cannot exceed 50 percent of annual wages paid, is phased in as follows: 3percent of QPI in 2005-2006, 6 percent in 2007-2009, and 9 percent in 2010 andthereafter. The Jobs Creation Act also provides for a two-year phase-out of theexisting extra-territorial income exclusion (ETI) for foreign sales with a 20percent phase-out in 2005, 40 percent in 2006 and 100 percent thereafter.  The impact on the Company’s tax rate of thenew manufacturing deduction at a fully phased-in rate of 9 percent has not yetbeen determined.

 

The Jobs Creation Act also creates a temporary incentive for U.S.corporations to repatriate accumulated income earned abroad by providing an 85percent dividends received deduction for certain dividends from controlledforeign corporations. The deduction is subject to a number of limitations anduncertainty remains as to how to interpret numerous provisions in the JobsCreation Act.

 

As of December 31, 2004, the Company was not in a position to decide onwhether, and to what extent, foreign earnings that have not yet been remittedto the U.S. may be repatriated.

 

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

 
| ** **     | ** ** | **Years Ended December 31,** | ** ** |
|----------------|------------|------------------------------|------------|
| ** **     | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:       |       |                         |       |   |   |   |   |
| Federal        |       | $                            | (42        | ) | $ | (1,014 | ) | $ | (629 | ) |
| State          |       | 153                          |       | 163 |   | 641 |   |
| Foreign        |       | 3,930                        |       | 3,277 |   | 332 |   |
| Total current  |       | 4,041                        |       | 2,426 |   | 344 |   |
|           |       |                         |       |   |   |   |   |
| Deferred:      |       |                         |       |   |   |   |   |
| Federal        |       | 9,000                        |       | (9,000 | ) | — |   |
| Foreign        |       | 580                          |       | (4,796 | ) | — |   |
| Total deferred |       | 9,580                        |       | (13,796 | ) | — |   |
|           |       | $                            | 13,621     |   | $ | (11,370 | ) | $ | 344 |   |

 

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,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                         | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Provision (benefit) at U.S. statutory rate of 35% for  all periods |       | $                            | (1,262     | ) | $ | 2,259 |   | $ | 343 |   |
| Increase in tax expense resulting from:                            |       |                         |       |   |   |   |   |
| Impact of foreign and Puerto Rico income tax rate                  |       | 203                          |       | (236 | ) | 450 |   |
| State income tax, net of federal income tax benefit                |       | 109                          |       | (9 | ) | 457 |   |
| Change in valuation allowance                                      |       | 9,695                        |       | (12,336 | )  | (304 | ) |
| Permanent differences                                              |       | 4,669                        |       | 147 |   | — |   |
| Other                                                              |       | 207                          |       | (1,195 | ) | (602 | ) |
|                                                               |       | $                            | 13,621     |   | $ | (11,370 | ) | $ | 344 |   |

 

TheCompany paid cash totaling $2.8 million, $1.5 million, and $0.3 million forincome taxes on continuing operations during the years ended December 31, 2004,2003 and 2002, respectively.

 

37

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Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and liabilities at December 31, 2004 and 2003 arepresented below (dollars in thousands):

 
| ** **                            | ** ** | **December 31,**   | ** ** |
|---------------------------------------|------------|--------------------|------------|
| ** **                            | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                            | ** ** | **(In thousands)** | ** ** |
| Gross deferred tax assets:            |       |               |       |   |   |
| Net operating losses                  |       | $                  | 47,335     |   | $ | 38,106 |   |
| AMT credit carryforwards              |       | 101                |       | 328 |   |
| Inventory reserves                    |       | 4,948              |       | 5,360 |   |
| Receivable allowance                  |       | 205                |       | 301 |   |
| Intangible assets previously deducted |       | 905                |       | 1,341 |   |
| Deferred revenues                     |       | 15,450             |       | 23,152 |   |
| Deferred compensation                 |       | 2,639              |       | 2,443 |   |
| Foreign timing differences, net       |       | 9,088              |       | 3,835 |   |
| Other                                 |       | 5,723              |       | 5,129 |   |
| Total gross deferred tax asset        |       | 86,394             |       | 79,995 |   |
|                                  |       |               |       |   |   |
| Gross deferred tax liabilities:       |       |               |       |   |   |
| Depreciation                          |       | (1,352             | )          | (1,646 | ) |
| Other                                 |       | —             |       | (679 | ) |
| Total gross deferred tax liability    |       | (1,352             | )          | (2,325 | ) |
| Deferred tax asset valuation reserve  |       | (76,184            | )          | (63,874 | ) |
| Net deferred tax asset                |       | $                  | 8,858      |   | $ | 13,796 |   |

 

Avaluation allowance has been provided to reduce the deferred tax assets to anamount management believes is more likely than not to be realized. Expectedrealization of deferred tax assets for which a valuation allowance has not beenrecognized is based upon the reversal of existing taxable temporary differencesand taxable income expected to be generated in the future.

 

Componentsof the valuation allowance are as follows.

 
| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **2004**                     | ** ** | **2003** | ** ** |
| Valuation allowance at  beginning of year |       | $                            | 63,874     |   | $ | 75,735 |   |
| (Release) Increase in valuation allowance |       | 10,305                       |       | (13,796 | ) |
| Income from continuing  operations        |       | 1,612                        |       | 1,457 |   |
| Prior year true-ups and  corrections      |       | 393                          |       | 478 |   |
| Valuation allowance at end of  year       |       | $                            | 76,184     |   | $ | 63,874 |   |

 

Company’seffective tax rate was (377.7%), (176.1%), and 5.1% for the years endedDecember 31, 2004, 2003, and 2002, respectively.

 

TheCompany’s net operating loss carryforwards of $124.6 million expire as follows:$5.8 million in the period from 2005 through 2007, $0.3 million in the periodsfrom 2008 through 2013, $0.1 million in the period from 2014 through 2019,$88.8 million in the period from 2020 through 2025, and $29.6 million with noexpiration.

 

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

 
| ** **          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------|------------|------------------------------|------------|
| ** **          | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| United States       |       | $                            | (16,441    | ) | $ | (5,788 | ) | $ | (3,384 | ) |
| Foreign             |       | 12,835                       |       | 12,244 |   | 4,084 |   |
| Total income (loss) |       | $                            | (3,606     | ) | $ | 6,456 |   | $ | 700 |   |

 

38

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Undistributedearnings of foreign subsidiaries included in continuing operations wereapproximately $17.7 million, $25.5 million, and $17.5 million, at December 31,2004, 2003 and 2002, respectively.  Notaxes have been provided on the undistributed earnings as they are consideredto be permanently reinvested.

 

**NOTE I -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.  No amountswere expensed under the plan for the years ended December 31, 2004, 2003 and2002.

 

TheCompany’s subsidiary in United Kingdom provides pension benefits to retireesand eligible dependents. Employees eligible for participation include allfull-time regular employees who are more than three years from retirement. Aretirement pension or a lump-sum payment may be paid dependent upon length ofservice at the mandatory retirement age. The Company accrues the cost of thesebenefits over the service lives of the covered employees based on an actuarialcalculation.   The Company uses aDecember 31 measurement date for this plan.

 

Thefollowing table provides a reconciliation of the benefit obligation, planassets and funded status of the pension fund.

 
| ** **                                                | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Change in Benefit Obligation                              |       |                         |       |   |   |   |   |
| Benefit obligation at beginning of year                   |       | $                            | 26,856     |   | $ | 14,032 |   | $ | 14,768 |   |
| Service cost                                              |       | 446                          |       | 465 |   | 682 |   |
| Interest cost                                             |       | 1,586                        |       | 915 |   | 933 |   |
| Participant’s contributions                          |       | 728                          |       | 497 |   | 456 |   |
| Actuarial (gain) loss                                     |       | 3,975                        |       | 8,498 |   | (4,224 | ) |
| Amendments                                                |       | —                       |       | 92 |   | 141 |   |
| Benefits paid                                             |       | (108                         | )          | (123 | ) | (134 | ) |
| Foreign-exchange rate changes                             |       | 2,301                        |       | 2,480 |   | 1,410 |   |
| Benefit Obligation at end of year                         |       | 35,784                       |       | 26,856 |   | 14,032 |   |
|                                                      |       |                         |       |   |   |   |   |
| Change in Plan Assets                                     |       |                         |       |   |   |   |   |
| Estimated fair value of plan assets at beginning of  year |       | 13,434                       |       | 8,678 |   | 8,700 |   |
| Actual return on plan assets                              |       | 990                          |       | 2,123 |   | (2,199 | ) |
| Employer contribution                                     |       | 1,269                        |       | 990 |   | 998 |   |
| Employee contribution                                     |       | 728                          |       | 497 |   | 456 |   |
| Benefits paid                                             |       | (108                         | )          | (123 | ) | (134 | ) |
| Foreign-exchange rate changes                             |       | 1,130                        |       | 1,269 |   | 857 |   |
| Estimated fair value of plan assets at end of year        |       | 17,443                       |       | 13,434 |   | 8,678 |   |
|                                                      |       |                         |       |   |   |   |   |
| Funded status                                             |       | (18,341                      | )          | (13,422 | ) | (5,354 | ) |
| Unrecognized actuarial loss                               |       | 12,994                       |       | 8,541 |   | 831 |   |
| Unrecognized transition cost                              |       | —                       |       | — |   | 275 |   |
| Accrued benefit cost                                      |       | $                            | (5,347     | ) | $ | (4,881 | ) | $ | (4,248 | ) |
|                                                      |       |                         |       |   |   |   |   |
| Weighted-average assumptions as of December 31, 2004      |       |                         |       |   |   |   |   |
| Discount Rate                                             |       | 5.55                         | %          | 5.80 | % | 6.30 | % |
| Expected asset return                                     |       | 6.20                         | %          | 7.60 | % | 7.00 | % |
| Rate of compensation increase                             |       | 2.60                         | %          | 2.50 | % | 1.20 | % |

 

39

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Thecomponents of the net periodic benefit cost are as follows:

 
| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service Cost                       |       | $                            | 446        |   | $ | 465 |   | $ | 682 |   |
| Interest Cost                      |       | 1,586                        |       | 915 |   | 933 |   |
| Expected return on plan assets     |       | (1,095                       | )          | (655 | ) | (644 | ) |
| Amortization of transition amount  |       | —                       |       | 280 |   | 266 |   |
| Amortization of prior service cost |       | —                       |       | 92 |   | 141 |   |
| Recognized actuarial loss          |       | 431                          |       | 49 |   | 45 |   |
| Net periodic benefit cost          |       | $                            | 1,368      |   | $ | 1,146 |   | $ | 1,423 |   |

 

The net pension liabilityat December 31, 2004 and 2003 was $18.3 million and $13.4 million,respectively.  This liability isclassified in Other Liabilities in the Consolidated Balance Sheets.  The increase in minimum liability included inother comprehensive loss for the years ended December 31, 2004, 2003 and 2002was $4.5 million, $6.2 million and $1.2 million, respectively.

 

The weighted averageasset allocations for the Company’s defined benefit plans at December 31, 2004and 2003, are as follows:

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|------------------|------------|
| ** **                     | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Domestic and overseas equities |       | 69.4             | %          | 78.2 | % |
| UK government bonds            |       | 15.4             | %          | 19.1 | % |
| Corporate bonds                |       | 15.2             | %          | NIL |   |
| Cash                           |       | —           |       | 2.7 | % |
| Total                          |       | 100.0            | %          | 100.0 | % |

 

The Company’s investmentpolicy related to the defined benefit plans is to continue to increase thepercentage of its funds held in government gilts and highly rated bonds as ameans to reduce the overall risk of assets held in the funds and to betterbalance the allocation of fund assets.  During 2004, all contributions made to the fund were in thesecategories.

 

The Company’s fundingmethods are based on governmental requirements and differ from those methodsused to recognize pension expense. The Company expects to contribute $1.3million to the pension plan during 2005 and expects this level of funding tocontinue in future periods.

 

Pension benefit paymentsexpected to be paid to plan participants are as follows:

 
| **Year**  | ** ** | **(In Thousands)** | ** ** |
|-----------|------------|--------------------|------------|
| 2005      |       | $                  | 171        |   |
| 2006      |       | 200                |       |
| 2007      |       | 203                |       |
| 2008      |       | 280                |       |
| 2009      |       | 326                |       |
| 2010-2014 |       | 2,954              |       |
| Total     |       | $                  | 4,134      |   |

 

40

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**NOTE J -WARRANTY LIABILITY**

 

The Company offers various product warrantiesfor hardware sold to its customers.  The specific terms and conditions ofthe warranties vary depending upon the customer and the product sold. Factors that affect the Company’s warranty liability include number of productssold, historical and anticipated rates of warranty claims and cost perclaim.  The Company accrues for estimated warranty costs as sales are madeand periodically assesses the adequacy of its recorded warranty liability andadjusts the amount as necessary.

 

Changes to the Company’s warranty liability,which is reported as a component of other accrued expenses and liabilities inthe accompanying condensed consolidated balance sheet during the year endedDecember 31, 2003 and 2004 are summarized as follows:

 
| ** **                                        | ** ** | **(In thousands)** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|
| Balance  at December 31, 2002                     |       | $                  | 139        |   |
|                                              |       |               |       |
| Warranties  issued                                |       | 75                 |       |
| Claims  paid/settlements                          |       | (74                | )          |
| Changes  in liability for pre-existing warranties |       | —             |       |
| Balance  at December 31, 2003                     |       | $                  | 140        |   |
|                                              |       |               |       |
| Warranties  issued                                |       | 199                |       |
| Claims  paid/settlements                          |       | (159               | )          |
| Changes  in liability for pre-existing warranties |       | —             |       |
| Balance  at December 31, 2004                     |       | $                  | 180        |   |

 

**NOTE K -COMMITMENTS AND CONTINGENCIES**

 

*Leases.* The Company leases certain sales and serviceoffice facilities and equipment under non-cancelable operating leases expiringthrough year 2010. Total Company rent expense for the years ended December 31,2004, 2003, and 2002 was $8.4 million, $7.9 million, and $8.9 million,respectively.

 

Futureminimum payments under non-cancelable operating leases, net of expectedsublease income of $0.3 million, $0.2 million, $0.2 million, and $0.2 millionfor 2005, 2006, 2007, and 2008, respectively, are as follows:

 
| **Year**   | ** ** | **(In thousands)** | ** ** |
|------------|------------|--------------------|------------|
| 2005       |       | $                  | 7,104      |   |
| 2006       |       | 5,518              |       |
| 2007       |       | 4,247              |       |
| 2008       |       | 3,260              |       |
| 2009       |       | 734                |       |
| Thereafter |       | 1,622              |       |
|       |       | $                  | 22,485     |   |

 

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

 

*Litigation.* A lawsuit captioned CerberusInternational, Ltd., et al. vs. BancTec, Inc., et al. (Case No. 03600287)was filed on January 28, 2003 in the Supreme Court of the State of New York forthe County of New York naming as defendants the Company and certain of itsaffiliates.  The complaint alleges that the Company improperly made apayment to the holder of the Sponsor Note and sought damages of not less than$89 million as a result of the alleged improper payment and the imposition of aconstructive trust on monies paid by the Company to the holder of the SponsorNote.  The Company’s $90 million payment to the holder of the Sponsor Notewas disclosed in the Company’s Current Report on Form 8-K dated November 27,2002.

 

On May 5, 2004, theSupreme Court granted the Company’s motion for summary judgment dismissing theplaintiffs’ complaint in its entirety. On or about November 8, 2004, the plaintiffs/appellants filed theirbrief with the appellate division of the New York Supreme Court.  On March 3, 2005, the Supreme Court of NewYork, Appellate Division affirmed the lower court’s decision in favor ofBancTec.

 

TheCompany and its subsidiaries are parties to various other legal proceedings.Although the ultimate disposition of such

 

41

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proceedingsis not presently determinable, in the opinion of the Company, any liabilitythat may ensue would not have a material adverse impact on the financialposition or results of operations or cash flows of the Company.

 

**NOTE L -BUSINESS SEGMENT DATA**

 

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

 

TheCompany has segmented its operations based on geographical U.S.Solutions (“USS”) and International Solutions (“INTL”), and product lines,Computer and Network Services (“CNS”).  INTL reporting includes both the U.S. andinternational operations of Plexus®products (“Plexus”).   For 2003 and 2004, CNS reporting includesstart-up service operations in Canada and Europe.

 

*USSolutions and International Solutions.* USS and INTL offer similar systems-integration and business-processsolutions and services and market to similar types of customers. These segmentsoffer similar systems integration and business process solutions and services,and market to similar types of customers. The solutions offered primarilyinvolve high-volume transaction processing using advanced technologies thatcapture, process and archive paper and electronic documents.  The Company’s powerful, high-volumeintegrated systems deliver important benefits to some of the world’s largestcredit card companies and major banks. In addition, these segments providetheir products and services to other customers, including financial servicescompanies and insurance providers, telecommunications companies, utilitycompanies, governmental agencies, and retail companies.   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.  Key applications provided by USS and INTLfocus around the following process services and solutions: (1) EnterpriseContent Management, (2) Image Capture, (3) Support Services, and (4) PaymentProcessing.

 

*Computerand Network Services.* CNSprovides quality integrated support services to the evolving InformationTechnology industry, with focused deployment and ongoing support solutions forthe OEM, Enterprise and Fortune marketplaces. CNS provides coverage in North America and Europe, and customers includeOEM providers, defense and aerospace companies, strategic outsourcingorganizations, and consumer electronics manufacturers.

 

Dataexcludes 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, 2004 |       |              |       |                                  |       |              |       |           |       |      |       |
|                                 |       |              |       |                                  |       |              |       |           |       |      |       |
| Revenue from external customers      |       | $                 | 109,950    |                                  | $          | 127,061           |       | $              | 123,715    |      | $          | — |   | $ | 360,726 |   |
| Intersegment revenues                |       | 3,063             |       | —                                |       | 8,683             |       | (11,746        | )          | —    |       |
| Segment gross profits                |       | 25,640            |       | 11,617                                |       | 43,779            |       | (614           | )          | 80,422    |       |
| Segment operating income (loss)      |       | 6,112             |       | 3,838                                 |       | 15,452            |       | (9,594         | )          | 15,808    |       |
| Segment identifiable assets          |       | 78,735            |       | 25,552                                |       | 55,418            |       | 56,360         |       | 216,065   |       |
| Capital appropriations               |       | 1,807             |       | 2,085                                 |       | 1,724             |       | 1,527          |       | 7,143     |       |
|                                 |       |              |       |                                  |       |              |       |           |       |      |       |
| For the year ended December 31, 2003 |       |              |       |                                  |       |              |       |           |       |      |       |
|                                 |       |              |       |                                  |       |              |       |           |       |      |       |
| Revenue from external customers      |       | $                 | 138,882    |                                  | $          | 128,209           |       | $              | 111,800    |      | $          | — |   | $ | 378,891 |   |
| Intersegment revenues                |       | 2,324             |       | —                                |       | 7,074             |       | (9,398         | )          | —    |       |
| Segment gross profits                |       | 31,962            |       | 19,337                                |       | 39,091            |       | 298            |       | 90,688    |       |
| Segment operating income (loss)      |       | 8,107             |       | 10,829                                |       | 12,973            |       | (8,039         | )          | 23,870    |       |
| Segment identifiable assets          |       | 82,384            |       | 21,116                                |       | 57,702            |       | 78,313         |       | 239,515   |       |
| Capital appropriations               |       | 2,103             |       | 1,607                                 |       | 3,966             |       | 2,443          |       | 10,119    |       |
|                                 |       |              |       |                                  |       |              |       |           |       |      |       |
| 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    |       |

 

42

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**NOTE M -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, 2004,2003 and 2002, 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, 2004                |       |               |       |                |       |                     |       |             |       |             |       |
| Sales to unaffiliated customers             |       | $                  | 234,908    |                | $          | 60,625                   |       | $                | 65,193     |             | $          | — |   | $ | 360,726 |   |
| Inter-area sales to affiliates              |       | 8,326              |       | 3,111               |       | 309                      |       | (11,746          | )          | —           |       |
| Long-lived assets other than deferred taxes |       | 97,409             |       | 3,185               |       | 7,826                    |       | (27,888          | )          | 80,532           |       |
|                                        |       |               |       |                |       |                     |       |             |       |             |       |
| Year ended December 31, 2003                |       |               |       |                |       |                     |       |             |       |             |       |
| Sales to unaffiliated customers             |       | $                  | 273,474    |                | $          | 51,881                   |       | $                | 53,536     |             | $          | — |   | $ | 378,891 |   |
| Inter-area sales to affiliates              |       | 7,521              |       | 1,281               |       | 596                      |       | (9,398           | )          | —           |       |
| Long-lived assets other than deferred taxes |       | 112,639            |       | 3,882               |       | 3,893                    |       | (24,206          | )          | 96,208           |       |
|                                        |       |               |       |                |       |                     |       |             |       |             |       |
| 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          |       |
|                                             |            |                    |            |                     |            |                          |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |

 

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

 
| ** **          | ** ** | **Year Ended December 31, 2004** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **Q1**                           | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| Revenue             |       | $                                | 89,084     |   | $ | 99,819 |   | $ | 83,117 |   | $ | 88,706 |   | $ | 360,726 |   |
| Gross profit (loss) |       | 19,344                           |       | 24,376 |   | 16,163 |   | 20,539 |   | 80,422 |   |
| Net income (loss)   |       | (792                             | )          | (1,679 | ) | (3,449 | ) | (11,367 | ) | (17,227 | ) |
|                     |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **          | ** ** | **Year Ended December 31, 2003** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **Q1**                           | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| Revenue             |       | $                                | 90,752     |   | $ | 97,043 |   | $ | 97,403 |   | $ | 93,693 |   | $ | 378,891 |   |
| Gross profit (loss) |       | 22,488                           |       | 24,883 |   | 24,040 |   | 19,277 |   | 90,688 |   |
| Net income (loss)   |       | (146                             | )          | 303 |   | 4,217 |   | 13,452 |   | 17,826 |   |
|                     |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

43

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**NOTE O -ACCUMULATED OTHER COMPREHENSIVE LOSS**

 

The components ofaccumulated other comprehensive loss is as follows:

 
| ** **                               | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------|------------|------------------------------|------------|
| ** **                               | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Foreign-currency translation adjustments |       | $                            | (4,443     | ) | $ | (6,020 | ) | $ | (7,434 | ) |
| Minimum pension liability                |       | (9,096                       | )          | (8,542 | ) | (2,387 | ) |
| Accumulated Other Comprehensive Loss     |       | $                            | (13,539    | ) | $ | (14,562 | ) | $ | (9,821 | ) |

 

For the year endedDecember 31, 2004, other comprehensive loss consisted of foreign-currencytranslation adjustments related to the Company’s international operations (again of $1.6 million) and minimum pension liability related to the Company’ssubsidiary in the United Kingdom ($0.6 million).

 

44

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**BANCTEC, INC.**

 

**INDEX TO FINANCIAL STATEMENTS AND SCHEDULES**

 

Financial Statements and Independent Registered Public Accounting Firm’sReport

 
| Reports  of Independent Registered Public Accounting Firm                                                    |   |
|--------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                         |   |
| Consolidated Balance Sheets  at December 31, 2004 and December 31, 2003                                      |   |
|                                                                                                         |   |
| Consolidated  Statements of Operations for the years ended December 31, 2004, 2003 and 2002                  |   |
|                                                                                                         |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                  |   |
|                                                                                                         |   |
| Consolidated  Statements of Stockholders’ Deficit for the years ended December 31, 2004,  2003 and 2002 |   |
|                                                                                                         |   |
| Consolidated  Statements of Comprehensive (Loss) Income                                                      |   |
|                                                                                                         |   |
| Notes to  Consolidated Financial Statements                                                                  |   |
|                                                                                                         |   |
| Supplemental  Schedules                                                                                      |   |
|                                                                                                         |   |
| Schedule  II-Valuation and Qualifying Accounts for the years ended December 31, 2004,  2003 and 2002         |   |

 

 

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

 

45

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**ITEM 9.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None.

 

**ITEM9A.  CONTROLS AND PROCEDURES**

 

During the audit of theCompany’s 2000 financial statements, the Company’s certifying accountant,Deloitte & Touche LLP (D&T) noted what D&T considered to bematerial weaknesses in internal-control design and in the operation of internalcontrols.  See Current Report on Form 8-Kfiled with the Securities and Exchange Commission on November 13, 2001 foradditional information regarding this item and the subsequent change in theCompany’s independent accountant.  TheCompany’s current independent accountant, KPMG, LLP (KPMG), also informallynoted certain internal-control weaknesses as a result of the 2001 audit, someof which are the same weaknesses as noted by D&T in their report.

 

The Company has addressedthe individual internal-control weaknesses noted by D&T and KPMG, andanalysis of internal control factors continues on an ongoing basis.  Steps that have been implemented to addressinternal-control weaknesses include policies covering loss contracts, inventoryreserves, allowance for doubtful accounts, revenue recognition, and project costing.  In addition, as a result of Exchange Act Rule13a-14, the Company has begun to put in place procedures addressing theadequacy of disclosure controls, including obtaining certifications from eachmember of management involved in the preparation and review of this Form 10-K.  The Company believes that it has implementedadequate controls and procedures for the preparation of this report.

 

Within the 90 days priorto the filing date of this report, the Chief Executive Officer and the ChiefFinancial Officer of the Company, with the participation of the Company’smanagement, continued to evaluate the effectiveness of the Company’s disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-14.  Based upon the evaluation completed to date,and the new procedures put in place, the Chief Executive Officer and the ChiefFinancial Officer believe that the Company’s disclosure controls and proceduresare effective in making known to them material information relating to theCompany (including its consolidated subsidiaries) required to be included inthis report.  The Company will continueto evaluate disclosure controls on an ongoing basis.

 

Disclosure controls andprocedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objectivesis affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment indecision-making can be faulty and that breakdowns in internal control can occurbecause of human failures such as simple errors or mistakes or intentionalcircumvention of the established process.

 

**Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect internal controls, known to the ChiefExecutive Officer or the Chief Financial Officer, subsequent to the date of theevaluation.**

** **

**ITEM 9B.  OTHER INFORMATION**

 

None

 

46

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**PART III**

 

**ITEM10.  DIRECTORS AND EXECUTIVE OFFICERS OFBANCTEC, INC.**

 

Thefollowing table sets forth the names, ages, and positions of each of thedirectors and executive officers of the Company as of April 8, 2005.

 

TheBoard of Directors elects executive officers annually. No family relationshipsexist among the directors or executive officers of the Company.  Except for traffic offenses or other minoroffenses, no director or executive officer has been convicted or named in acriminal proceeding during the past five years.

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                       |
|----------------------|------------|---------|------------|----------------------------------------------------|
| J.  Coley Clark      |       | 59      |       | President  and Chief Executive Officer             |
| Jeffrey  D. Cushman  |       | 43      |       | Senior  Vice President and Chief Financial Officer |
| Robert  A. Minicucci |       | 52      |       | Chairman  of the Board and Director                |
| Gary  J. Fernandes   |       | 61      |       | Director                                           |
| Eric  J. Lee         |       | 33      |       | Director                                           |
| Sanjay  Swani        |       | 38      |       | Director                                           |

 

Mr.Clark has been a director of the Company since March 2004 and Chief ExecutiveOfficer since September 2004, when he joined BancTec from EDS.  Mr. Clark retired from EDS in 2004 as aSenior Vice President and President of EDS Financial Global IndustrySolutions.  Mr. Clark is also director ofCarreker Corp., a provider of software solutions to the financial industry andFundsXpress, a software provider to the financial industry.

 

Mr.Cushman has been Senior Vice President and Chief Financial Officer sinceFebruary 18, 2005.  Mr. Cushmanjoined BancTec, Inc. in November 2004 as Vice President of Finance.  Mr. Cushman previously did strategicdevelopment work for Metromedia Fiber Network, Inc. and before joiningMetromedia, Mr. Cushman was the Chief Financial Officer, Senior Vice President,Secretary and Treasurer for GroceryWorks, Inc and Evercom, Inc.  Prior to this time, Mr. Cushman was Directorof Business Development at Electronic Data Systems Corporation, after holding anumber of financial positions, including Group Financial Officer, Controller,and Financial Manager & Supervisor.

 

Mr.Minicucci has been a director of the Company since July 1999. Mr. Minicuccialso serves as a Managing Member of WCAS VIII Associates LLC, the generalpartner of Welsh, Carson, Anderson & Stowe VIII, L.P. (a private investmentcompany) and as a director of Amdocs Limited (a telecom customer care andbilling software and services company). Mr. Minicucci has served as a GeneralPartner of Welsh, Carson, Anderson & Stowe since 1993.

 

Mr.Fernandes has been a director of the Company since March 2003.  Mr. Fernandes retired as Vice Chairmanof Electronic Data Systems Corporation (EDS), a global services company, in1998, after serving on the Board of Directors of EDS since 1981.  After retiring from EDS, Mr. Fernandesfounded Convergent Partners, a venture-capital fund focusing on buyouts oftechnology-related companies.  He alsoserved as Chairman and CEO of GroceryWorks, Inc, an internet grocery-fulfillmentcompany until 2001.  He currently serveson the Boards of Directors of 7-Eleven, Inc., a worldwide operator, franchisorand licensor of convenience stores, webMethods, Inc., a software-integrationcompany listed on NASDAQ, and Anacomp, Inc. Mr. Fernandes is currently the Chairman and President of FLF Real EstateVentures.

 

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

 

Mr.Swani has been a director of the Company since December 2000. Mr. Swani joinedWelsh, Carson, Anderson & Stowe in July 1999 and became a General Partnerin October 2001. Mr. Swani also served as a principal of Fox Paine &Company (a San Francisco-based buyout firm) from June 1998 to June 1999 andworked in the mergers and acquisitions department of Morgan Stanley & Co.(a global financial services firm) from August 1994 to June 1998. Mr. Swani isalso a director of Global Knowledge Networks, Inc. and ValorTelecommunications, LLC.

 

47

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## *Audit Committee*

## * *

On March 15, 2005, theAudit Committee consisted of Sanjay Swani,Eric J. Lee, and Gary J. Fernandes.  Nomember of the Audit Committee was an officer of the Company.  No member of the Audit Committee was formerlyan officer of the Company.

 

## *Code of BusinessConduct and Ethics*

## * *

The Company has adopted aCode of Business Conduct and Ethics that applies to all of the Company’sdirectors, officers and employees, including its principal executive officer,principal financial officer, principal accounting officer and controller. TheCode is posted on the Company’s website at www.banctec.com. The Company intendsto disclose any amendments to the Code by posting such amendments on itswebsite. In addition, any waivers of the Code for directors or executive officersof the Company will be disclosed in a report on Form 8-K.

 

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

## * *

Notapplicable.

 

**ITEM 11. EXECUTIVECOMPENSATION**

 

**SummaryCompensation Table**

 

Thefollowing table sets forth certain information regarding compensation earnedduring the fiscal years ended December 31, 2004, 2003 and 2002, by theCompany’s Chief Executive Officer and each of the Company’s other most highlycompensated executive officers earning in excess of $100,000 per year (basedupon salary and bonus earned during the fiscal year ended December 31, 2004).

 

 
| ** **                         | ** ** | ** **       | ** ** | ** **              | ** ** | **Long Term Compensation Awards** | ** ** |
|------------------------------------|------------|------------------|------------|-------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | ** **       | ** ** | **Annual Compensation** | ** ** | **Restricted**                    | ** ** | **Securities  underlying** | ** ** | **All Other** | ** ** |
| **Name and Principal Position(s)** | ** ** | **Fiscal  Year** | ** ** | **Salary($)**           | ** ** | **Bonus  ($) (1)**                | ** ** | **Stock  Awards($)** | ** ** | **options  (#) (2)** | ** ** | **Compensation  ($) (3)** | ** ** |
| J. Coley Clark                     |       | 2004             |       | $                       | 128,077    |                              | 0          |   | 0 |   | 1,050,000 |   | 0 |   |
| President and Chief                |       | 2003             |       | 0                       |       | 0                                 |       | 0 |   | 0 |   | 0 |   |
| Executive Officer                  |       | 2002             |       | 0                       |       | 0                                 |       | 0 |   | 0 |   | 0 |   |
|                               |       |             |       |                    |       |                              |       |   |   |   |   |   |   |
| Jeffrey D. Cushman                 |       | 2004             |       | 46,154                  |       | 0                                 |       | 0 |   | 0 |   | 0 |   |
| Senior Vice President and          |       | 2003             |       | 0                       |       | 0                                 |       | 0 |   | 0 |   | 0 |   |
| Chief Financial Officer            |       | 2002             |       | 0                       |       | 0                                 |       | 0 |   | 0 |   | 0 |   |
|                               |       |             |       |                    |       |                              |       |   |   |   |   |   |   |
| Craig D. Crisman (4)               |       | 2004             |       | 369,630                 |       | 134,215                           |       | 0 |   | 0 |   | 157,289 |   |
| President and Chief                |       | 2003             |       | 450,000                 |       | 158,063                           |       | 0 |   | 0 |   | 0 |   |
| Executive Officer                  |       | 2002             |       | 432,675                 |       | 357,563                           |       | 0 |   | 0 |   | 0 |   |
|                               |       |             |       |                    |       |                              |       |   |   |   |   |   |   |
| Brian R. Stone (5)                 |       | 2004             |       | 336,415                 |       | 22,679                            |       | 0 |   | 0 |   | 0 |   |
| Senior Vice President and          |       | 2003             |       | 325,000                 |       | 114,156                           |       | 0 |   | 0 |   | 0 |   |
| Chief Financial Officer            |       | 2002             |       | 310,831                 |       | 255,612                           |       | 0 |   | 0 |   | 0 |   |
|                                    |            |                  |            |                         |            |                                   |            |  |  |  |  |  |  |  |

 

----

(1) Reflects bonus earned during each fiscal year.

 

(2)Amount represents options to purchase 1,050,000 shares of our commonstock granted September 14, 2004.

 

(3) Includes cash compensation received for severancepayments to Mr. Crisman (2004).

 

(4) Mr. Crisman served as President and ChiefExecutive Officer from May 2001 to September 2004 and Director from September2004 to April 7, 2005.  Mr. Crismanterminated employment effective September 9, 2004.

 

(5) Mr. Stone serviced as Senior Vice President andChief Financial Officer from May 2001 to February 2004.  Mr. Stone

 

48

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terminatedemployment effective February 18, 2004.

 

**OptionGrants in 2004**

 

During2004, Mr. Clark was granted a total of 1,050,000 options.

 

**AggregatedOption Exercises in 2004 and Fiscal Year-End Option Values**

 

No options were exercisedby any named executive officer in 2004. The following table provides information related to the number and valueof options held by the named executive officers at the end of 2004.

 
| ** **         | ** ** | **Shares**                    | ** ** | **Value**         | ** ** | **Number of Unexercised  Options at Fiscal Year-End** | ** ** | **Value of Unexercised In-  the-Money Options at Fiscal  Year-End** | ** ** |
|--------------------|------------|-------------------------------|------------|-------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **Name**           | ** ** | **Acquired on  Exercise (#)** | ** ** | **Realized  ($)** | ** ** | **Exercisable  (#)**                                  | ** ** | **Unexercisable  (#)**                                              | ** ** | **Exercisable  ($)** | ** ** | **Unexercisable  ($)** | ** ** |
| J. Coley Clark     |       | 0                             |       | 0                 |       | 0                                                     |       | 1,050,000                                                           |       | 0 |   | 0 |   |
| Jeffrey D. Cushman |       | 0                             |       | 0                 |       | 0                                                     |       | 0                                                                   |       | 0 |   | 0 |   |
| Craig D. Crisman   |       | 0                             |       | 0                 |       | 0                                                     |       | 0                                                                   |       | 0 |   | 0 |   |
| Brian R. Stone     |       | 0                             |       | 0                 |       | 0                                                     |       | 0                                                                   |       | 0 |   | 0 |   |

 

**Compensationof Directors**

 

During2004, director’s fees of $10,000 were paid to Mr. Clark for his service on theboard of directors prior to becoming Chief Executive Officer.  The Company has no standard arrangementsunder which director’s receive compensation, and no other directors fees werepaid during 2004.

 

**EmploymentAgreements**

 

TheCompany does not have any employment agreements with any named officers.

 

**CompensationCommittee and Option Committee Interlocks and Insider Participation**

 

FromJanuary 1, 2002 through December 31, 2004, the Compensation Committee wascomposed of Robert A. Minicucci.

 

FromJanuary 1, 2002 through December 31, 2004, the Option Committee was composed ofRobert A. Minicucci.

 

Nomember of the Compensation Committee or the Option Committee was an officer oremployee of the Company. No member of the Compensation Committee or the OptionCommittee was formerly an officer of the Company.

 

### **REPORT OF THE COMPENSATION COMMITTEE**

### ** **

**Compensation Policy and ExecutiveCompensation. **Theexecutive compensation program is designed to attract, motivate, reward andretain the executive officers needed to achieve the Company’s businessobjectives, to increase profitability and to provide value to the stockholders.The program has been structured and implemented to provide competitivecompensation opportunities and various incentive awards based on company andindividual performance. The executive compensation program is composed of threeprincipal components: base salary, short-term incentive awards and long termincentive awards.

 

**Base Salary.**  The base salary for each executive officer isdetermined at levels considered appropriate for comparable positions at similarcompanies.

 

**Short-Term Incentive Awards.**  To reinforce the attainment of Company goals,the Committee believes that a substantial portion of the annual compensation ofeach executive officer should be in the form of variable incentive pay.   The Company maintains an incentive planunder which the executive officers may earn an award as a percentage of theirbase compensation, if the Company meets the EBITDA profit objective set by theCompensation Committee at the beginning of the fiscal year.

 

**Long-Term Incentive Awards. **Under the 2000 Plan, stockoptions are awarded based on an individual’s level of responsibility within hisor her area, such individual’s executive development potential and competitivemarket norms. Options granted under the 2000 Plan are granted at the fairmarket value of the stock on the date of grant.

 

49

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**2004 Total Compensation for theChief Executive Officer. **J. Coley Clark*.*WhenMr. Clark became the company’s Chief Executive Officer in September 2004,the Committee designed a compensation plan which was consistent with thatprovided to the company’s other executive officers. Although a significantportion of Mr. Clark’s potential future compensation consists of bonusplan payments based on company performance, the Committee did not rely entirelyon predetermined formulas or a limited set of criteria when it determined thecompensation of the company’s Chief Executive Officer.

 

The Committee designed a compensation packagefor Mr. Clark that provided a competitive salary with the potential ofsignificant bonus plan compensation in the event the company performed wellunder his leadership. For 2004, Mr. Clark’s annual salary level as ChiefExecutive Officer was $450,000 with no bonus compensation paid in 2004.

 

50

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**ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Thefollowing table sets forth certain information as of March 15, 2005 regardingthe ownership of Common Stock, Class A Common Stock, and Preferred Stock of:(1) each person who is known by the Company to be the beneficial owner of morethan five percent of the outstanding shares of the named class of Stock; (2)each director of the Company; (3) each executive officer named in the SummaryCompensation Table; and (4) all executive officers and directors of the Companyas a group. Percentage of ownership is based on 17,003,838 shares of CommonStock and 1,181,946 shares of Class A Common Stock (both issued and outstandingat March 15, 2004), 100,667 shares of Series A Preferred Stock (Preferred A),and 35,520 shares of Series B Preferred Stock (Preferred B) outstanding as ofMarch 15, 2004.   The assumed exercise ofthe Series A Preferred warrants (“Series A Warrants”) and the assumedconversion of the Series B Preferred (“Series B Conversion Rights”) results in750,000 and 640,000 additional shares, respectively, of Common Stock.Additionally, the assumed exercise of options results in 185,150 additionalshares of Common Stock. Included in the Number of Shares Beneficially Owned areshares attributable to stock options, stock warrants, and conversion rightsthat are exercisable as of, or will be exercisable within 60 days after, March15, 2005.

 
| **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                                         | %          |
|                                               |       |                            |       |                                                |       |                                          |       |
| Murray Holland(12)                                 |       | Common                          |       | 19,575,784                                          |       | 100.0                                         | %          |
| 100 Crescent Court, Suite 230                      |       | Preferred  A                    |       | 100,667                                             |       | 100.0                                         | %          |
| Dallas, TX 75201                                   |       | Preferred  B                    |       | 35,520                                              |       | 100.0                                         | %          |
|                                               |       |                            |       |                                                |       |                                          |       |
| Sanjay Swani(13)                                   |       | Common                          |       | 19,575,784                                          |       | 100.0                                         | %          |
| 320 Park Avenue, Suite 2500                        |       | Preferred  A                    |       | 100,667                                             |       | 100.0                                         | %          |
| New York, NY 10022                                 |       | Preferred  B                    |       | 35,520                                              |       | 100.0                                         | %          |
|                                               |       |                            |       |                                                |       |                                          |       |
| Craig D. Crisman(14)                               |       | Common                          |       | 19,575,784                                          |       | 100.0                                         | %          |
| 2701 E. Grauwyler                                  |       | Preferred  A                    |       | 100,667                                             |       | 100.0                                         | %          |
| Irving, TX 75061                                   |       | Preferred  B                    |       | 35,520                                              |       | 100.0                                         | %          |
|                                               |       |                            |       |                                                |       |                                          |       |
| J. Coley Clark                                     |       | Common                          |       | 0                                                   |       |                                          | *          |
| 2701 E. Grauwyler                                  |       | Preferred  A                    |       | 0                                                   |       |                                          | *          |
| Irving, TX 75061                                   |       | Preferred  B                    |       | 0                                                   |       |                                          | *          |
|                                               |       |                            |       |                                                |       |                                          |       |
| Jeffrey D. Cushman                                 |       | Common                          |       | 0                                                   |       |                                          | *          |
| 2701 E. Grauwyler                                  |       | Preferred  A                    |       | 0                                                   |       |                                          | *          |
| Irving, TX 75061                                   |       | Preferred  B                    |       | 0                                                   |       |                                          | *          |
|                                               |       |                            |       |                                                |       |                                          |       |
| All executive officers and directors as a group    |       | Common                          |       | 19,575,784                                          |       | 100.0                                         | %          |
| (6 persons)                                        |       | Preferred  A                    |       | 100,667                                             |       | 100.0                                         | %          |
|                                               |       | Preferred  B                    |       | 35,520                                              |       | 100.0                                         | %          |

 

51

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*                 Less than 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)          100,000 shares of Series A Preferred includes a warrant to purchasebetween 2.5 and 7.75 shares of Common Stock. Common Stock exercisable by thewarrants totals 750,000 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.

(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 VIII.

(11)    Mr. Fernandesholds a minority interest in BancTec Upper-Tier Holding, LLC. Mr. Fernandesdisclaims beneficial ownership of such shares.

(12) Mr. Holland holds a minority interest in BancTecUpper-Tier Holding, LLC. Mr. Holland disclaims beneficial ownership of suchshares.

(13)    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.

(14) Mr. Crisman holds a minorityinterests in BancTec Upper-Tier Holding, LLC. Mr. Crisman disclaims beneficial ownership of such shares.

 

**ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

None.

 

**ITEM14.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

KPMG LLP, and their respective affiliates(collectively, the “KPMG Entities”) have been retained as the company’sindependent auditors for the 2004 fiscal year. The following table presents theaggregate fees billed by the KPMG Entities, for services provided during 2003and 2004:

 

| ** **          | ** ** | **2003(3)(4)**     | ** ** | **2004(3)(4)** | ** ** |
|---------------------|------------|--------------------|------------|----------------|------------|
| ** **          | ** ** | **(in thousands)** | ** ** |
| Audit  Fees (1)     |       | $                  | 515        |           | $          | 832 |   |
| Audit-Related  Fees |       | —             |       | —         |       |
| Tax  Fees (2)       |       | 1,330              |       | 517            |       |
| All  Other Fees     |       | 9                  |       | —         |       |
| Total               |       | $                  | 1,854      |           | $          | 1,349 |   |

 

----

| (1)    |   | Audit fees consisted of  audit work performed in the preparation of the financial statements, as well  as work that generally only the independent auditor can reasonably be  expected to provide, such as statutory audits and reviews of interim  financial information.                                                                                                                                                                                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (2)    |   | Tax fees consist  principally of assistance related to tax compliance and reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (3)    |   | All audit and  audit-related fees were approved by the Audit Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (4)    |   | The Audit Committee  approves in advance all audit services, audit-related services and  tax-related services provided by the Company’s independent public  accountants. Pursuant to the pre-approval policy adopted by the Board of  Directors in 2003, the Audit Committee also approves all other services  provided by the independent public accountants in advance on a case-by-case  basis. All engagements of the independent public accountants in 2003 and 2004  were pre-approved pursuant to the policy. |

 

52

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**PART IV**

 

**ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

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

 

(b)         Reports onForm 8-K:

 

The Company filed aCurrent Report on Form 8-K dated September 9, 2004, regarding the terminationof Craig D. Crisman as Chief Executive Officer and the appointment of J. ColeyClark as Chief Executive Officer.

 

(c)          Exhibits:

 

3.1— Amended and Restated Certificate of Incorporation, incorporated by referenceto Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

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 to Exhibit 10.1 to theCompany’s Current Report on Form 8-K filed as of November 27, 2002.

 

10.14– Fifth Amendment to Loan and Security Agreement, dated as of May 7, 2003,between Heller Financial, Inc. and BancTec, Inc., incorporated by reference toExhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the periodended March 31, 2003.

 

10.15 –Sixth Amendment to Loan and Security Agreement, dated as of September 1, 2003,between Heller Financial, Inc. and BancTec, Inc., incorporated by reference toExhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the periodended September 30, 2003.

 

10.16— Certificate of Designations, Preferences and Rights of Series A and BPreferred Stock, dated March 31, 2004.

 

10.17 – Loan and SecurityAgreement—Waiver and Consent, dated as of August 9, 2004, between HellerFinancial, Inc. and BancTec, Inc.

 

10.18 – Loan and SecurityAgreement – December 31, 2004 Amendment to Paragraph B of Financial CovenantsRider to Loan and Security Agreement, dated as of December 31, 2004, betweenHeller Financial, Inc. and BancTec, Inc.

 

21.1— Subsidiaries of Registrant

 

31.1— Certificate of Chief Executive Officer pursuant to Rule 15d-14(a)under the Securities Exchange Act.

 

31.2— Certificate of Chief Financial Officer pursuant to Rule 15d-14(a)under the Securities Exchange Act.

 

32.1 – Certificate ofChief Executive Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under theSarbanes-Oxley Act.

 

32.2 – Certificate ofChief Financial Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under theSarbanes-Oxley Act.

 

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**SCHEDULE II**

 

**BANCTEC, INC.**

 

**VALUATION AND QUALIFYING ACCOUNTS**

 

Forthe Years Ended December 31, 2004, 2003 and 2002

 
| **Column A**                    | ** ** | **Column B**                         | ** ** | **Column C**                                   | ** ** | **Column D**              | ** ** | **Column E**                   | ** ** |
|---------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **Balance at  beginning of  period** | ** ** | **Additions  charged to  costs and  expenses** | ** ** | **Deductions****(a) (b)** | ** ** | **Balance at  end of  period** | ** ** |
| Allowance for Doubtful Accounts |       |                                 |       |                                           |       |                      |       |                           |       |
| Year ended December 31, 2004    |       | $                                    | 1,126      |                                           | $          | (229                      | )          | $                              | (34        | )(a) | $ | 931 |   |
| Year ended December 31, 2003    |       | 2,216                                |       | (999                                           | )          | (91                       | )(a)       | 1,126                          |       |
| Year ended December 31, 2002    |       | 7,636                                |       | (5,215                                         | )          | (205                      | )(a)       | 2,216                          |       |
|                            |       |                                 |       |                                           |       |                      |       |                           |       |
| Reorganization Accrual          |       |                                 |       |                                           |       |                      |       |                           |       |
| Year ended December 31, 2004    |       | $                                    | —     |                                           | $          | —                    |       | $                              | —     |  (b) | $ | — |   |
| Year ended December 31, 2003    |       | —                               |       | —                                         |       | —                    |  (b)  | —                         |       |
| Year ended December 31, 2002    |       | 48                                   |       | —                                         |       | (48                       | )(b)       | —                         |       |

 

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(a)          Write-offof uncollectible accounts.

(b)         Severanceand related payments.

 

55

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**SIGNATURES**

 

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

 

**BancTec, Inc.**

 

 
| * * | * * | *By*   | */s/ J.  Coley Clark*                    |   |
|----------|----------|--------|------------------------------------------|--------|
|     |     |   | *J. Coley  Clark*                        |
|     |     |   | *President  and Chief Executive Officer* |
|          |          |        |                                          |        |  |

 

 

Dated:April 8, 2005

 

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/ J. Coley Clark          |       | President  and Chief Executive Officer (Principal Executive Officer); and Director                           |       | April  8, 2005 |
|   J. Coley Clark       |
|                        |       |                                                                                                         |       |           |
| /s/ Jeffrey D. Cushman      |       | Senior  Vice President, Chief Financial Officer, and Treasurer (Principal Accounting  Officer); and Director |       | April  8, 2005 |
|   Jeffrey D.  Cushman  |
|                        |       |                                                                                                         |       |           |
| /s/ Robert A. Minicucci     |       | Chairman  of the Board and Director                                                                          |       | April  8, 2005 |
|   Robert A.  Minicucci |       |                                                                                                         |       |           |
|                        |       |                                                                                                         |       |           |
| /s/ Eric J. Lee             |       | Director                                                                                                     |       | April  8, 2005 |
|  Eric J. Lee           |       |                                                                                                         |       |           |
|                        |       |                                                                                                         |       |           |
| /s/ Gary J. Fernandes       |       | Director                                                                                                     |       | April  8, 2005 |
|   Gary J.  Fernandes   |       |                                                                                                         |       |           |
|                        |       |                                                                                                         |       |           |
| /s/ Sanjay Swani            |       | Director                                                                                                     |       | April  8, 2005 |
|   Sanjay Swani         |       |                                                                                                         |       |           |
|                        |       |                                                                                                         |       |           |
| /s/ Craig D. Crisman        |       | Director                                                                                                     |       | April  8, 2005 |
|   Craig D.  Crisman    |       |                                                                                                         |       |           |

 

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