** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-K**

** **

**(Mark One)**

**ý****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Fiscal Year Ended December 31,2003**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 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) 579-6000**                                                |
| (Registrant’s telephone number,  including area code)        |
|                                                              |   |                                  |
| Securities  registered pursuant to Section 12(b) of the Act: |
|                                                              |   |                                  |
| **None**                                                          |
|                                                              |
| Securities  registered pursuant to Section 12(g) of the Act: |
|                                                              |
| **None**                                                          |

** **

Indicate by check mark 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)has been subject to such filing requirements for the past 90 days. Yes: ý No: o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor 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 oNO 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, 2004** |
|----------------------------------------|--------|-----------------------------------------------------------|
| 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, 2003

 

**FORWARD-LOOKINGSTATEMENTS**

 

*ThisAnnual Report on Form 10-K, including Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in Item 7 and Quantitative andQualitative Disclosure About Market Risk in Item 7A, contains forward-lookingstatements as that term is defined in the Private Securities Litigation ReformAct of 1995 (the “PSLRA”) that involve risks and uncertainties, as well asassumptions that, if they never materialize or prove incorrect, could cause theresults of BancTec, Inc. and its consolidated subsidiaries (the “Company”) todiffer materially from those expressed or implied by such forward-lookingstatements. All statements other than statements of historical fact arestatements that could be deemed forward-looking statements, including anyprojections of earnings, revenues, or other financial items; any statements ofthe plans, strategies, and objectives of management for future operations; anystatements concerning proposed new products, services, or developments; anystatements regarding future economic conditions or performance; statements ofbelief and any statement of assumptions underlying any of the foregoing. Therisks, uncertainties and assumptions referred to above include the ability ofthe Company to retain and motivate key employees; the timely development,production and acceptance of products and services and their feature sets; thechallenge of managing asset levels, including inventory; the flow of productsinto third-party distribution channels; the difficulty of keeping expensegrowth at modest levels while increasing revenues; and other risks that aredescribed from time to time in the Company’s Securities and Exchange Commissionreports, including but not limited to the items discussed in Factors Affectingthe Company’s Business and Prospects set forth in Management’s Discussion andAnalysis of Financial Condition and Results of Operations in Item 7 below inthis report, and items described in the Company’s other filings with theSecurities and Exchange Commission. The Company assumes no obligation to updatethese forward-looking statements.*

 

TABLE OF CONTENTS

 
| PART I    |                                                                                             |
|-----------|--------------------------------------------------------------------------------------------------|
| ITEM 1.   | Business                                                                                         |   |
| ITEM 2.   | Properties                                                                                       |   |
| ITEM 3.   | Legal  Proceedings                                                                               |   |
| ITEM 4.   | Submission  of Matters to a Vote of Security Holders                                             |   |
| PART II   |                                                                                             |
| ITEM 5.   | Market  for Registrant’s Common Equity and Related Stockholder Matters                      |   |
| ITEM 6.   | Selected  Financial Data                                                                         |   |
| ITEM 7.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |   |
| ITEM  7A. | Quantitative  and Qualitative Disclosure About Market Risk                                       |   |
| ITEM 8.   | Financial  Statements and Supplementary Data                                                     |   |
| ITEM 9.   | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure            |   |
| 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

 

**PART I**

** **

**ITEM 1.****BUSINESS.**

 

**Overview**

 

BancTec, Inc. (BancTec or the Company), aDelaware corporation, is a worldwide systems integration and services companythat delivers solutions that address complex data and paper-intensive workprocesses. The Company provides comprehensive solutions by combining advancedweb-enabled imaging and workflow technologies with both BancTec-manufacturedequipment and third-party equipment. These solutions are subsequentlymaintained and supported by the Company’s service operations. The Company isalso a leading provider of personal computer maintenance services for majorcomputer companies, government and corporate customers. Worldwide, the Companyemploys approximately 3,100 people full-time and is headquartered in Irving,Texas. 

 

Founded in 1972, the Company operatesworldwide serving approximately 1,500 customers in over 20 countries, withinternational revenue in 2003 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”), aprivate investment partnership and Convergent Equity Partners, L.P.(“Convergent”), a private investment partnership, formed Colonial AcquisitionCorp., (“Colonial”) with WCAS owning 93.5% and Convergent owning 6.5%. Throughthe merger of Colonial into BancTec, WCAS acquired 17,003,838 shares ofBancTec’s common stock and Convergent acquired 1,181,946 shares of BancTec’sClass A common stock. In connection with the recapitalization, each previouslyoutstanding share of BancTec common stock was converted into the right toreceive $18.50 in cash, totaling approximately $360.2 million, andsimultaneously canceled. Funding for the distribution to the former BancTec stockholderswas provided by a $145.0 million capital contribution from WCAS and Convergent,by the Tranche A Term Loan, the Sponsor Note, and the Revolving CreditFacility.  In addition to the funds thatwere paid for the shares, cash payments were made for employee stock options of$9.3 million and an employee stock purchase plan of $0.3 million. The optionsand the employee stock purchase plan payments were recorded as a reduction tostockholders’ equity.  WCAS also ownedSeries A preferred stock (“Series A Preferred”) which included warrants, andSeries B preferred stock (“Series B Preferred”) which included conversionrights.

** **

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, all the outstandingcapital stock of the Company and warrants to purchase capital stock of theCompany (but not employee stock options) are held by BancTec IntermediateHolding, Inc., a Delaware corporation (“Intermediate Holding”).  In turn, all the outstanding capital stockof Intermediate Holding is held by BancTec Upper-Tier Holding, LLC, a Delawarelimited liability company (“Upper-Tier Holding”), whose members consist of theprior owners of all the outstanding capital stock of the Company and seniormanagement of the Company (or entities controlled by them).  As part of 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 isone of the largest private equity firms in the U.S. and the largest in theworld focused exclusively on investments in the healthcare services, informationand business services, and communications services industries.  Since its founding in 1979, WCAS hasorganized 12 private investment partnerships with total capital of more than$11 billion and has completed over 200 management buyouts and initialinvestments.  The firm currently investsout of Welsh, Carson, Anderson & Stowe IX, L.P., a $3.8 billion equityfund.  WCAS was the founding investor ofUS Oncology, Inc. in 1992.

 

**Productsand Markets**

** **

**U.S.Solutions and International Solutions**. U.S. Solutions (“USS”) and InternationalSolutions (“INTL”) offer similar systems integration and business processsolutions and services, and market to similar types of customers. The solutionsoffered primarily involve high-volume transaction processing using advancedtechnologies that capture, process and archive paper and electronic documents.Key applications include payment and check processing, document imaging andworkflow, as well as related ongoing service and support. The Company’spowerful, high-volume integrated systems deliver important benefits to some ofthe world’s largest credit card companies and major banks. In addition, thesesegments provide their products and services to other customers, includingfinancial services companies and insurance providers, telecommunicationscompanies, utility companies, governmental agencies, and transportation firms. 

 

The Company combines its extensive businessapplication knowledge with a full range of software and equipment offerings forcomplex transaction processing environments. The Company’s integrated systemsgenerally incorporate advanced

 

3

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applicationssoftware developed by the Company and by third parties. These solutions mayalso include hardware developed and manufactured by the Company as well as bythird parties. USS and INTL offer the following process services and solutions:

 

**Paymentand Check Processing Solutions. **The Company offers aline of payment and check processing solutions that encompass both hardware andsoftware components.  The Company’s image software systems capture,digitize, analyze, process and archive checks and other documents, includingutility, telephone, retail and credit card bills, mortgage coupons, salesdrafts, prescriptions, airline tickets, tax notices and other documents. Theseimaging systems are also used by banks for high volume check-processingapplications such as proof-of-deposit, reject repair and image statementpreparation.  The Company’s financialdocument imaging products utilize an open-systems architecture platform, whichenables customers to add industry-standard hardware and software components toimprove processing capabilities.  The Company also manufactures low,medium, and high-speed document reader/sorters and related components that readmagnetic ink character recognition and optical character recognition data fromfinancial documents and sort the documents according to establishedpatterns.  The hardware components aresold by the company as a bundled solution with software or separately.

** **

**ElectronicDocument Management (EDM) Solutions**.  TheCompany’s EDM business offers a complete suite of internet-enabled documentimaging software and hardware solutions. The Company’s software products, marketed under the eFIRST brand, aredesigned for high-volume, complex and distributed environments designed toimprove accessibility to the data and reduce access time.  eFIRST Capture**provides a softwaresolution to capture, sort and process all types of paper and electronicdocuments with minimal operator intervention. Any structured or unstructured document can be automatically classifiedand processed, including general correspondence and preprinted documents, suchas applications forms, invoices, information requests, and letters.  These products can be implemented on a stand-alone basis or incorporatedwith the Company’s hardware.  TheCompany’s high-speed, full-page scanners utilize photo-optical technology,color and gray scale image capture capabilities, character recognition softwareand high precision document transports to scan and digitize mixed businessdocuments such as invoices, statements and business forms.

** **

**Deliveryand Maintenance of the Company’s Products**. The Company installs and provides maintenanceand support services for its own hardware and software products, as well asthird-party hardware, including document reader/sorters, scanners and softwareproducts / solutions. The Company employs customer service engineers located inthe United States and International locations to perform such service. TheCompany’s maintenance contracts usually include both parts and labor, and thecontracts are typically renewed for five to seven years. 

 

**Peripheral Supplies and Products**.  TheCompany markets a full range of consumable supplies that complement theCompany’s document processing systems. The Company also manufactures andmarkets microfilm cameras, image cameras, MICR encoders, ink jet components andvarious peripheral equipment.

 

**Computerand Network Services**. The Company is a leading provider of personal computer repair servicesin North America and Europe.  TheCompany provides such services to many companies, including Fortune 1000companies, and consumers. Computer and Network Services (“CNS”) is structuredaround the following three customer areas: 

 

**Strategic alliances, including outsource andsystem integration partners**. The Company enters into strategic alliances to establish and maintainpartnerships with industry-recognized providers of outsourcing services as wellas with system integrators who offer specific support to their customer base.The partnerships with these organizations enable CNS to provide servicesconsistent with its core competencies for desktop/enterprise applications,while enabling the strategic alliance partners to focus on program managementand specific services. 

 

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

 

**Fortune and retail market accounts**. The Fortune and retail accounts group servesthose customers that have support needs consistent with CNS’ core competenciesin desktop/enterprise applications while leveraging the nationwide

 

4

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service organization. Typical customersrequire national service in order to support their various sites. Agreementswith these customers require flexibility to manage support needs ranging fromhigh-priority mission-critical systems to office automation with lower-prioritysupport requirements. 

 

**InformationAbout 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.  TheCompany reports its operations as three primary segments, US Solutions (“USS”),International Solutions (“INTL”), and CNS. The operations of USS and INTLinclude manufacturing and supplies, maintenance of Company-manufactured andrelated products, integrated systems, and Plexus products. The CNS operationsinclude personal computer repair services and administration of third-partyextended-service contracts.  INTLreporting includes both US and International operations of Plexus products.

 

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.

 

**GeographicalLocations**

 

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.

 

**ProductDevelopment**

 

The Company is engaged in ongoing softwareand hardware product development activities for both new and existing products,employing approximately 102 people for such activities as of December 31,2003. 

 

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

 
|                         |   | **For the years ended December 31,** |   |
|------------------------------|--------|-------------------------------------------|--------|
|                         |   | **2003**                                  |   | **2002** |   | **2001** |   |
|                         |   | **(dollars in thousands)**                |   |
|                         |   |                                      |   |   |   |   |   |
| Product Development Expenses |   | $                                         | 12,548 |   | $ | 15,984 |   | $ | 15,926 |   |
| Percent of Total Revenue     |   | 3.3                                       | %      | 4.2 | % | 3.7 | % |
|                              |        |                                           |        |  |  |  |  |  |  |  |

 

Currentexpenditures are concentrated on developing new applications for the Company’sproduct lines and improving and expanding existing products. The Company iscurrently focusing on payment, check and document processing technology,Electronic Document Management (“EDM”) solutions and significant hardware enhancements.There can be no assurance that the Company’s development efforts will result insuccessful commercial products. Many risks exist in developing new productconcepts, adapting new technology and introducing new products to the market.

 

*Electronic DocumentManagement.*BancTec’s EDM business is organized around the creation of a set of high-levelreusable components that form the basis of vertical solutions for specificmarkets. The three core modules in the eFIRSTTM suite of solutions, genericcapture system (eFIRST Capture), business process automation (eFIRST Process),and archiving (eFIRST Archive), can be integrated within the same environmentand expanded. 

 

eFIRST Capture recognizes data from many types of interaction such ase-mail, web, scanned documents, faxes and web-forms, andextracts useful data previously thoughtunsuitable for such purposes as general correspondence, non-standard invoicesand delivery notes. 

 

eFIRST Process provides a technology platform and user tools toconstruct workflows, data views, user environments and access permission modelsthat draw in existing systems and people to automate business processes. 

 

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

* *

*Payments Products*. The Company’s Payments products have beenexpanded to include a refreshed Wholesale System to replace the legacy systemthat has been installed in a number of clients for over 12 years. In parallel,the Company is integrating this new system with eCAP, which is the ‘Check andList ‘ product for automatically capturing invoice data from semi-structuredforms. 

* *

*HardwareEnhancements.* In2004, the Company plans to complete the development of the DocuScan system andimprove the reliability of the X-Series Transport. All other products are noweffectively in a sustaining mode only of development, and as such require lessengineering resources assigned. The new DocuScan system directly addresses the market for mixedfinancial documents and white mail. The envelope and its contents are scanned,the images are machine read and directed to the appropriate place in theorganization based on the content.  Thiswill target a new market for the Company and supports the Company’s focus onDocument Imaging.

 

5

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**Salesand 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. 

 

**CustomerDiversification**

 

For the years ended December 31, 2003,2002 and 2001, Dell, accounted for 15.7%, 16.2%, and 14.5%, respectively, ofthe total revenue of the Company (as restated for discontinuedoperations).  The Company’s ten largestcustomers accounted for 42.7%, 39.6%, and 45.1%, of the Company’s revenues (asrestated for discontinued operations) for the years ended December 31,2003, 2002, and 2001, respectively. 

 

6

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**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 technological knowledgeto 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. 

 

**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. Management does notconsider the Company’s patents and licenses to be critical to the ongoingoperations of the Company. 

 

**Employees**

 

At December 31, 2003, the Companyemployed approximately 3,100 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 the fourthquarter of 2001 and the facility is currently being offered for sale. 

 

As of December 31, 2003, 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. 

 

7

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**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 the Supreme Court of the State of New York for the County of New Yorknaming as defendants the Company and certain of its affiliates.  Thecomplaint alleges that the Company improperly made a payment to the holder ofthe Sponsor Note.  The complaint seeks damages of not less than $89million as a result of the alleged improper payment and the imposition of a constructivetrust on monies paid by the Company to the holder of the Sponsor Note. The Company’s $90 million payment to the holder of the Sponsor Note, wasdisclosed in the Company’s Current Report on Form 8-K dated November 27,2002.  This action is in its earliest stages.  The Company believesthat the allegations are without merit and intends to defend against themvigorously.

 

If the lawsuit results in a determination that the payment to reducethe principal amount of the Sponsor Note was in contravention of the terms ofthe Sponsor Note, a position strongly opposed by the Company, underits terms, such payment shall be held in trust to be paid over to the holdersof the Senior Notes, to the extent they remain unpaid.  Therefore, in theevent of an unfavorable outcome in this litigation, there will be no adverseeffect on the Company’s financial statements.

 

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 OF SECURITY HOLDERS.**

 

None.

 

8

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**PART II******

** **

**ITEM 5**.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” and the Consolidated Financial Statementsof the Company for the three years ended December 31, 2003, 2002 and 2001,and the related notes thereto.

 
|                                                          |   | **Years Ended**             |    |
|---------------------------------------------------------------|--------|-----------------------------|---------|
|                                                          |   | **December 31,  2003** |    | **December 31,  2002** |   | **December 31,  2001** |   | **December 31,  2000** |   | **December 31,  1999** |   |
|                                                          |   | **(In thousands)**          |    |
| Revenue                                                       |   | $                           | 378,891 |   | $ | 379,433 |   | $ | 427,264 |   | $ | 412,620 |   | $ | 475,005 |   |
| Gross profit                                                  |   | 90,688                      |    | 96,205 |   | 55,885 |   | 25,231 |   | 89,020 |   |
| Operating expenses                                            |   | 66,818                      |    | 70,968 |   | 94,364 |   | 102,487 |   | 109,377 |   |
| Interest expense                                              |   | 19,473                      |    | 33,080 |   | 35,527 |   | 37,239 |   | 22,652 |   |
| Income (loss) from continuing  operations before income taxes |   | 6,456                       |    | 700 |   | (52,258 | ) | (113,501 | ) | (42,646 | ) |
| Income tax expense (benefit)                                  |   | (11,370                     | )       | 344 |   | 445 |   | 34,236 |   | (17,355 | ) |
| Net income (loss)                                             |   | 17,826                      |    | 59,126 |   | (45,826 | ) | (144,850 | ) | (11,197 | ) |
|                                                          |   |                        |    |   |   |   |   |   |   |   |   |
| Total assets                                                  |   | 239,515                     |    | 231,395 |   | 315,049 |   | 399,752 |   | 473,105 |   |
| Working capital (deficit)                                     |   | 9,947                       |    | (8,877 | ) | (8,970 | ) | 84,718 |   | 130,448 |   |
| Long-term debt, less current  maturities                      |   | 197,823                     |    | 201,723 |   | 304,798 |   | 388,112 |   | 350,500 |   |
| Series A preferred stock                                      |   | 16,568                      |    | 14,856 |   | 13,151 |   | 11,638 |   | — |   |
| Series B preferred stock                                      |   | 10,609                      |    | 8,324 |   | 6,532 |   | — |   | — |   |
| Stockholders’ deficit                                    |   | (152,636                    | )       | (161,724 | ) | (219,049 | ) | (167,342 | ) | (21,738 | ) |
|                                                               |        |                             |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In September 1999, the Company completedthe sale of its community banking business to Jack Henry and Associates. Forfinancial statement purposes, the sale was treated as a discontinued operation.As a result, the financial data above has been restated for 1999 and prioryears to reflect the continuing operations of the Company. 

 

In November 2002, the Company completedthe sale of BancTec Japan.  Forfinancial statement purposes, the sale was treated as a discontinuedoperation.  As a result, the financialdata above has been restated for 2002 and prior years to reflect the continuingoperations of the Company.

 

**ITEM 7****. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND 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 discussion contains forward-lookingstatements as that term is defined in the PSLRA.  See “Forward Looking Statements.” The Company cautions investorsthat there can be no assurance that actual results or business conditions willnot differ materially from those projected or suggested in such forward-lookingstatements as a result of various factors, including those described belowunder the caption “Factors Affecting the Company’s Business andProspects.”  The Company undertakes no obligation to update orrevise forward-looking statements to reflect changes in assumptions, the occurrenceof unanticipated results or changes to future operating results over time.

 

9

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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, 2003.  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 international markets.  Additionally, during 2003, the USS and INTLsegments experienced revenue declines in the maintenance business, the durationof which the Company cannot predict.

 

Expected economic and businessconditions into 2004 indicate a cautious outlook regarding the Company’snear-term revenue and earnings growth prospects.  Most of the Company’s product offerings represent a significantcapital expenditure for its customers. The general economic conditions have caused a continued weakening indemand for systems solutions products offered by USS and INTL. The Company hasconcentrated on cost reductions and on existing offerings.  Product-development efforts are focused onpayment, check and document processing technologies, in addition to investmentsin Electronic Document Management (“EDM”) vertical solutions and an investmentin archiving solutions for all markets, as well as hardware enhancements. Byincorporating more third-party products into the Company’s solutions ratherthan developing the products, the Company can more easily target its effortsand expenditures to these core products and solutions. 

 

**Critical AccountingPolicies**

 

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

•                  Inventory valuation

•                  Goodwill 

•                  Income taxes 

 

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

 

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

 

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-worthiness ofthe customer. The Company does not request collateral from customers. If theCompany determines that collection of the fee is not reasonably assured, theCompany defers the revenue and recognizes revenue at the time collectionbecomes reasonably assured, which is generally upon receipt of cash. For allsales, the Company generally uses either a binding purchase order or signedsales agreement as evidence of an arrangement. 

 

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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 forDoubtful Accounts**. The Company’s allowance fordoubtful accounts relates to trade accounts receivable. The allowance fordoubtful accounts is an estimate prepared by management based on identificationof the collectibility of specific accounts and the overall condition of thereceivable portfolios. The Company analyzes trade receivables, and analyzeshistorical bad debts, customer credits, customer concentrations, customercredit-worthiness, current economic trends and changes in customer paymentterms, when evaluating the adequacy of the allowance for doubtful accounts. Ifthe financial condition of the Company’s customers were to deteriorate,resulting in an impairment of their ability to make payments, additional allowancesmay be required. Likewise, should the Company determine that it would be ableto realize more of its receivables in the future than previously estimated, anadjustment to the allowance would increase income in the period suchdetermination was made. The allowance for doubtful accounts is reviewedperiodically and adjustments are recorded as deemed necessary. 

 

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

 

**Goodwill.** Since January 1, 2002, when Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets” became effective, the Company has assessed the impairment of goodwillannually, or more frequently whenever events or changes in circumstancesindicate 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 ofDecember 31, 2002.  Prior toJanuary 1, 2002, the Company amortized its goodwill.  The Company recorded approximately $3.2million of goodwill amortization during 2001. As required 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 to estimate income taxes in each of the jurisdictionsin which the Company operates. This process involves estimating the Company’sactual current tax expense together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which would beincluded within the Company’s consolidated balance sheet. The Company must thenassess the likelihood that the deferred tax assets will be recovered fromfuture taxable income and to the extent that the Company believes recovery is notlikely, the Company must establish a valuation allowance. To the extent theCompany establishes a valuation allowance in a period, the Company must includean expense within the tax provision in the statement of operations. The Companyhas recorded a valuation allowance to reduce the carrying amount of recordeddeferred tax assets representing future deductions to an amount that is morelikely than not to be realizable. In the event the Company were to determinethat it would be able to realize additional deferred tax assets in the future,an adjustment to the deferred tax asset would increase income in the periodsuch determination was made. 

 

**DISCONTINUEDOPERATIONS**

 

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

 

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On November 27, 2002, the Company completed the sale of itswholly-owned subsidiary, BancTec Japan (“BTJ”), to JAFCO MBO Co., Ltd.(“JAFCO”) pursuant to a Stock Purchase Agreement dated as of November 27,2002, between the Company and JAFCO. The sale involved two separate transactions: (1) the purchase by JAFCOof 100% of the outstanding shares of BTJ for 6.5 billion yen, and (2) aone-time, up-front payment by BTJ to the Company of 4.0 billion yen undercertain distribution and licensing agreements. Under such agreements, BTJ will continue to supply the Company productsand services in its markets, and 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 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.”

 

**RESULTSOF OPERATIONS**

** **

The operating results of BancTec Japan havebeen treated as a discontinued operation in the accompanying financialstatements.  As a result, all prior-yearamounts have been restated to exclude the results of BancTec Japan fromcontinuing operations.

 

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

### ** **

Consolidated revenue of $378.9 million forthe year ended December 31, 2003 decreased by $0.5 million or 0.1% fromthe comparable prior-year period. The CNS decrease of $8.8 million is primarilydue to pricing decreases resulting from competitive pressure, as well asdecreased volumes under certain maintenance programs.  The USS decrease of $6.8 million was principally related to a13.3% decline in maintenance revenue due to the Company’s installed productsreaching the 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 theintroduction in the United Kingdom of document processing services during 2003and the impact of the weakening dollar on the conversion of revenue stated inforeign currencies.  Factors impactingfuture revenue include lower corporate-customer spending for large systemssolutions as a result of economic weakness, customer and prospective customermergers, on-going competitive pressures, fluctuations in internationalcurrencies, and the 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 yearprimarily due to the focused realignment of research and developmentexpenditures against future product strategies and marketing plans and due tothe use of outsourced product-development. (2) Selling, general, and administrative expenses decreased by $0.7million due primarily to on-going efforts to realign the coststructure.

 

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 allowance

 

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compared to acorresponding prior-year period income tax provision of $0.3 million.  The Company’s effective tax rate wasapproximately (176.1%) for the year ended December 31,2003 as compared to 5.1% for the corresponding prior-year period.

 

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

 

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

 

### **Comparisonof Years Ended December 31, 2002 and December 31, 2001**

### ** **

Consolidated revenue of $379.4 million forthe year ended December 31, 2002 decreased by $47.8 million or 11.2% fromthe comparable prior-year period. The CNS decrease of $10.0 million resultedfrom pricing decreases resulting from competitive pressure.  The INTL decrease of $19.4 million resultedprimarily from the impact of longer acceptance periods on highly customizedproducts in the prior-year period.  Theseproducts, scheduled for acceptance in 2000, achieved acceptance in 2001 alongwith those products scheduled for acceptance in 2001.  The USS decrease of $18.5 million was principally related to theimpact of continued economic weakness, and declines in maintenance revenue dueto the Company’s installed products reaching the end of their useful lives andfrom increased competition.  The Companyexpects these trends to continue in the foreseeable future. Factors impactingfuture revenue include lower corporate-customer spending for large systemssolutions as a result of the continuing weakness in the economy, customer andprospective customer mergers, on-going competitive pressures, and fluctuationsin international currencies. 

 

Consolidated gross profit of $96.2 millionincreased by $40.3 million or 72.1% from the comparable prior-year period. Theincrease occurred primarily in USS, which increased by $28.4 million, and CNS,which increased by $11.9 million, offset partially by a decrease in INTL of$0.9 million. CNS’ gross profit increase was primarilyattributable to an improved labor model, with additional benefit providedthrough a reduction in support costs, including streamlining the number ofdistricts and the expanded automation of its call center operations. The INTL decrease resulted from a margindecline in the Company’s subsidiaries in Europe due primarily to lower revenueswithout a corresponding percentage decline in fixed expenses.  USS gross profit increased despite decreasedrevenues due to significantly lower cost of sales resulting from the Company’scost-containment efforts. The Company is in the process of transitioningits product-offering focus to proven deliverables and new targeted offerings,including EDM solutions, its other archive solutions and hardwareenhancements.  Incorporating morethird-party products into the Company’s solutions rather than developing theproducts has enabled the concentration of efforts and expenditures on thetargeted items which, along with the Company’s ongoing cost-containmentefforts, allowed for cost reductions to help offset revenue declines.  The Company will continue to monitor theeffects of the business climate and its strategic plans on the recoverability ofits investment in inventory and long-lived assets, all of which may continue tohave a negative impact on gross profit in the future.

 

Operating expenses of $71.0 million decreased$23.4 million compared to the comparable prior-year period. Operating expenses,by component, changed as follows: Product development expenses were flatcompared to the prior year.  Selling,general, and administrative expenses decreased by $20.2 million or 26.9%due primarily to on-going efforts to realign the cost structure.  Goodwill amortization ceased in 2002 as aresult of the implementation of SFAS 142. Goodwill amortization for the yearended December 31, 2001 was$3.2 million. 

 

Interest expense for the yearended December 31, 2002 decreased to $33.1 million from $35.5 million inthe comparable prior-year period. The decrease was due mainly to therepurchase of a portion of the Senior Notes, a lower outstanding balance on therevolving credit facilities anddeclining interest rates, partially offset by a $6.1 million increase in debtrelated to the Sponsor Note during 2001.

 

Sundry items resulted in a net income of $8.3 million during the yearended December 31, 2002 ascompared to net income of $20.9 million during the comparable prior-year period. This decrease is primarily due to foreign exchange gains of $1.4 millionand a gain of approximately $6.8 million from the Company’s repurchase ofSenior Notes during 2002, compared to foreign exchange losses of $1.8 millionand a net gain of $22.1 million as a result of the repurchase of Senior Notesduring 2001, partially offset by the extinguishment of a previous creditfacility during 2001. 

 

Pre-tax income in foreigntax jurisdictions resulted in an income tax provision (on continuingoperations) of $0.3 million for the year ended December 31, 2002 compared to a corresponding prior-yearperiod income tax provision of $0.4 million. The

 

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income tax provisions forboth periods related to income from the Company’s international subsidiariesand a valuation allowance provided to reduce the Company’s deferred tax assetsto an amount management believes is more likely than not to be realized.  The Company’s effective tax rate wasapproximately 5.1% for the year ended December 31,2002 as compared to (17.2%) for the corresponding prior-year period.

 

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

 

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

 

**LIQUIDITYAND 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 the revolving credit agreement is determined by a borrowing-baseformula equal to a specified percentage of the value of the Company’s eligibleaccounts receivable, inventory and pledged cash.  General economic conditions,decreased revenues from the Company’s maintenance contracts, and therequirement to obtain performance bonds or similar instruments could have amaterial impact on the Company’s future liquidity.  

 

The Company’s cash and cash equivalentstotaled $61.6 million at December 31, 2003, compared to $31.6 million atDecember 31, 2002.  Working capitalincreased $18.8 million to working capital of $9.9 million at December 31,2003.  The change in working capitalincluded a current liability decrease of $12.8 million resulting from adecrease in accrued liabilities of $10.0 million, partially offset by anincrease in accrued income taxes of $0.9 million. Current assets increases of $6.0 million included the increase in cash of$30.0 million, partially offset by a decrease in accounts receivable of $21.7million and an inventory decrease of $1.6 million.  The Company used cash generated from the improved collections and cash conserved fromdecreased spending on inventories to reduce the Company’s long-term debt, asfurther described below.

 

During 2003, the Company relied primarily oncash flows generated from operating activities to fund operations. AtDecember 31, 2003, the Company’s borrowing base under the Revolver, ashereinafter defined, was $21.2 million, of which the Companycould draw $17.2 million. 

 

Operating activities provided $39.6 millionand $59.5 million of cash in 2003 and 2002, respectively, a decrease of $19.9million.  Although net income fromcontinuing operations increased $24.4 million, cash generated by changes inworking capital assets and liabilities was $28.4 million less than in theprior-year period.  See the discussionin Comparison of Years Ended December 31, 2003 and December 31, 2002for the factors contributing to the increased net income. 

 

Investing activities used net cash of $6.3million during 2003 compared to cash provided of $75.0 million in 2002. The$81.3 million decrease was due to proceeds from the disposal of discontinuedoperations of $82.5 million received in 2002 and lower purchases of property,plant and equipment in 2003. 

 

Financing activities used $4.0 million of netcash in 2003 compared to $125.2 million of net cash in 2002. The $121.2 millionchange related primarily to the reduction of the Company’s debt of $121.3million in 2002.

 

At December 31, 2003, the Company’s principal outstanding debtinstruments consisted of (i) no balance under the Revolving credit facilitymaturing May 30, 2006 (which is more fully described below) (ii) $94.0million of 7.5% Senior Notes due 2008, and (iii) $103.8 million Sponsor Notesdue 2009.  As of December 31, 2003,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 potentialbidders.  However, the Company has notentered into any binding agreements or agreements in principle to sell anyassets and there

 

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can be no assurance that anysuch asset sales will occur or, if they occur, as to the timing or amount ofproceeds that such assets sales may generate.

 

**Revolving CreditFacility.**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.  OnNovember 27, 2002, the Company and Heller entered into an amendment to theRevolver that added pledged cash to the borrowing base.  Funds availability under the Revolver isdetermined by a borrowing-base formula equal to a specified percentage of thevalue of the Company’s eligible accounts receivable, inventory and pledgedcash.  At December 31, 2003, theCompany had no balance outstanding under the Revolver and an outstandingbalance on letters-of-credit totaling $18.7 million.  The balance remaining under the Revolver that the Company candraw was $17.2 million at December 31, 2003 ($21.2 million in availabilityless a $4.0 million reserve).  Acommitment fee of 0.5% per annum on the unused portion of the Revolver ispayable quarterly.

 

The interest rate on loans under the Revolver is, at the Company’soption, either (1) 0.75% over prime or (2) 2.25% 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) 2.0 to 1.0, (2) 1.75 to 1.0, (3) 1.5 to 1.0 and (4) 1.25 to 1.0 and (totalrate increase of 1.00%) or decreased by 0.25% increments when the fixed chargecoverage ratio is greater than 2.25 to 1.0 (total rate decrease of 0.25%).  The interest rate was remeasured as of theeffective date of September 1, 2003 under this amendment.  At December 31, 2003, the Company’sweighted average rate on the Revolver was 4.75%.

 

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, 2003 of $19.6 million representscash pledged under the terms of the Revolver. The Revolver contains various representations, warranties and covenants,including financial covenants as to maximum capital expenditures, minimum fixedcharge coverage ratio and minimum average borrowing availability.  OnJuly 30, 2002, the Company and Heller amended the Revolver, which reducedthe Company’s fixed charge coverage ratio covenant during the first, second andthird quarters of 2002, and reduced the minimum undrawn availabilityrequirement from $10.0 million to $4.0 million.  At December 31, 2003, the Company was in compliancewith all covenants under the Revolver.  

 

**SeniorNotes**. InAugust 1998, the Company exchanged the public Senior Notes (the “SeniorNotes”) for the notes sold in a May 1998 Rule 144A private offering.Interest is fixed at 7.5% and is due and payable in semi-annual installments,which began December 1, 1998. The Senior Notes contain covenants placinglimitations on the Company’s ability to permit subsidiaries to incur certaindebts, incur certain loans, and engage in certain sale and leasebacktransactions. During the year ended December 31, 2003, the Companyrepurchased Senior Notes with a face amount of $3.9 million. The Company wroteoff a proportionate share of deferred financing fees, resulting in a gain ofapproximately $1.1 million, which was reported as sundry (other) income in thecondensed consolidated statements of operations for 2003. 

 

**Senior SubordinatedUnsecured Sponsor Note**. The Company’s $160.0 millionSponsor Note bears interest at 10.0%, due and payable quarterly.  The Sponsor Note is subordinate only uponbankruptcy or insolvency of the Company, or if upon maturity of the SeniorNotes, the Senior Notes remain unpaid. The payments began September 30,1999.  As provided under the agreement,however, the Sponsor Note holder, WCAS, elected to defer quarterly interestpayments of $4.0 million for each of the June 2000 throughSeptember 2001 quarterly periods resulting in an increase in the SponsorNote totaling $33.8 million. Such election required a deferred financing fee of30.0% 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 holderof the Senior Notes is contesting this payment.  See discussion under Item 3, Legal Proceedings.  The Company wrote off a proportionate shareof deferred financing fees totaling $3.8 million.

 

**PreferredStock – Series A**.****TheCompany allocated the proceeds from its Series A preferred stock issuance basedupon the relative fair value of the preferred stock and warrants issued. Therelated discount is being accreted over a period of 8 years. For the year endedDecember 31, 2003, accretion ofthe related discount and accrued but unpaid dividends totaled $1.7 million,increasing the carrying amount to $16.6 million. As of December 31,2003, the stated value of the Series Apreferred stock, including accumulated but unpaid dividends, was $187.82 pershare.

 

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**PreferredStock – Series B**.****Forthe year ended December 31,2003, the Company accrued additional unpaid dividends for its Series Bpreferred stock totaling $2.3 million, increasing the carrying amount to $10.6million.  As of December 31, 2003, the stated value of the Series Bpreferred stock, including accumulated but unpaid dividends, was $298.66 pershare.

 

See Note A – Summary of Significant AccountingPolicies, under Reclassification, contained in Notes to the ConsolidatedFinancial Statements, for a discussion of the reclassification of the Series BPreferred Stock out of permanent equity to the mezzanine section of theConsolidated Balance Sheets under the guidance of EITF Topic D-98, “Classificationand Measurement of Redeemable Securities.”

 

### **Inflation**.  Inflation has not had amaterial effect on the operating results of the Company. 

### ** **

### **ContractualObligations and Commercial Commitments**

### ** **

In the normal course of business, the Company enters into variouscontractual and other commercial commitments that impact, or could impact, theliquidity of operations. The following table outlines the commitments atDecember 31, 2003:

 
|                               |   | **Total  Amounts** |   | **Less than  1 Year** |   | **1-3  Years** |   | **4-5  Years** |   | **Over 5  Years** |   |
|------------------------------------|--------|--------------------|--------|-----------------------|--------|----------------|--------|----------------|--------|-------------------|--------|
|                               |   | **(In Millions)**  |   |                  |   |           |   |           |   |
| Long-term debt                     |   | $                  | 197.8  |                  | $      | —         |   | $              | — |              | $      | 94.0 |   | $ | 103.8 |   |
| Capital leases                     |   | 1.3                |   | 1.1                   |   | 0.2            |   | —         |   | —            |   |
| Operating leases  (non-cancelable) |   | 19.6               |   | 5.8                   |   | 4.2            |   | 3.4            |   | 6.2               |   |
| Total Contractual                  |   | $                  | 218.7  |                  | $      | 6.9            |   | $              | 4.4    |              | $      | 97.4 |   | $ | 110.0 |   |
|                               |   |               |   |                  |   |           |   |           |   |              |   |
| Unused lines of credit             |   | $                  | 21.2   |                  | $      | 21.2           |   | $              | — |              | $      | — |   | $ | — |   |
| Standby letters of credit          |   | 18.7               |   | 18.7                  |   | —         |   | —         |   | —            |   |
| Total Commercial                   |   | $                  | 39.9   |                  | $      | 39.9           |   | $              | — |              | $      | — |   | $ | — |   |

 

**NEWACCOUNTING PRONOUNCEMENTS**

 

In August 2001, the FASB issued SFAS No. 143, “Accounting forAsset Retirement Obligations.” SFAS No. 143 requires entities to record thefair value of a liability for an asset retirement obligation in the period inwhich it is incurred. The Company adopted SFAS No. 143 on January 1, 2003,with no impact to its financial position and results of operations.

 

In July 2002, the FASB issued SFAS No.146, “Accounting for Exit or Disposal Activities”.  This statement requires companies to recognize costs associatedwith exit or disposal activities when they are incurred rather than at the dateof a commitment to an exit or disposal plan. SFAS No. 146 nullifies EITF Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring),” and will be applied prospectivelyto exit or disposal activities initiated after December 31, 2002.  The Company adopted SFAS No. 146 onJanuary 1, 2003 with no impact to the Company’s financial statements.

 

In December 2002, the FASB issued SFASNo. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—anamendment of SFAS No. 123.”  Thisstatement provides alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation.  This statement alsoamends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28,“Interim Financial Reporting,” to require prominent disclosures in both annualand interim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reportedresults.  The Company implemented SFASNo. 148 on January 1, 2003, regarding disclosure requirements forcondensed financial statements for interim periods.  The Company has not yet determined whether it will voluntarilychange to the fair-value-based method of accounting for stock-based employeecompensation.  The following tableillustrates the effect on net income had compensation for the Company’s stockoption plans been determined consistent with SFAS No. 123:

 
|                                                                                                                             |   | **Years Ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                             |   | **2003**                          |   | **2002** |   | **2001** |   |
| Net Income (loss) as reported                                                                                                    |   | $                                 | 17,826 |   | $ | 59,126 |   | $ | (45,826 | ) |
| Total stock-based employee compensation  benefit (expense) determined under fair-value-based method for all rewards,  net of tax |   | 103                               |   | 1,318 |   | 1,021 |   |
| Pro Forma net income (loss)                                                                                                      |   | $                                 | 17,929 |   | $ | 60,444 |   | $ | (44,805 | ) |

 

16

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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**          |   | **2003**                          |   | **2002** |   | **2001** |   |
| Risk free interest rate       |   | 5.8                               | %      | N/A |   | N/A |   |
| Expected life                 |   | 10 years                          |   | N/A |   | N/A |   |
| Expected volatility           |   | 0                                 |   | N/A |   | N/A |   |
| Fair value of options granted |   | $                                 | 4.03   |   | N/A |   | N/A |   |
|                               |        |                                   |        |  |  |  |  |  |

 

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

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”).FIN 46 requires that unconsolidated variable-interest entities be consolidatedby their primary beneficiaries. A primary beneficiary is the party that absorbsa majority of the entity’s expected losses or residual benefits. FIN 46 appliesimmediately to variable-interest entities created after January 31, 2003and to existing variable-interest entities in the periods beginning afterJune 15, 2003.  The Company hasadopted FIN 46 with no effect on the Company’s results of operations orfinancial position.

 

In November 2002, the FASB’s Emerging Issues Task Force (“EITF”)reached a consensus on Issue 00-21, “Accounting for Revenue Arrangements withMultiple Deliverables,” which must be applied to all revenue arrangementsentered into no later than June 30, 2003. EITF 00-21 governs how toidentify whether goods or services or both that are to be delivered separatelyin a bundled sales arrangement should be accounted for separately. Theappropriate accounting literature for revenue recognition would then be appliedto each unit.  The Company has adoptedthe consensus reached in EITF 00-21 with no impact on the Company’s results ofoperations or financial position.

 

In June 2003, the FASB issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity.” The statement is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003, except formandatorily redeemable financial instruments of a nonpublic entity.  For mandatorily redeemable financialinstruments of a nonpublic entity, this statement shall be effective for fiscalperiods beginning after December 15, 2003.  It is not anticipated that the adoption of this statement willhave a material effect on the Company’s results of operations or financialposition.

 

**FACTORS AFFECTING THECOMPANY’S BUSINESS AND PROSPECTS**

 

Information provided by the Company in this Annual Report on Form 10-Kand other documents filed with the Securities and Exchange Commission include“forward-looking” information, as that term is defined in the PrivateSecurities Litigation Reform Act of 1995 (the “PSLRA”). All statements other than statements of historical fact are statementsthat could be deemed forward-looking statements.  The Company cautions investors that there canbe no assurance that actual results or business conditions will not differmaterially from those projected or suggested in such forward-looking statementsas a result of numerous factors beyond the Company’s control. The Companyundertakes no obligation to update or revise forward-looking statements toreflect 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.

 

***General EconomicConditions***

*** ***

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

 

17

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products and solutions, such as those offered by the Company, couldhave a material adverse effect on the Company, including its business,operating results, financial condition and prospects.

 

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

 

***Dependence onSuppliers***

*** ***

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

 

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

 

***Indebtedness andImpact on Operating Results***

 

As a result of the Company’s high debt to equityratio, the Company is required to devote significant cash to debt service.  This limits the Company’s future operatingflexibility and could make the Company more vulnerable to a downturn in itsoperating performance or a decline in general economic conditions.

 

***International Activities***

* *

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

 

***Fluctuations inOperating Results***

* *

The Company’s operating results may fluctuate from period to period andwill depend on numerous factors, including: customer demand and marketacceptance of the Company’s products and solutions, new product introductions,product obsolescence, varying product mix, foreign-currency exchange rates,competition and other factors. The Company’s business is sensitive to thespending patterns of its customers, which in turn are subject to prevailingeconomic conditions and other factors beyond the Company’s control. Anyunfavorable change in one or more of these factors could have a materialadverse effect on the Company.

 

***TechnologicalChanges and Product Transitions***

* *

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

 

***Product DevelopmentActivities***

* *

The strength of the Company’s overall business 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

 

18

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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.

 

19

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**ITEM 7A.****QUANTITATIVE AND QUALITATIVE 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. 

 

**InterestRate 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, 2003 and 2002, the Companyhad outstanding Senior Notes, due in 2008, of $94.0 million and $97.9 million,respectively, with a fixed interest rate of 7.5%. At December 31, 2003 and2002, the Company also had the Sponsor Note, due 2009, with a balance of $103.8million. The Sponsor Note bears interest at a fixed rate of 10.0%. 

 

The Company also utilizes a revolving creditfacility to support working capital needs The interest rate onloans under the Revolver is, at the Company’s option, either (1) 0.75% overprime or (2) 2.25% over LIBOR.  Under anamendment effective September 1, 2003, the interest rate margins overprime and LIBOR may be increased by 0.25% increments when the fixed chargecoverage ratio falls below (1) 2.0 to 1.0, (2) 1.75 to 1.0, (3) 1.5 to 1.0 and(4) 1.25 to 1.0 and (total rate increase of 1.00%) or decreased by 0.25%increments when the fixed charge coverage ratio is greater than 2.25 to 1.0(total rate decrease of 0.25%).  Theinterest rate was remeasured as of the effective date of September 1, 2003under this amendment.  AtDecember 31, 2003, the Company’s weighted average rate on the Revolver was4.75%.  No borrowings were outstanding under the Revolver at December 31,2003.

 

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 and $62.6 million,respectively, at December 31, 2003 and 2002 for the Senior Notes, and$64.4 million and $59.2 million, respectively, at December 31, 2003 and2002 for the Sponsor Note. The increase in fair value of the Senior Notesincludes the effect of increases in the traded values of the Senior Notes,partially offset by the repurchase of approximately $3.9 million face value ofthe Senior Notes during 2003.  Theincrease in fair value of the Sponsor Note reflects an estimated decrease inthe yield to maturity coinciding with the decreased yield to maturity on theSenior Notes. The Company does not expect changes in fair value of the SeniorNotes or the Sponsor Note to have a significant effect on the Company’soperations, cash flow or financial position. 

 

**ForeignCurrency 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 $107.3 million or28.3% 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 2003.

 

20

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

 

**REPORT OF INDEPENDENTAUDITORS**

 

 

To the Board of Directors andStockholders of BancTec, Inc.

 

We have audited theaccompanying consolidated balance sheets of BancTec, Inc. and subsidiaries asof December 31, 2003 and 2002, and the related consolidated statements ofoperations, comprehensive loss, stockholders’ deficit and cash flows for eachof the years in the three-year period ended December 31, 2003.  In connection with our audit of theconsolidated financial statements, we have also audited the accompanyingfinancial statement schedule as of December 31, 2003 and 2002 and for the yearsthen ended.  These consolidatedfinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedule based on ouraudits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor 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, 2003 and 2002,and the results of their operations and their cash flows for each of the yearsin the three-year period ended December 31, 2003, in conformity with accountingprinciples generally accepted in the United States of America.  Also, in our opinion, the related financialstatement schedule as of December 31, 2003 and 2002 and for the years thenended, 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 FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets.”

 

 

/s/ KPMG LLP

 

Dallas, Texas

March 31, 2004

 

21

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**BANCTEC, INC.**

**CONSOLIDATED BALANCE SHEETS**

**ASSETS**

(In thousands) 

 
|                                                                                                                |   | **December 31,** |    |
|---------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                                                |   | **2003**              |    | **2002** |   |
| CURRENT ASSETS:                                                                                                     |   |                  |    |   |   |
| Cash and cash equivalents,  including restricted cash of $19,578 and $88 at December 31, 2003 and  2002        |   | $                     | 61,566  |   | $ | 31,595 |   |
| Accounts receivable, less  allowance for doubtful accounts of $1,126 and $2,216 at December 31,  2003 and 2002 |   | 39,193                |    | 60,891 |   |
| Inventories, net                                                                                                    |   | 23,908                |    | 25,528 |   |
| Prepaid expenses                                                                                                    |   | 4,823                 |    | 5,177 |   |
| Other current assets                                                                                                |   | 21                    |    | 334 |   |
| Total current assets                                                                                                |   | 129,511               |    | 123,525 |   |
|                                                                                                                |   |                  |    |   |   |
| PROPERTY, PLANT AND EQUIPMENT,  AT COST:                                                                            |   |                  |    |   |   |
| Land                                                                                                                |   | 2,860                 |    | 2,860 |   |
| Field support spare parts                                                                                           |   | 59,789                |    | 58,339 |   |
| Systems and software                                                                                                |   | 55,769                |    | 64,604 |   |
| Machinery and equipment                                                                                             |   | 21,075                |    | 50,053 |   |
| Furniture, fixtures and other                                                                                       |   | 22,672                |    | 22,953 |   |
| Buildings                                                                                                           |   | 27,653                |    | 29,006 |   |
|                                                                                                                |   | 189,818               |    | 227,815 |   |
| Less accumulated depreciation  and amortization                                                                     |   | 144,986               |    | 173,033 |   |
| Property, plant and equipment,  net                                                                                 |   | 44,832                |    | 54,782 |   |
|                                                                                                                |   |                  |    |   |   |
| OTHER ASSETS:                                                                                                       |   |                  |    |   |   |
| Goodwill, less accumulated  amortization of $30,001 at December 31, 2003 and 2002                              |   | 41,476                |    | 41,476 |   |
| Deferred income tax benefit                                                                                         |   | 13,796                |    | — |   |
| Other assets                                                                                                        |   | 9,900                 |    | 11,612 |   |
| Total other assets                                                                                                  |   | 65,172                |    | 53,088 |   |
| TOTAL ASSETS                                                                                                        |   | $                     | 239,515 |   | $ | 231,395 |   |

 

See notes to consolidatedfinancial statements.

 

22

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**BANCTEC, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**LIABILITIES AND STOCKHOLDERS’ DEFICIT**

(In thousands, except share data)

 
|                                                                                              |   | **December 31,** |    |
|---------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                              |   | **2003**              |    | **2002** |   |
| CURRENT LIABILITIES:                                                                              |   |                  |    |   |   |
| Current obligations under  capital leases                                                         |   | $                     | 1,105   |   | $ | — |   |
| Trade accounts payable                                                                            |   | 13,122                |    | 12,891 |   |
| Other accrued expenses and  liabilities                                                           |   | 36,901                |    | 46,883 |   |
| Deferred revenue                                                                                  |   | 22,179                |    | 24,107 |   |
| Maintenance contract deposits                                                                     |   | 44,540                |    | 47,685 |   |
| Income taxes                                                                                      |   | 1,717                 |    | 836 |   |
| Total current liabilities                                                                         |   | 119,564               |    | 132,402 |   |
|                                                                                              |   |                  |    |   |   |
| OTHER LIABILITIES:                                                                                |   |                  |    |   |   |
| Long-term debt, less current  maturities                                                          |   | 197,823               |    | 201,723 |   |
| Non-current maintenance  contracts deposits                                                       |   | 30,837                |    | 25,933 |   |
| Other liabilities                                                                                 |   | 16,750                |    | 9,881 |   |
| Total other liabilities                                                                           |   | 245,410               |    | 237,537 |   |
| Total liabilities                                                                                 |   | 364,974               |    | 369,939 |   |
| COMMITMENTS AND CONTINGENCIES  (Note K)                                                           |   |                  |    |   |   |
|                                                                                              |   |                  |    |   |   |
| SERIES A PREFERRED STOCK                                                                          |   | 16,568                |    | 14,856 |   |
| SERIES B PREFERRED STOCK                                                                          |   | 10,609                |    | 8,324 |   |
|                                                                                              |   |                  |    |   |   |
| COMMON STOCKHOLDERS’ DEFICIT:                                                                |   |                  |    |   |   |
| Common stock authorized,  32,000,000 shares of $0.01 par value at December 31, 2003 and 200: |   |                  |    |   |   |
| Common stock-issued and  outstanding 17,003,838 shares at December 31, 2003 and 2002         |   | 170                   |    | 170 |   |
| Class A common stock-issued and  outstanding 1,181,946 shares at December 31, 2003 and 2002  |   | 12                    |    | 12 |   |
| Subscription stock warrants                                                                       |   | 3,726                 |    | 3,726 |   |
| Additional paid-in capital                                                                        |   | 127,038               |    | 131,035 |   |
| Accumulated deficit                                                                               |   | (269,020              | )       | (286,846 | ) |
| Accumulated other comprehensive  loss                                                             |   | (14,562               | )       | (9,821 | ) |
| Total common stockholders’  deficit                                                          |   | (152,636              | )       | (161,724 | ) |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                 |   | $                     | 239,515 |   | $ | 231,395 |   |

 

See notes to consolidatedfinancial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands)

 
|                                                                                           |   | **Years Ended December 31,** |    |
|------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                           |   | **2003**                          |    | **2002** |   | **2001** |   |
| REVENUE                                                                                        |   |                              |    |   |   |   |   |
| Equipment and software                                                                         |   | $                                 | 149,654 |   | $ | 139,843 |   | $ | 171,529 |   |
| Maintenance and other services                                                                 |   | 229,237                           |    | 239,590 |   | 255,735 |   |
|                                                                                           |   | 378,891                           |    | 379,433 |   | 427,264 |   |
| COST OF SALES                                                                                  |   |                              |    |   |   |   |   |
| Equipment and software                                                                         |   | 98,781                            |    | 105,448 |   | 152,444 |   |
| Maintenance and other services                                                                 |   | 189,422                           |    | 177,780 |   | 218,935 |   |
|                                                                                           |   | 288,203                           |    | 283,228 |   | 371,379 |   |
| Gross profit                                                                                   |   | 90,688                            |    | 96,205 |   | 55,885 |   |
|                                                                                           |   |                              |    |   |   |   |   |
| OPERATING EXPENSES                                                                             |   |                              |    |   |   |   |   |
| Product development                                                                            |   | 12,548                            |    | 15,984 |   | 15,926 |   |
| Selling, general and  administrative                                                           |   | 54,270                            |    | 54,984 |   | 75,223 |   |
| Goodwill amortization                                                                          |   | —                            |    | — |   | 3,215 |   |
|                                                                                           |   | 66,818                            |    | 70,968 |   | 94,364 |   |
| Income (loss) from operations                                                                  |   | 23,870                            |    | 25,237 |   | (38,479 | ) |
|                                                                                           |   |                              |    |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                                        |   |                              |    |   |   |   |   |
| Interest income                                                                                |   | 690                               |    | 272 |   | 820 |   |
| Interest expense                                                                               |   | (19,473                           | )       | (33,080 | ) | (35,527 | ) |
| Sundry, net                                                                                    |   | 1,369                             |    | 8,271 |   | 20,928 |   |
|                                                                                           |   | (17,414                           | )       | (24,537 | ) | (13,779 | ) |
| INCOME (LOSS) FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES                                  |   | 6,456                             |    | 700 |   | (52,258 | ) |
| INCOME TAX EXPENSE (BENEFIT)                                                                   |   | (11,370                           | )       | 344 |   | 445 |   |
| INCOME (LOSS) FROM CONTINUING  OPERATIONS                                                      |   | 17,826                            |    | 356 |   | (52,703 | ) |
| INCOME FROM DISCONTINUED OPERATIONS,  NET OF TAX EXPENSE OF $2,726 AND $6,294 IN 2002 AND 2001 |   | —                            |    | 2,725 |   | 6,877 |   |
| GAIN ON DISPOSAL OF  DISCONTINUED OPERATIONS, NET OF TAX PROVISION OF $0                       |   | —                            |    | 63,005 |   | — |   |
| INCOME (LOSS) BEFORE CUMULATIVE  EFFECT OF ACCOUNTING CHANGE                                   |   | 17,826                            |    | 66,086 |   | (45,826 | ) |
| CUMULATIVE EFFECT OF ACCOUNTING  CHANGE                                                        |   | —                            |    | (6,960 | ) | — |   |
| NET INCOME (LOSS)                                                                              |   | 17,826                            |    | 59,126 |   | (45,826 | ) |
| PREFERRED STOCK DIVIDENDS AND  ACCRETION OF DISCOUNT                                           |   | (3,997                            | )       | (3,397 | ) | (2,717 | ) |
| NET INCOME (LOSS) APPLICABLE TO  COMMON STOCK                                                  |   | $                                 | 13,829  |   | $ | 55,729 |   | $ | (48,543 | ) |

 

See notes to consolidatedfinancial statements.

 

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                            |   | **Years Ended December 31,** |   |
|---------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                            |   | **2003**                          |   | **2002** |   | **2001** |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES                                           |   |                              |   |   |   |   |   |
| Net income (loss)                                                               |   | $                                 | 17,826 |   | $ | 59,126 |   | $ | (45,826 | ) |
| Income from discontinued  operations                                            |   | —                            |   | 2,725 |   | 6,877 |   |
| Gain on sale of discontinued  operations                                        |   | —                            |   | 63,005 |   | — |   |
| Income (loss) from continuing  operations                                       |   | 17,826                            |   | (6,604 | ) | (52,703 | ) |
| Adjustments to reconcile to  cash flows provided by operations:                 |   |                              |   |   |   |   |   |
| Cumulative effect of accounting  change                                         |   | —                            |   | 6,960 |   | — |   |
| Depreciation and amortization                                                   |   | 21,096                            |   | 23,970 |   | 35,192 |   |
| Provision for doubtful accounts                                                 |   | (999                              | )      | (5,215 | ) | 3,891 |   |
| Interest paid in-kind                                                           |   | —                            |   | — |   | 14,264 |   |
| Deferred income tax benefit                                                     |   | (13,796                           | )      | — |   | — |   |
| Loss on disposition of  property, plant and equipment                           |   | 176                               |   | 1,210 |   | 1,854 |   |
| Gain on extinguishment of  long-term debt                                       |   | (1,129                            | )      | (6,798 | ) | (23,958 | ) |
| Other non-cash items                                                            |   | (75                               | )      | 10 |   | 3,540 |   |
| Changes in operating assets and  liabilities                                    |   |                              |   |   |   |   |   |
| Decrease in accounts receivable                                                 |   | 22,697                            |   | 19,592 |   | 23,189 |   |
| (Increase) decrease in  inventories                                             |   | (509                              | )      | 12,856 |   | 32,163 |   |
| Decrease in other assets                                                        |   | 2,847                             |   | 3,373 |   | 4,998 |   |
| Increase (decrease) in trade  accounts payable                                  |   | 231                               |   | (4,177 | ) | (6,604 | ) |
| Increase (decrease) in deferred  revenue & maintenance contracts deposits   |   | (5,073                            | )      | 12,579 |   | 19,473 |   |
| Increase (decrease) in other  accrued expenses and liabilities                  |   | (3,677                            | )      | 734 |   | 5,078 |   |
| Cash flows provided by  continuing operations                                   |   | 39,615                            |   | 58,490 |   | 60,377 |   |
| Cash flows provided by  discontinued operations                                 |   | —                            |   | 1,040 |   | 2,209 |   |
| Cash flows provided by  operating activities                                    |   | 39,615                            |   | 59,530 |   | 62,586 |   |
|                                                                            |   |                              |   |   |   |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                           |   |                              |   |   |   |   |   |
| Purchases of property, plant  and equipment                                     |   | (6,259                            | )      | (7,205 | ) | (11,411 | ) |
| Proceeds from disposal of  discontinued operations                              |   | —                            |   | 82,538 |   | — |   |
| Cash flows provided by (used  in) continuing operations                         |   | (6,259                            | )      | 75,333 |   | (11,411 | ) |
| Cash flows used in discontinued  operations                                     |   | —                            |   | (288 | ) | (196 | ) |
| Cash flows provided by (used  in) investing activities                          |   | (6,259                            | )      | 75,045 |   | (11,607 | ) |
|                                                                            |   |                              |   |   |   |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES                                           |   |                              |   |   |   |   |   |
| Payments of current maturities  of long-term debt and capital lease obligations |   | (1,097                            | )      | — |   | (2,500 | ) |
| Proceeds from long-term  borrowings                                             |   | —                            |   | — |   | 8,000 |   |
| Payments on long-term borrowing                                                 |   | (2,752                            | )      | (96,277 | ) | (82,592 | ) |
| Proceeds from (payments on)  short-term borrowings, net                         |   | —                            |   | (25,040 | ) | 25,040 |   |
| Debt issuance costs                                                             |   | (95                               | )      | (207 | ) | (2,358 | ) |
| Net proceeds from sales and  issuances of preferred stock                       |   | —                            |   | 100 |   | 5,328 |   |
| Cash flows used in continuing  operations                                       |   | (3,944                            | )      | (121,424 | ) | (49,082 | ) |
| Cash flows provided by (used  in) discontinued operations                       |   | —                            |   | (3,798 | ) | 3,798 |   |
| Cash flows used in financing  activities                                        |   | (3,994                            | )      | (125,222 | ) | (45,284 | ) |
|                                                                            |   |                              |   |   |   |   |   |
| EFFECT OF EXCHANGE RATE CHANGES  ON CASH                                        |   | 559                               |   | (142 | ) | (1,500 | ) |
| NET INCREASE IN CASH AND CASH  EQUIVALENTS                                      |   | 29,971                            |   | 9,211 |   | 4,195 |   |
| CASH AND CASH EQUIVALENTS—BEGINNING  OF YEAR                               |   | 31,595                            |   | 22,384 |   | 18,189 |   |
|                                                                            |   |                              |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS—END  OF YEAR                                     |   | $                                 | 61,566 |   | 31,595 |   | 22,384 |   |
|                                                                            |   |                              |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF  INFORMATION:                                       |   |                              |   |   |   |   |   |
| Cash paid (refunded) during the  period for:                                    |   |                              |   |   |   |   |   |
| Interest                                                                        |   | $                                 | 19,724 |   | 28,483 |   | 15,948 |   |
| Taxes                                                                           |   | $                                 | 1,498  |   | 1,346 |   | 5,407 |   |
|                                                                                 |        |                                   |        |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

25

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**BANCTEC, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’DEFICIT**

# **For the yearsended December 31, 2003, 2002 and 2001**

(In thousands, except share data)

 
|                                      |   |       |   | **Class**  |   |             |   |           |   |            |   | **Accumulated**   |   |      |     |
|-------------------------------------------|--------|------------|--------|------------|--------|------------------|--------|----------------|--------|-----------------|--------|-------------------|--------|-----------|----------|
|                                      |   |       |   | **A**      |   |             |   | **Additional** |   |            |   | **Other**         |   |      |     |
|                                      |   | **Common** |   | **Common** |   | **Subscription** |   | **Paid in**    |   | **Accumulated** |   | **Comprehensive** |   |      |     |
|                                      |   | **Stock**  |   | **Stock**  |   | **Warrants**     |   | **Capital**    |   | **Deficit**     |   | **Loss**          |   | **Total** |     |
| Balance at December 31,  2000        |   | $          | 170    |       | $      | 12               |   | $              | 3,726  |            | $      | 137,149           |   | $         | (300,146 | ) | $ | (8,253 | ) | $ | (167,342 | ) |
|                                      |   |       |   |       |   |             |   |           |   |            |   |              |   |      |     |
| Foreign currency translation  adjustments |   | —     |   | —     |   | —           |   | —         |   | —          |   | (1,934            | )      | (1,934    | )        |
| Net loss                                  |   | —     |   | —     |   | —           |   | —         |   | (45,826         | )      | —            |   | (45,826   | )        |
| Minimum pension liability, net  of tax    |   | —     |   | —     |   | —           |   | —         |   | —          |   | (1,230            | )      | (1,230    | )        |
| Series A preferred stock  dividends       |   | —     |   | —     |   | —           |   | (1,100         | )      | —          |   | —            |   | (1,100    | )        |
| Series B preferred stock  dividends       |   | —     |   | —     |   | —           |   | (1,204         | )      | —          |   | —            |   | (1,204    | )        |
| Accretion of discount                     |   | —     |   | —     |   | —           |   | (413           | )      | —          |   | —            |   | (413      | )        |
| Balance at December 31,  2001        |   | 170        |   | 12         |   | 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 | ) |

 

See notes to consolidatedfinancial statements.

 

26

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**BANTEC, INC.**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS**

(In thousands)

** **
|                                      |   | **Years Ended December 31,** |   |
|-------------------------------------------|--------|-----------------------------------|--------|
|                                      |   | **2003**                          |   | **2002** |   | **2001** |   |
| Net Income (Loss)                         |   | $                                 | 17,826 |   | $ | 59,126 |   | $ | (45,826 | ) |
| Foreign currency translation  adjustments |   | 1,414                             |   | 2,753 |   | (1,934 | ) |
| Minimum pension liability                 |   | (6,155                            | )      | (1,157 | ) | (1,230 | ) |
| Total comprehensive income  (loss)        |   | $                                 | 13,085 |   | $ | 60,722 |   | $ | (48,990 | ) |

** **

See notes to ConsolidatedFinancial Statements. 

 

27

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**BANCTEC,INC.**

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

# **For the years ended December 31, 2003, 2002, and 2001**

# ** **

**NOTE A—SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Description ofBusiness**

 

BancTec,Inc., a Delaware corporation, and its subsidiaries (the “Company” or“BancTec”), is a worldwide systems integration and services company with a 30-year history in imaging technology, financial transaction processing andworkflow productivity improvement. Serving a variety of industries, includingbanking, financial services, insurance, healthcare, governmental agencies andothers, the Company offers a portfolio of payment and document processingsystems and services, workflow and image management software products, andcomputer and network support services. See Note K for further discussion of Company business structure.

 

**Principles ofConsolidation**

 

Theconsolidated financial statements include the accounts of BancTec, Inc. and itswholly-owned subsidiaries. The Company accounts for investments in which it doesnot exercise control (generally ownership of 50% or less) under the equitymethod of accounting. At December 31, 2003, retained earnings included $1.74million of undistributed earnings for investments accounted for under theequity method.  During 2003, the Companyrecorded $0.07 million of earnings from these investments in the consolidatedstatement of operations and received a dividend payment of $0.35 million.Intercompany accounts and transactions have been eliminated in consolidation.

 

**Use of Estimates**

 

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

 

**Cash and CashEquivalents and Short-Term Investments**

 

Cash andcash equivalents include cash on hand and on deposit, including highly liquidinvestments with original maturities of three months or less. Short-terminvestments are similar instruments with original maturities in excess of threemonths and are valued at cost, which approximates market.Restricted cash at December 31, 2003 of $19.6 million represents the cashpledged under the terms of the revolver.

 

**Allowance forDoubtful 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**

 

Inventoriesare valued at the lower of cost or market and include the cost of rawmaterials, labor, factory overhead, and purchased subassemblies. Cost isdetermined using the first-in, first-out and weighted average methods. TheCompany revised its standard costs for manufacturing inventory to effectivelyeliminate the purchasing burden component as of October 1, 2002.  At least quarterly, theCompany evaluates the carrying amount of inventory based on the identificationof excess and obsolete inventory. The Company’s evaluation involves amulti-element approach incorporating the stratification of inventory by timeheld and the stratification of inventory by risk category, among otherelements.  The approach incorporates bothrecent historical 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.  Inventoryreserves as of December 31, 2003, 2002, and 2001 were $15.0 million, $16.3million, and $25.7 million, respectively. Inventory reserves establish a new cost basis for inventory and are notreversed in future periods.

 

28

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**Property, Plant, andEquipment**

 

Property,plant, and equipment are recorded at cost and are depreciated or amortizedprincipally on a straight-line basis over the estimated useful lives of therelated assets. Estimated useful lives range from three to five years for fieldsupport spare parts, three to eight years for systems and software, five toseven years for machinery and equipment, leasehold improvements, and furnitureand fixtures. Buildings are depreciated over 40 years. Depreciation expense forthe years ended December 31, 2003, 2002, and 2001 was $21.1 million, $24.0million, and $32.0 million, respectively.

 

**Intangible Assets**

 

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

 

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

 

Components of the Company’sgoodwill include amounts that are foreign currency denominated.  These goodwill amounts are subject totranslation at each balance sheet date. The Company records the change to its Accumulated Other ComprehensiveLoss on the balance sheet.  Goodwillpreviously classified as unallocated has been allocated to the reporting unitsas required by SFAS No. 142.  There wereno changes in the carrying amount ofgoodwill by segment for the year ended December 31, 2003.

 

The following is a summarycomparison of net income (loss) for the years ended December 31, 2003, 2002,and 2001, as adjusted to remove the amortization of goodwill with indefiniteuseful lives:

 
|                                                                          |   | **Years Ended December 31,** |       |
|-------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                          |   | **2003**                     |       | **2002** |   | **2001** |   |
|                                                                          |   | **(In thousands)**           | ** ** |
| Net income (loss) before  cumulative effect of accounting change, as reported |   | $                            | 17,826     |   | $ | 66,086 |   | $ | (45,826 | ) |
| Goodwill amortization                                                         |   | —                       |       | — |   | 3,215 |   |
| Net income (loss) before  cumulative effect of accounting change, as adjusted |   | $                            | 17,826     |   | $ | 66,086 |   | $ | (42,611 | ) |

 
|                           |   | **Years Ended December 31,** |   |
|--------------------------------|--------|------------------------------|--------|
|                           |   | **2003**                     |   | **2002** |   | **2001** |   |
|                           |   | **(In thousands)**           |   |
| Net income (loss), as reported |   | $                            | 17,826 |   | $ | 59,126 |   | $ | (45,826 | ) |
| Goodwill amortization          |   | —                       |   | — |   | 3,215 |   |
| Net income (loss), as adjusted |   | $                            | 17,826 |   | $ | 59,126 |   | $ | (42,611 | ) |

 

**Derivative FinancialInstruments**

 

Derivativefinancial instruments may be utilized by the Company to reduce interest rate orforeign-currency exchange rate

 

29

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risks.The Company has established policies and procedures for risk assessment and theapproval, reporting and monitoring of derivative financial instrumentactivities. The Company does not enter into financial instruments for tradingor speculative purposes.

 

TheCompany accounts for derivative instruments in accordance with Statement ofFinancial Accounting Standards No. 133 Accounting for Derivatives Instrumentsand Hedging Activities (“SFAS 133”), which requires that all derivatives berecognized as assets and liabilities on the balance sheet and measured at fairvalue. The corresponding derivative gains or losses are reported based on thehedge relationship that exists. Changes in fair value derivative instrumentsthat are not designated as hedges or that do not meet the hedge accountingcriteria in SFAS 133 are required to be reported in earnings. At the time ofadoption of SFAS No. 133, the Company determined that the forwardforeign-exchange contracts did not qualify as a hedge and marked the contractsto market, reflecting the changes in the statement of operations in gain fromdiscontinued operations. The Company recognized an immaterial transitionadjustment at adoption.  In 2001, theCompany settled the then outstanding remaining yen-denominated foreign-currencyforward contracts. The Company realized a gain of approximately $1.1 million indiscontinued operations from the yen-denominated foreign-currency forwardcontracts for the year ended December 31, 2001.  At December 31, 2003, and at December 31, 2002, the Company wasnot a party to any derivative financial instruments.

 

**Revenue Recognition**

 

The Company derives revenuefrom primarily two sources- 1) product sales- systems integration solutionswhich address complex data and paper-intensive work processes, includingadvanced web-enabled imaging and workflow technologies with both BancTec-manufactured  equipment and third-party equipment,  and 2) services- which consist primarilyof application design, development and maintenance, all aspects of desktopoutsourcing, including field engineering, as well as help desk and LAN/WANnetwork outsourcing.

 

The Company applies theprovisions of Statement of Position 97-2, “Software Revenue Recognition,”as amended by Statement of Position 98-9 “Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions” to alltransactions involving the sale of software products and sales of hardwarewhere the software is not incidental. For those transactions that involveacceptance certificates, the Company recognizes revenue upon receipt of theacceptance 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.

 

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

 

The Company recognizes hardwareand software revenue when persuasive evidence of an arrangement exists,delivery has occurred, the sales price is fixed or determinable andcollectibility is probable. At the time of the transaction, the Companydetermines whether the fee associated with revenue transactions is fixed ordeterminable and whether or not collection is reasonably assured. The Companydetermines whether the fee is fixed or determinable based on the payment termsassociated with the transaction. If a significant portion of a fee is due afterthe normal payment terms, which are generally 30 days from invoice date, theCompany recognizes revenue as the fees are collected. The Company assessescollectibility based on a number of factors, including past transaction historywith the customer and the credit-worthiness of the customer. The Company doesnot request collateral from customers. If the Company determines thatcollection of the fee is not reasonably assured, the Company defers the revenueand recognizes revenue at the time collection becomes reasonably assured, whichis generally upon receipt of cash. For all sales, the Company generally useseither a binding purchase order or signed sales agreement as evidence of anarrangement.

 

Maintenancecontracts are primarily at least one year in duration and the revenue generatedis generally recognized ratably over the term of the contract.

 

The Company’s services revenueis primarily billed based on contractual rates and terms, and the Companygenerally recognizes revenue as these services are performed which, in somecases is ratably 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 andDevelopment**

 

Researchand development costs are expensed as incurred. Research and development costsfor the year ended December 31, 2003 and 2002 were $12.5 and $16.0 million.

 

30

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**Income Taxes**

** **

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

 

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

 

**Foreign CurrencyTranslation**

 

Foreignassets and liabilities are translated using the exchange rate in effect at thebalance sheet date, and results of operations are translated using an averagerate for the period. Translation adjustments are accumulated and reported as acomponent of stockholders’ deficit and comprehensive income. Transaction gainsand losses are included in results of operations in “Sundry, net”. Foreigncurrency transaction gains (losses) for the years ended December 31, 2003,2002, and 2001 were $0.2 million, $1.4 million, and $(1.8) million, respectively.

 

**Concentration of Risk**

 

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

 

TheCompany sells its products to customers under specified credit terms in thenormal course of business. These customers’ businesses can generally beclassified as banking, personal computer manufacturers, financial services,insurance, healthcare, government agencies, utilities and telecommunications.During 2003, 2002, and 2001, the Company derived 15.7%, 16.2%, and 14.5%,respectively, of revenues from a single source. The loss of this revenue couldhave a material adverse effect on the Company. The Company currently receives funds in advance for a significantportion of the Company’s services prior to the performance of the services theyrelate to and management does not currently consider this source to be a creditrisk.  Due to the diversity of theCompany’s customers, management does not consider there to be a concentrationof risk within any single classification. However, general economic conditionsthat cause customers in such industries to reduce or delay their investments inproducts and solutions such as those offered by the Company could have amaterial adverse effect on the Company.

 

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

 

**Fair Value ofFinancial Instruments**

 

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

 

Cash andshort-term investments: Carrying amount approximates fair value due to theshort-term nature of the instruments.

 

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

 

Seniornotes: The Company estimated fair value for 2003 based on an average value ofrecently completed market trades, resulting in a yield-to-maturity ofapproximately 17%.  The number of actualtrades is limited, therefore the result may vary if a widely-traded marketenvironment existed.

 

SponsorNote: The Company estimated fair value at December 31, 2003, using ayield-to-maturity of approximately 22%, based on the terms of the Sponsor Note.

 

31

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The estimatedfair values of the Company’s financial instruments at December 31 are asfollows:

 
|                            |   | **2003**             |   | **2002**          |   |
|---------------------------------|--------|----------------------|--------|-------------------|--------|
|                            |   | **(In thousands)**   |   |
|                            |   | **Carrying  Amount** |   | **Fair****Value** |   | **Carrying****Amount** |   | **Fair****Value** |   |
| Cash and short-term investments |   | $                    | 61,566 |              | $      | 61,566 |   | $ | 31,595 |   | 31,595 |   |
| Senior Notes                    |   | 93,975               |   | 66,924            |   | 97,875 |   | 62,570 |   |
| Sponsor Note                    |   | 103,848              |   | 64,386            |   | 103,848 |   | 59,193 |   |
|                                 |        |                      |        |                   |        |  |  |  |  |  |  |  |

 

**Stock-BasedCompensation**

 

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

 

2000Stock Plan:

 

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

 

IncentiveOptions. During the year ended December 31, 2000, 1,303,460 incentive optionswere granted by the Company. During 2001 and 2002, no additional incentiveoptions were granted.  During the yearended December 31, 2003, 45,000 incentive options were granted by the Company.  Under the Plan, incentive options aregranted at a fixed exercise price not less than 100% of the fair market valueof the shares of stock on the date of grant (or 110% of the fair market valuein certain circumstances). A portion of the incentive options vest over afour-year period at 25% per year beginning January 2, 2001; the remainder vestbased on the performance of the Company. As a part of an employee retentionprogram, vesting of 20.0% of the performance-based incentive options wasaccelerated in October 2000.

 

Non-qualifiedstock options. During the year ended December 31, 2000, 377,040 non-qualifiedstock options were granted by the Company. During 2001 and 2002, no additionalnon-qualified options were granted. Under the Plan, non-qualified options are granted at a fixed exerciseprice equal to, more than, or less than 100% of the fair market value of theshares of stock on the date of grant. A portion of the non-qualified optionsvest over a four-year period at 25% per year beginning January 2, 2001; theremainder vest based on the performance of the Company. As a part of anemployee retention program, vesting of 20.0% of the performance-based incentiveoptions was accelerated in October 2000.

 

Restrictedstock awards. The amount, if any, to be paid by the award recipient to acquirethe shares of stock pursuant to a restricted stock-award is a fixed exerciseprice equal to, more than, or less than 100% of the fair market value of theshares of stock subject to the award on the date of grant. The restricted stockawards are subject to vesting provisions determined by the Company’s Board ofDirectors. At December 31, 2003, no restricted stock-awards had been granted.

 
|                                   |   | **Incentive  Shares** |   | **Non-qualified  Shares** |   | **Weighted   Average  Exercise  Price** |   |
|----------------------------------------|--------|-----------------------|--------|---------------------------|--------|-----------------------------------------|--------|
| Options outstanding-December  31, 2001 |   | 632,240               |   | 31,760                    |   | $                                       | 9.25   |   |
| Forfeited                              |   | (135,000              | )      | —                    |   | 9.25                                    |   |
| Options outstanding-December  31, 2002 |   | 497,240               |   | 31,760                    |   | 9.25                                    |   |
| Granted                                |   | 45,000                |   | —                    |   | 9.25                                    |   |
| Forfeited                              |   | (60,000               | )      | —                    |   | 9.25                                    |   |
| Options outstanding-December  31, 2003 |   | 482,240               |   | 31,760                    |   | $                                       | 9.25   |   |

 

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

 

AtDecember 31, 2003, options to purchase 514,000 shares were outstanding, ofwhich 222,775 were vested. All options

 

32

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outstandinghave an exercise price of $9.25. No options have been exercised.

 

Under theintrinsic-value method, compensation expense is recorded only to the extentthat the strike price is less than market price on the measurement date.  There were no stock options granted in 2002or 2001, and all options granted in 2003 and 2000 were issued at or abovemarket price, and therefore no stock-based compensation was recorded.

 

**NEW ACCOUNTINGPRONOUNCEMENTS**

 

In August 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143requires entities to record the fair value of a liability for an assetretirement obligation in the period in which it is incurred. The Company adoptedSFAS No. 143 on January 1, 2003, with no impact to its financial position andresults of operations.

 

In July2002, the FASB issued SFAS No. 146, “Accounting for Exit or DisposalActivities”.  This statement requirescompanies to recognize costs associated with exit or disposal activities whenthey are incurred rather than at the date of a commitment to an exit ordisposal plan.  SFAS No. 146 nullifiesEITF Issue No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring),” and will be applied prospectively to exit or disposalactivities initiated after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003 with no impact tothe Company’s financial statements.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of SFAS No. 123.”  This statement provides alternative methodsof transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  This statement also amends the disclosure requirements of SFASNo. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The Company implemented SFAS No. 148 on January 1, 2003, regardingdisclosure requirements for condensed financial statements for interimperiods.  The Company has not yetdetermined whether it will voluntarily change to the fair-value-based method ofaccounting for stock-based employee compensation.  The following table illustrates the effect on net income hadcompensation for the Company’s stock option plans been determined consistentwith SFAS No. 123:

 
|                                                                                                                             |   | **Years Ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                             |   | **2003**                     |   | **2002** |   | **2001** |   |
| Net Income (loss) as reported                                                                                                    |   | $                            | 17,826 |   | $ | 59,126 |   | $ | (45,826 | ) |
| Total stock-based employee compensation  benefit (expense) determined under fair-value-based method for all rewards,  net of tax |   | 103                          |   | 1,318 |   | 1,021 |   |
| Pro Forma net income (loss)                                                                                                      |   | $                            | 17,929 |   | $ | 60,444 |   | $ | (44,805 | ) |

 

The fairvalue of each stock-option grant under the stock option plans was estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions and results:

 
| **Weighted Average**          |     | **Years Ended December 31,** |     |
|-------------------------------|----------|------------------------------|----------|
|                          | **2003** |                         | **2002** |   | **2001** |   |
| Risk free interest rate       |     | 5.8                          | %        | N/A |   | N/A |   |
| Expected life                 |     | 10 years                     |     | N/A |   | N/A |   |
| Expected volatility           |     | 0                            |     | N/A |   | N/A |   |
| Fair value of options granted |     | $                            | 4.03     |   | N/A |   | N/A |   |
|                               |          |                              |          |  |  |  |  |  |

 

In November 2002, the FASBissued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”). It clarifies that a guarantor is required to recognize, atthe inception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee, including its ongoing obligation to standready to perform over the term of the guarantee in the event that the specifiedtriggering events or conditions occur. The objective of the initial measurementof the liability is the fair value of the guarantee at its inception. Theinitial recognition and initial measurement provisions of FIN 45 are effectiveon a prospective basis to guarantees issued after December 31, 2002. TheCompany has adopted FIN 45 with no impact on the Company’s results ofoperations or financial position.

 

33

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In January 2003, the FASBissued Interpretation No. 46 (“FIN 46”). FIN 46 requires that unconsolidatedvariable-interest entities be consolidated by their primary beneficiaries. Aprimary beneficiary is the party that absorbs a majority of the entity’sexpected losses or residual benefits. FIN 46 applies immediately tovariable-interest entities created after January 31, 2003 and to existingvariable-interest entities in the periods beginning after June 15, 2003.  The Company has adopted FIN 46 with noeffect on the Company’s results of operations or financial position.

 

In November 2002, the FASB’sEmerging Issues Task Force (“EITF”) reached a consensus on Issue 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables,” which must beapplied to all revenue arrangements entered into no later than June 30,2003. EITF 00-21 governs how to identify whether goods or services or both thatare to be delivered separately in a bundled sales arrangement should beaccounted for separately. The appropriate accounting literature for revenuerecognition would then be applied to each unit.  The Company has adopted the consensus reached in EITF 00-21 withno impact on the Company’s results of operations or financial position.

 

In June 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.” The statement is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003, except for mandatorily redeemable financial instruments ofa nonpublic entity.  For mandatorilyredeemable financial instruments of a nonpublic entity, this statement shall beeffective for fiscal periods beginning after December 15, 2003.  It is not anticipated that the adoption ofthis statement will have a material effect on the Company’s results of operationsor financial position.

 

**Reclassification**

 

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

 

TheCompany has two issues of Preferred Stock as described in Note F – PreferredStock, contained in Notes to the Consolidated Financial Statements.  Series A Preferred Stock has beenhistorically classified in the mezzanine section of the Consolidated BalanceSheets due to the provision providing for mandatory redemption.  Both the Series A Preferred and the Series BPreferred include provisions for redemption at the option of holders in certaincircumstances including a sale or merger of the Company and redemption at theoption of the Company.  The Series BPreferred has been historically classified in the stockholders’ equity sectionof the Consolidated Balance Sheets, however the Company has determined that theSeries B Preferred Stock should be classified in the mezzanine section asprovided by guidance contained in EITF Topic D-98, “Classificationand Measurement of Redeemable Securities.” Under this guidance, classification in the permanent equity section isnot considered appropriate if the preferred stock is redeemable upon majorityvote of the Board of Directors and such board is controlled by the preferredsecurity holders.  At December 31, 2003,preferred security holders comprised 50% of the Board of Directors.  As a result, the Series B Preferred Stock isbeing reclassified into the mezzanine section of the Consolidated BalanceSheets.

 

On March 31, 2004, the Board ofDirectors elected a seventh member who is not a preferred security holder.  As a result, the preferred security holderswill no longer control the Board of Directors and the Series A and Series BPreferred Stock will be classified in the permanent equity section of the ConsolidatedBalance Sheets at March 31, 2004.  Inaddition, on March 31, 2004, the Board of Directors approved an amendment tothe Series A Preferred Stock agreement to remove the mandatory redemptionprovision.

 

**NOTE B – SUPPLEMENTALSCHEDULE OF NONCASH INVESTING AND FINANCING TRANSACTIONS**

 

TheConsolidated Statement of Cash Flows included the following noncash investingand financing transactions:

 
|                                                              |   | **Years Ended December 31,** |   |
|-------------------------------------------------------------------|--------|------------------------------|--------|
|                                                              |   | **2003**                     |   | **2001** |   | **2001** |   |
| Deferral if Sponsor Note  Quarterly Interest Payments             |   | $                            | — |   | $ | — |   | $ | 17,735 |   |
| Capital lease obligation  incurred for lease of computer hardware |   | 2,396                        |   | — |   | — |   |
| Inventory put in service as  fixed asset                          |   | 1,856                        |   | — |   | — |   |
|                                                                   |        |                              |        |  |  |  |  |  |  |  |

 

**NOTE C - DISCONTINUEDOPERATIONS, RESTRUCTURING AND IMPAIRMENT**

 

*DiscontinuedOperations.*

1.               In 1999, the Company completed the sale ofsubstantially all of the net assets of its community banking business to JackHenry and Associates (“JHA”). The Company received proceeds of $50.0 million incash from the sale and recorded a pre-tax gain of approximately $20.3 million.During 2001 and 2000, an additional $0.7 million and $1.7 million, 

 

34

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respectively, was accrued representing changes in estimate foradditional expenses related to the Company’s obligation to complete certaindevelopment activities.  For financialstatement purposes, the Company treated the sale as a discontinued operation,and accordingly, financial statement presentation was made in accordance withAPB Opinion No. 30, “Reporting the Results of Operations - Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions”.

 

2.               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 the Companyand JAFCO.  The sale involved twoseparate transactions: (1) the purchase by JAFCO of 100% of the outstandingshares of BTJ for 6.5 billion yen, and (2) a one-time, up-front payment by BTJto the Company of 4.0 billion yen under certain distribution and licensingagreements.  Under such agreements, BTJwill continue to operate under the name “BancTec Japan”.  After foreign currency conversions andtransaction costs, the Company received approximately US $82.5 million inaggregate net proceeds.  For financialstatement purposes, the Company treated the sale as a discontinued operationunder SFAS No. 144, and accordingly, financial statement presentation was madein accordance with APB Opinion No. 30. BTJ’s operating results have been segregated and reported asdiscontinued operations in the accompanying consolidated statements of incomeand cash flows, and related notes. During 2002, the Company recorded a gain on the disposal of the businessof $63.0 (net of income tax expense of $0). Revenue from the discontinued operations of BTJ for the fiscal years2002 and 2001 was $63,213 and $78,473, respectively.  Pretax income from the discontinued operations of BTJ for fiscal2002 and 2001 was $5,451 and $13,856, respectively.  The assets related to BTJ were previously classified in theInternational segment (See Note K for the discussion 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.  At December 31, 2001, the Company’s balance sheet accrual forseverance was approximately $4.5 million. During 2002, the Company recorded additional accruals of approximately$1.9 million and recorded payments of approximately $4.8 million against theseaccruals, resulting in a liability balance of $1.6 million at December 31,2002.  During 2003, the Company recordedadditional accruals of approximately $2.1 million and recorded payments ofapproximately $3.2 million against these accruals, resulting in a liabilitybalance of $0.5 million at December 31, 2003. As of December 31, 2003, approximately 720 employees have beenterminated since 2001, including employees in production, product development,sales and marketing and other administrative functions.

 

*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. Duringthe fourth quarter of 2001, the Company determined that long-lived tangibleassets totaling approximately $4.1 million were impaired. Impairment chargesare included in Cost of sales, Selling, general and administrative and Productdevelopment expenses in the Company’s Consolidated Statements ofOperations.  The impairments includedapproximately $1.9 million for capitalized spare parts, which were determinedto be obsolete, and approximately $2.2 million for property, plant and equipment(of which $1.5 million was from vacating an owned facility currently beingoffered for sale).

 

**NOTE D - INVENTORIES**

 

Inventoryconsists of the following:

 

|             |   | **December 31,**   |   |
|------------------|--------|--------------------|--------|
|             |   | **2003**           |   | **2002** |   |
|             |   | **(In thousands)** |   |
| Raw materials    |   | $                  | 6,035  |   | $ | 5,374 |   |
| Work-in-progress |   | 7,168              |   | 9,995 |   |
| Finished goods   |   | 10,705             |   | 10,159 |   |
|             |   | $                  | 23,908 |   | $ | 25,528 |   |

 

35

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**NOTE E - DEBT ANDOTHER OBLIGATIONS**

 

Debt andother obligations consist of the following:

 
|                                                   |   | **December 31,**   |    |
|--------------------------------------------------------|--------|--------------------|---------|
|                                                   |   | **2003**           |    | **2002** |   |
|                                                   |   | **(In thousands)** |    |
| 7.5% Senior Notes, due 2008                            |   | $                  | 93,975  |   | $ | 97,875 |   |
| Revolver                                               |   | —             |    | — |   |
| Senior Subordinated Sponsor  Note, unsecured, due 2009 |   | 103,848            |    | 103,848 |   |
|                                                   |   | 197,823            |    | 201,723 |   |
| Less:  Current portion                            |   | —             |    | — |   |
|                                                   |   | $                  | 197,823 |   | $ | 201,723 |   |

 

RevolvingCredit Facility. The Company has a revolving creditfacility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”), whichwill mature on May 30, 2006.  EffectiveMay 7, 2003, the Company and Heller entered into an amendment to the Revolverwhich reduced the committed amount from $60 million to $40 million, whileincreasing the letter-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.  OnNovember 27, 2002, the Company and Heller entered into an amendment to theRevolver that added pledged cash to the borrowing base.  Funds availability under the Revolver isdetermined by a borrowing-base formula equal to a specified percentage of thevalue of the Company’s eligible accounts receivable, inventory and pledgedcash.  At December 31, 2003, the Companyhad no balance outstanding under the Revolver and an outstanding balance onletters-of-credit totaling $18.7 million. The balance remaining under the Revolver that the Company can draw was$17.2 million at December 31, 2003 ($21.2 million in availability less a $4.0million reserve).  A commitment fee of0.5% per annum on the unused portion of the Revolver is payable quarterly.

 

The interest rate on loansunder the Revolver is, at the Company’s option, either (1) 0.75% over prime or(2) 2.25% over LIBOR.  Under anamendment effective September 1, 2003, the interest rate margins over prime andLIBOR may be increased by 0.25% increments when the fixed charge coverage ratiofalls below (1) 2.0 to 1.0, (2) 1.75 to 1.0, (3) 1.5 to 1.0 and (4) 1.25 to 1.0and (total rate increase of 1.00%) or decreased by 0.25% increments when thefixed charge coverage ratio is greater than 2.25 to 1.0 (total rate decrease of0.25%).  The interest rate wasremeasured as of the effective date of September 1, 2003 under thisamendment.  At December 31, 2003, theCompany’s weighted average rate on the Revolver was 4.75%.

 

Under the Revolver,substantially all of the Company’s domestic cash receipts (including proceedsfrom accounts receivable and asset sales) must be applied to repay theoutstanding loans, which may be re-borrowed subject to availability inaccordance with the borrowing base formula. The Revolver contains restrictionson the use of cash for dividend payments or non-scheduled principal payments oncertain indebtedness.  Restricted cashat December 31, 2003 of $19.6 million represents cash pledged under the termsof the Revolver.  The Revolver containsvarious representations, warranties and covenants, including financialcovenants as to maximum capital expenditures, minimum fixed charge coverageratio and minimum average borrowing availability.  On July 30, 2002, the Companyand Heller amended the Revolver, which reduced the Company’s fixed chargecoverage ratio covenant during the first, second and third quarters of 2002,and reduced the minimum undrawn availability requirement from $10.0 million to$4.0 million.  At December 31,2003, the Company was in compliance with all covenants under the Revolver.

 

Senior Notes.  Interest on the Senior Notes is fixed at7.5% and is due and payable in semi-annual installments. Payments beganDecember 1, 1998. The Notes contain covenants placing limitations on theCompany’s ability to permit subsidiaries to incur certain debts, incur certainloans, and engage in certain sale and leaseback transactions. As of December31, 2002, the Company is in compliance with all covenants. During 2001, the Company repurchased Senior Noteswith a face amount of $39.0 million. The Company wrote off a proportionateshare of deferred financing-fees, resulting in a gain of approximately $23.9million.  During 2001, theCompany repurchased Senior Notes with a face amount of $13.1 million.  The Company wrote of a proportionate shareof deferred financing-fees, resulting in a gain of approximately $6.8million.  During 2003, the Companyrepurchased Senior Notes with a face amount of $3.9 million.  The Company wrote off a proportionate shareof deferred financing-fees, resulting in a gain of approximately $1.1 million.

 

SeniorSubordinated Unsecured Sponsor Note. The Company’s$160.0 million Sponsor Note is issued in U.S. dollars, with interest at 10.0%due and payable quarterly.  The SponsorNote is subordinate only upon bankruptcy or insolvency of the Company, or ifupon maturity of the Senior Notes, the Senior Notes remain unpaid. The paymentsbegan September 30,

 

36

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1999. However, as providedunder the agreement, the Sponsor Note holder, WCAS, elected to defer quarterlyinterest payments of $4.0 million for each of the June 2000 through September2001 quarterly periods. Such election required a deferred financing fee of30.0% of each of the interest payments being deferred.  The Company accounts for the additionalfinancing fees as a change in the effective interest rate of the debt.  For the years ended December 31, 2001 and2000, the Company increased the outstanding deferred-interest notes by $17.7million and $16.1 million, respectively. These increases were comprised of the $4.0 million quarterly deferrals,plus financing fees and interest thereon. At December 31, 2001, the Company had$33.8 million outstanding in WCAS notes representing deferred interest. WCASmay, at its election, defer each future quarterly payment under similarterms.  WCAS did not elect to deferquarterly payments due since September 2001. In accordance with the terms of the Sponsor Note, on December 6, 2002, theCompany made a $90 million principal payment on the Sponsor Note.  The Company wrote off a proportionate shareof deferred financing-fees totaling $3.8 million.

 

CapitalLeases.  Duringthe first quarter of 2003, the Company entered into a capital lease for $2.4million that 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 Consolidated BalanceSheets and the non-current portion of capital leases are included in OtherLiabilities.

 

TheCompany had no outstanding foreign-credit balances as of December 31, 2003.

 

As ofDecember 31, 2003 the future maturities of debt are as follows:

 

| **Year**   |   | **(In thousands)** |    |
|------------|--------|--------------------|---------|
| 2004       |   | $                  | —  |   |
| 2005       |   | —             |    |
| 2006       |   | —             |    |
| 2007       |   | —             |    |
| 2008       |   | 93,975             |    |
| Thereafter |   | 103,848            |    |
|       |   | $                  | 197,823 |   |

 

TheCompany paid cash totaling $19.7 million, $28.5 million, and $15.9 million, forinterest during the twelve months ended December 31, 2003, 2002, and 2001,respectively. During the years ended December 31, 2003, 2002 and 2001, theCompany capitalized no interest costs.

 

**NOTE F - PREFERREDSTOCK**

 

**SERIES A PREFERREDSTOCK**

 

Inconsideration for amending the Company’s credit agreements with its Lenders, inSeptember 2000, the Company issued 100,000 shares of $0.01 par value Series APreferred Stock to WCAS, its primary owners. In exchange, WCAS contributed anadditional $15.0 million in cash to the Company. Dividends on the Series APreferred accrue quarterly at an annual dividend rate of 7.0% of the thenStated Value. The Stated Value equals $150.00 per share, plus accumulated andunpaid dividends. Dividends are paid when declared by the Company’s Board ofDirectors. The aggregate liquidation preference/redemption value is $15.0million, plus accumulated and unpaid dividends.  The Company has the right to redeem theSeries A Preferred at any time by payingfor each share the Stated Value per share as of the redemption date. Inaddition, upon the occurrence of certain events, as defined, and upon theapproval of a majority of the holders of the Series A Preferred, the Companywould be required to redeem the shares. An amendment to the agreement covering the Series A preferred stock to remove the mandatory redemption date wasapproved by the Board 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.  TheCompany allocated the proceeds from the Series A preferred-stock issuance basedupon the relative fair-value of the preferred stock and warrants which resultedin recording preferred stock of $11.3 million and warrants of $3.7 million. Therelated discount is being accreted over a period of 8 years.

 

OnNovember 1, 2002, Intermediate Holding contributed $100,000 to the Company inexchange for 667 shares of Series A preferred stock of the Company.  These shares do not include warrants.

 

For theyears ended December 31, 2003 and 2002, accretion of the related discount andaccrued but unpaid dividends totaled $1.7 million and $1.6 million,respectively, increasing the carrying amount to $16.6 million and $14.9million, respectively.

 

37

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As ofDecember 31, 2003, the stated value of the Series A Preferred, includingaccumulated but unpaid dividends, was $187.82.

 

**SERIES B PREFERRED STOCK**

 

In February 2001, the Companyissued 35,520 shares of  $0.01 par valueSeries B Preferred Stock (“Series B Preferred”) to its primary owners, WCAS. Inexchange, WCAS contributed an additional $5.3 million in cash to the Company. Dividends on the Series B Preferred accruequarterly at an annual dividend rate of 25.0% of the then “StatedValue.” The Stated Value equals $150.00 per share, plus accumulated and unpaiddividends. Dividends are paid when declared by the Company’s Board ofDirectors. The aggregate liquidation preference/redemption value at December31, 2003, is $10.0 million, including accumulated and unpaid dividends. TheCompany has the right to redeem the Series B Preferred at any time by paying for each share the Stated Value pershare as of the redemption date. In addition, upon the occurrence ofcertain events, as defined, and upon the approval of a majority of the holdersof the Series B Preferred, the Company would be required to redeem the shares.Each share of Series B Preferred is convertible into shares of Common Stock atany time. The number of shares of Common Stock is determined by multiplying thenumber of shares being converted by $150.00 and dividing the result by $8.325per share. The conversion rate is subject to various adjustments (for anti-dilution).  The Company is required to keep availableapproximately 640,000 common shares for issuance upon conversion of alloutstanding shares of Series B Preferred.

 

 See NOTE A - Summary OfSignificant Accounting Policies under Reclassification, contained in Notes tothe Consolidated Financial Statements, for a discussion of the reclassificationof the Series B Preferred Stock out of permanent equity to the mezzaninesection of the Consolidated Balance Sheets under the guidance of EITF TopicD-98, “Classification and Measurement of Redeemable Securities.”

 

For theyears ended December 31, 2003 and 2002, accrued but unpaid dividends totaled$2.3 million and $1.8 million, respectively. As of December 31, 2003, the stated value of the Series B Preferred,including accumulated but unpaid dividends, was $298.66.

 

**NOTE G - OTHERACCRUED EXPENSES AND LIABILITIES**

 

Otheraccrued expenses and liabilities consist of the following:

 
|                                    |   | **December 31,**   |   |
|-----------------------------------------|--------|--------------------|--------|
|                                    |   | **2003**           |   | **2002** |   |
|                                    |   | **(In thousands)** |   |
| Salaries, wages and other  compensation |   | $                  | 12,843 |   | $ | 12,169 |   |
| Accrued taxes, other than  income taxes |   | 5,312              |   | 8,794 |   |
| Advances from customers                 |   | 907                |   | 586 |   |
| Accrued interest payable                |   | 3,211              |   | 4,951 |   |
| Accrued invoices and costs              |   | 2,114              |   | 2,395 |   |
| Other                                   |   | 12,514             |   | 17,988 |   |
|                                    |   | $                  | 36,901 |   | $ | 46,883 |   |

 

**NOTE H - TAXES**

 

The incometax expense (benefit) on income (loss) from continuing operations consists ofthe following:

 
|           |   | **Years Ended December 31,** |    |
|----------------|--------|------------------------------|---------|
|           |   | **2003**                     |    | **2002** |   | **2001** |   |
| Current:       |   |                         |    |   |   |   |   |
| Federal        |   | $                            | (1,014  | ) | $ | (629 | ) | $ | — |   |
| State          |   | 163                          |    | 641 |   | — |   |
| Foreign        |   | 3,277                        |    | 332 |   | 445 |   |
| Total current  |   | 2,426                        |    | 344 |   | 445 |   |
| Deferred:      |   |                         |    |   |   |   |   |
| Federal        |   | —                       |    | — |   | — |   |
| Foreign        |   | (13,796                      | )       | — |   | — |   |
| Total deferred |   | (13,796                      | )       | — |   | — |   |
|           |   | $                            | (11,370 | ) | $ | 344 |   | $ | 445 |   |

 

38

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

 
|                                                               |   | **Years Ended December 31,** |    |
|--------------------------------------------------------------------|--------|------------------------------|---------|
|                                                               |   | **2003**                     |    | **2002** |   | **2001** |   |
| Provision (benefit) at U.S.  statutory rate of 35% for all periods |   | $                            | 2,259   |   | $ | 343 |   | $ | (18,290 | ) |
| Increase in tax expense  resulting from:                           |   |                         |    |   |   |   |   |
| Impact of foreign and Puerto  Rico income tax rate                 |   | (236                         | )       | 450 |   | 51 |   |
| State income tax, net of  federal income tax benefit               |   | (9                           | )       | 457 |   | — |   |
| Expiration of net operating  losses                                |   | —                       |    | — |   | 400 |   |
| Goodwill amortization                                              |   | —                       |    | — |   | 774 |   |
| Change in estimate on valuation  allowance realization             |   | (13,796                      | )       | — |   | — |   |
| Change in valuation allowance                                      |   | 1,457                        |    | (304 | ) | 17,799 |   |
| Other                                                              |   | (1,045                       | )       | (602 | ) | (289 | ) |
|                                                               |   | $                            | (11,370 | ) | $ | 344 |   | $ | 445 |   |

 

TheCompany paid cash totaling $1.5 million and $0.3 million for income taxes oncontinuing operations during the years ended December 31, 2003 and 2002,respectively.  The Company received netcash refunds of $0.1 million for income taxes on continuing operations duringthe year ended December 31, 2001.

 

The taxeffects of temporary differences that give rise to significant portions of thedeferred tax assets and liabilities at December 31, 2003 and 2002 are presentedbelow (dollars in thousands):

 
|                                   |   | **December 31,**   |   |
|----------------------------------------|--------|--------------------|--------|
|                                   |   | **2003**           |   | **2002** |   |
|                                   |   | **(In thousands)** |   |
| Gross deferred tax assets:             |   |               |   |   |   |
| Net operating losses                   |   | $                  | 38,106 |   | $ | 34,857 |   |
| AMT credit carryforwards               |   | 328                |   |   |   |
| Inventory reserves                     |   | 5,360              |   | 5,742 |   |
| Receivable allowance                   |   | 301                |   | 557 |   |
| Intangible assets previously  deducted |   | 1,341              |   | 1,777 |   |
| Deferred revenues                      |   | 23,152             |   | 20,129 |   |
| Deferred compensation                  |   | 2,443              |   | 2,503 |   |
| Foreign timing differences, net        |   | 3,835              |   | 2,505 |   |
| Taxes paid on intercompany  profits    |   | 938                |   | 953 |   |
| Other                                  |   | 5,129              |   | 9,539 |   |
| Total gross deferred tax asset         |   | 80,933             |   | 78,562 |   |
| Gross deferred tax liabilities:        |   |               |   |   |   |
| Depreciation                           |   | (1,646             | )      | (2,520 | ) |
| Other                                  |   | (679               | )      | (307 | ) |
| Total gross deferred tax  liability    |   | (2,325             | )      | (2,827 | ) |
| Deferred tax asset valuation  reserve  |   | (64,812            | )      | (75,735 | ) |
| Net deferred tax asset                 |   | $                  | 13,796 |   | $ | — |   |

 

39

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Avaluation allowance has been provided to reduce the deferred tax assets to anamount management believes is more likely than not to be realized. Expectedrealization of deferred tax assets for which a valuation allowance has not beenrecognized is based upon the reversal of existing taxable temporary differencesand taxable income expected to be generated in the future.  The valuation allowance fordeferred tax assets as of December 31, 2003 and December 31, 2002 was$64,812,000 and $75,735,000, respectively. The net change in the total valuation allowance for the year endedDecember 31, 2002 was a decrease of $29,658,000, of which $29,354,000 relatedto the gain on the disposal of discontinued operations and $304,000 related toincome from continuing operations.  Thenet change in the total valuation allowance for the year ended December 31,2003 was a decrease of $10,923,000, of which $13,796,000 related to release ofvaluation allowance, $1,416,000 related to prior year true-ups and corrections,and $1,457,000 related to income from continuing operations.

 

Company’seffective tax rate was (176.1%), 5.1% and (17.2%) for the years ended December31, 2003, 2002, and 2001, respectively.

 

TheCompany’s net operating loss carryforwards of $100.4 million expire as follows:$14.5 million in the period from 2004 through 2007, $1.0 million in the periodfrom 2008 through 2012, $78.1 million in the period from 2013 through 2025, and$6.8 million with no expiration.

 

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

 
|                |   | **Years Ended December 31,** |   |
|---------------------|--------|------------------------------|--------|
|                |   | **2003**                     |   | **2002** |   | **2001** |   |
| United States       |   | $                            | (5,788 | ) | $ | (3,384 | ) | $ | (49,105 | ) |
| Foreign             |   | 12,244                       |   | 4,084 |   | (3,153 | ) |
| Total income (loss) |   | $                            | 6,456  |   | $ | 700 |   | $ | (52,258 | ) |

 

Undistributedearnings of foreign subsidiaries included in continuing operations wereapproximately $35.9 million, $17.5 million, and $18.0 million at December 31,2003, 2002 and 2001, respectively. No taxes have been provided on theseundistributed earnings as they are considered to be permanently reinvested.

 

**NOTE I - EMPLOYEEBENEFIT 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-tax contributions,up to a maximum that is tied to the Company’s achievement of certain financialobjectives.  Amounts expensed under theplan for the years ended December 31, 2003, 2002 and 2001 were $0.0 million,$0.0 million and $0.5 million, respectively.

 

The Company’ssubsidiary in United Kingdom provides pension benefits to retirees and eligibledependents. Employees eligible for participation include all full-time regularemployees who are more than three years from retirement. A retirement pensionor a lump-sum payment may be paid dependent upon length of service at themandatory retirement age. The Company accrues the cost of these benefits overthe service lives of the covered employees based on an actuarial calculation.

 

40

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

 
|                                                      |   | **Years Ended December 31,** |   |
|-----------------------------------------------------------|--------|------------------------------|--------|
|                                                      |   | **2003**                     |   | **2002** |   | **2001** |   |
| Change in Benefit Obligation                              |   |                         |   |   |   |   |   |
| Benefit obligation at beginning  of year                  |   | $                            | 14,032 |   | $ | 14,768 |   | $ | 13,199 |   |
| Service cost                                              |   | 465                          |   | 682 |   | 704 |   |
| Interest cost                                             |   | 915                          |   | 933 |   | 785 |   |
| Participant’s contributions                          |   | 497                          |   | 456 |   | 417 |   |
| Actuarial (gain) loss                                     |   | 8,498                        |   | (4,224 | ) | — |   |
| Amendments                                                |   | 92                           |   | 141 |   | — |   |
| Benefits paid                                             |   | (123                         | )      | (134 | ) | (26 | ) |
| Foreign-exchange rate changes                             |   | 2,480                        |   | 1,410 |   | (311 | ) |
| Benefit Obligation at end of  year                        |   | 26,856                       |   | 14,032 |   | 14,768 |   |
|                                                      |   |                         |   |   |   |   |   |
| Change in Plan Assets                                     |   |                         |   |   |   |   |   |
| Estimated fair value of plan  assets at beginning of year |   | 8,678                        |   | 8,700 |   | 9,244 |   |
| Actual return on plan assets                              |   | 2,123                        |   | (2,199 | ) | (1,474 | ) |
| Employer contribution                                     |   | 990                          |   | 998 |   | 771 |   |
| Employee contribution                                     |   | 497                          |   | 456 |   | 417 |   |
| Benefits paid                                             |   | (123                         | )      | (134 | ) | (26 | ) |
| Foreign-exchange rate changes                             |   | 1,269                        |   | 857 |   | (232 | ) |
| Estimated fair value of plan  assets at end of year       |   | 13,434                       |   | 8,678 |   | 8,700 |   |
|                                                      |   |                         |   |   |   |   |   |
| Funded status                                             |   | (13,422                      | )      | (5,354 | ) | (6,068 | ) |
| Unrecognized actuarial loss                               |   | 8,541                        |   | 831 |   | 2,131 |   |
| Unrecognized transition cost                              |   | —                       |   | 275 |   | 507 |   |
| Accrued benefit cost                                      |   | $                            | (4,881 | ) | $ | (4,248 | ) | $ | (3,430 | ) |
| Weighted-average assumptions as  of December 31, 2002     |   |                         |   |   |   |   |   |
| Discount Rate                                             |   | 5.8                          | %      | 6.3 | % | 5.8 | % |
| Expected asset return                                     |   | 7.6                          | %      | 7.0 | % | 6.8 | % |
| Rate of compensation increase                             |   | 2.5                          | %      | 1.2 | % | 2.5 | % |

 

Thecomponents of the net periodic benefit cost are as follows:

 
|                                |   | **Years Ended December 31,** |   |
|-------------------------------------|--------|------------------------------|--------|
|                                |   | **2003**                     |   | **2002** |   | **2001** |   |
| Service Cost                        |   | $                            | 465    |   | $ | 682 |   | $ | 704 |   |
| Interest Cost                       |   | 915                          |   | 933 |   | 785 |   |
| Expected return on plan assets      |   | (655                         | )      | (644 | ) | (640 | ) |
| Amortization of transition  amount  |   | 280                          |   | 266 |   | 256 |   |
| Amortization of prior service  cost |   | 92                           |   | 141 |   | — |   |
| Recognized actuarial loss           |   | 49                           |   | 45 |   | — |   |
| Net periodic benefit cost           |   | $                            | 1,146  |   | $ | 1,423 |   | $ | 1,105 |   |

 

**NOTE J - WARRANTYLIABILITY**

 

The Company offers various product warranties forhardware sold to its customers.  The specific terms and conditions of thewarranties vary depending upon the customer and the product sold.  Factorsthat affect the Company’s warranty liability include number of products sold,historical and anticipated rates of warranty claims and cost per claim. The Company accrues for estimated warranty costs as sales are made andperiodically assesses the adequacy of its recorded warranty liability andadjusts the amount as necessary.

 

Changes to the Company’s warranty liability, whichis reported as a component of other accrued expenses and liabilities in theaccompanying condensed consolidated balance sheet during the year endedDecember 31, 2003 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    |   |

 

41

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**NOTE K - COMMITMENTSAND 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 31,2003, 2002, and 2001 was $7.9 million, $8.9 million, and $11.5 million, respectively.

 

Futureminimum payments under non-cancelable operating leases, net of expectedsublease income of $0.2 million in calendar year 2004, are as follows:

 

| **Year**   |   | **(In thousands)** |   |
|------------|--------|--------------------|--------|
| 2004       |   | $                  | 5,832  |   |
| 2005       |   | 4,216              |   |
| 2006       |   | 3,415              |   |
| 2007       |   | 2,524              |   |
| 2008       |   | 1,901              |   |
| Thereafter |   | 1,703              |   |
|       |   | $                  | 19,591 |   |

 

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 a paymentto the holder of the Sponsor Note.  The complaint seeks damages of notless than $89 million as a result of the alleged improper payment and theimposition of a constructive trust on monies paid by the Company to the holderof the Sponsor Note.  The Company’s $90 million payment to the holder ofthe Sponsor Notes was disclosed in the Company’s Current Report on Form 8-Kdated November 27, 2002.  This action is in its earliest stages.  TheCompany believes that the allegations are without merit and intends to defendagainst them vigorously.

 

If the lawsuit results in adetermination that the payment to reduce the principal amount of the SponsorNote was in contravention of the terms of the Sponsor Note, a positionstrongly opposed by the Company, under its terms, such payment shall beheld in trust to be paid over to the holders of the Senior Notes, to the extentthey remain unpaid.  Therefore, in the event of an unfavorable outcome inthis litigation, there will be no adverse effect on the Company’s financialstatements.

 

TheCompany and its subsidiaries are parties to various other legal proceedings.Although the ultimate disposition of such proceedings is not presentlydeterminable, in the opinion of the Company, any liability that may ensue wouldnot have a material adverse impact on the financial position or results ofoperations or cash flows of the Company.

 

**NOTE L - BUSINESSSEGMENT DATA**

 

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

 

In 2001,the Company 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, CNS reporting includes start-upservice operations in Canada and Europe.

 

*US Solutions andInternational Solutions.* USS and INTL offer similar systems-integration and business-processsolutions and services and market to similar types of customers. The solutionsoffered primarily involve high-volume transaction processing using advancedtechnologies and processes. Key applications include payment and checkprocessing, document imaging and workflow, and ongoing service and support.These segments provide their products and services to customers, includingfinancial-services companies and insurance providers, telecommunicationscompanies, utility companies, governmental agencies, and transportationfirms.  USS develops and sellsthe Company’s Pay Courier Archive solution. Plexus offers a complete suite of Internet-enabled document imaging and workflowsoftware-solutions under the Plexus® brand.

 

42

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*Computer and NetworkServices.* TheCompany is a leading provider of integrated desktop and desk side support, andpersonal computer repair services in the United States to many customers,including many Fortune 1000 companies. One focus of CNS is providing warrantyfulfillment services and related support to manufacturers of desktop/enterpriseproducts. Another focus is the support of desktop/enterprise applications.

 

Data forall years excludes 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,  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    |   |
| Segment identifiable assets           |   | 101,076           |    | 33,818                                |   | 41,212            |   | 55,289         |    | 231,395   |   |
| Capital appropriations                |   | 3,500             |    | 1,757                                 |   | 1,635             |   | 313            |    | 7,205     |   |
|                                  |   |              |    |                                  |   |              |   |           |    |      |   |
| For the year ended December 31,  2001 |   |              |    |                                  |   |              |   |           |    |      |   |
|                                  |   |              |    |                                  |   |              |   |           |    |      |   |
| Revenue from external customers       |   | $                 | 164,162 |                                  | $      | 147,016           |   | $              | 116,086 |      | $      | — |   | $ | 427,264 |   |
| Intersegment revenues                 |   | 13,740            |    | —                                |   | 21,942            |   | (35,682        | )       | —    |   |
| Segment gross profits                 |   | 3,130             |    | 21,830                                |   | 30,117            |   | 808            |    | 55,885    |   |
| Segment operating income (loss)       |   | (35,198           | )       | 1,260                                 |   | (1,694            | )      | (2,847         | )       | (38,479   | )      |

 

**NOTE M - GEOGRAPHICOPERATIONS**

 

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.

 

Sales tounaffiliated customers and affiliates for the years ended December 31, 2003,2002 and 2001, 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  Inter-  national** |   | **Elimina-  tions** |   | **Consoli-  dated** |   |
|----------------------------------------------|--------|--------------------|---------|---------------------|--------|-----------------------------|--------|---------------------|--------|---------------------|--------|
| 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             |   |
|                                         |   |               |    |                |   |                        |   |                |   |                |   |
| Year ended December 31, 2001                 |   |               |    |                |   |                        |   |                |   |                |   |
| Sales to unaffiliated customers              |   | $                  | 323,122 |                | $      | 49,198                      |   | $                   | 54,944 |                | $      | — |   | $ | 427,264 |   |
| Inter-area sales to affiliates               |   | 32,145             |    | 1,997               |   | 1,540                       |   | (35,682             | )      | —              |   |
| Long-lived assets other than  deferred taxes |   | 152,347            |    | 3,566               |   | 5,442                       |   | (24,286             | )      | 137,069             |   |

 

43

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**NOTE N - SUMMARIZEDQUARTERLY DATA (UNAUDITED)**

 
|                                      |   | **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 |   |
| Income (loss) from continuing  operations |   | (146                             | )      | 303 |   | 4,217 |   | 13,452 |   | 17,826 |   |
| Net income (loss)                         |   | (146                             | )      | 303 |   | 4,217 |   | 13,452 |   | 17,826 |   |
|                                           |        |                                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

AS RESTATED

 
|                                      |   | **Year Ended December 31, 2002** |   |
|-------------------------------------------|--------|----------------------------------|--------|
|                                      |   | **Q1(1)**                        |   | **Q2(1)** |   | **Q3(1)** |   | **Q4(2)** |   | **Total** |   |
| Revenue                                   |   | $                                | 97,281 |   | $ | 95,574 |   | $ | 93,658 |   | $ | 92,920 |   | $ | 379,433 |   |
| Gross profit (loss)                       |   | 22,970                           |   | 20,880 |   | 27,442 |   | 24,913 |   | 96,205 |   |
| Income (loss) from continuing  operations |   | (3,973                           | )      | 75 |   | 945 |   | 3,309 |   | 356 |   |
| Net income (loss)                         |   | (9,962                           | )      | 955 |   | 1,501 |   | 66,632 |   | 59,126 |   |
|                                           |        |                                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Subsequent to the issuance of the Company’s financial statements as ofand for the quarters ended March 31, June 30 and September 30, 2002 and thefiling of Form 10-Q for the respective quarters of 2002, management determinedthat certain revenue items totaling $1.6 million were not recorded in theproper period.  Accordingly, the summarizedquarterly data for the first, second and third quarters of 2002 has beenrestated from amounts reported in the 2002 Form 10-Q’s to appropriately reportsuch revenues.  Also, during 2002, theCompany recorded as a cumulative effect of a change in accounting principle, anon-cash charge of $6.9 million related to the write off of a portion of thecarrying value of goodwill.  Net incomefor the quarter ended March 31, 2002 has been restated to reflect this writeoff.

 

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

 

(3)          All quarters for 2002 have been restated to reflect the sale of theCompany’s wholly-owned subsidiary, BancTec Japan, as a discontinued operation.

 

**NOTE O - ACCUMULATEDOTHER COMPREHENSIVE LOSS**

 

The components of accumulatedother comprehensive loss at December 31, 2003 consist of foreign-currencytranslation adjustments related to the Company’s international operations (again of $1.4 million) and minimum pension liability related to the Company’ssubsidiary in the United Kingdom ($6.2 million).

 

**NOTE P - SUBSEQUENTEVENTS**

 

None

 

44

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**BANCTEC,INC.**

 

**INDEXTO FINANCIAL STATEMENTS AND SCHEDULES**

 
| Financial Statements and Independent Auditors’ Report                                                           |
|----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                 |
| Independent Auditors’ Report                                                                                    |
|                                                                                                                 |
| Reports of Independent Public Accountants                                                                            |
|                                                                                                                 |
| Consolidated Balance Sheets at December 31, 2003 and December 31,  2002                                              |
|                                                                                                                 |
| Consolidated Statements of Operations for  the years ended December 31, 2003, 2002 and 2001                          |
|                                                                                                                 |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2003, 2002 and 2001                          |
|                                                                                                                 |
| Consolidated Statements of Stockholders’  Equity (Deficit) for the years ended December 31, 2003, 2002 and 2001 |
|                                                                                                                 |
| Consolidated Statements of Comprehensive  Income (Loss)                                                              |
|                                                                                                                 |
| Notes to Consolidated Financial Statements                                                                           |
|                                                                                                                 |
| Supplemental Schedules                                                                                               |
|                                                                                                                 |
| Schedule  II-Valuation and Qualifying Accounts for the years ended December 31, 2003,  2002 and 2001                 |

 

 

All otherschedules have been omitted as the required information is inapplicable, notrequired, or the information is included in the financial statements and notesthereto.

 

45

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

 

None.

 

**ITEM 9A****.  CONTROLS ANDPROCEDURES**

 

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 Form8-K filed 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 addressedcertain of the individual internal-control weaknesses noted by D&T andKPMG, but analysis of internal control factors continues on an ongoingbasis.  Steps that have been implementedto address internal-control weaknesses include policies covering losscontracts, inventory reserves, allowance for doubtful accounts, revenuerecognition, and project costing.  Inaddition, as a result of Exchange Act Rule 13a-14, the Company has begun to putin place procedures addressing the adequacy of disclosure controls, includingobtaining certifications from each member of management involved in thepreparation and review of this Form 10-K. The Company is continuing its efforts to correct the internal-controlweaknesses noted by D&T and KPMG. Although the Company believes that it has implemented adequate controlsand procedures for the preparation of this report, the actions taken by theCompany to correct certain of the previously identified weaknesses will not befully tested by the Company’s independent accountants until the annual auditfor the year ended December 31, 2005.

 

Within the 90 days prior to thefiling date of this report, the Chief Executive Officer and the Chief FinancialOfficer of the Company, with the participation of the Company’s management,began an evaluation of the effectiveness of the Company’s disclosure controlsand 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 judgmentin decision-making can be faulty and that breakdowns in internal control canoccur because of human failures such as simple errors or mistakes orintentional circumvention 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.**

** **

**46**

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**PART III**

 

**ITEM 10****. DIRECTORS AND EXECUTIVE OFFICERS OF BANCTEC, INC.**

 

Thefollowing table sets forth the names, ages, and positions of each of thedirectors and executive officers of the Company as of March 31, 2004.

 

The Boardof Directors elects executive officers annually. No family relationships existamong 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**                                      |
|---------------------|--------|---------|--------|---------------------------------------------------|
| Craig D. Crisman    |   | 63      |   | President and Chief Executive Officer             |
| Brian R. Stone      |   | 44      |   | Senior Vice President and Chief Financial Officer |
| Robert A. Minicucci |   | 51      |   | Chairman of the Board and Director                |
| Coley Clark         |   | 58      |   | Director                                          |
| Gary J. Fernandes   |   | 60      |   | Director                                          |
| Eric J. Lee         |   | 32      |   | Director                                          |
| Sanjay Swani        |   | 37      |   | Director                                          |

 

Mr.Crisman has been President and Chief Executive Officer since May 2001.  From August 1994 through April2001, Mr. Crisman served as Chief ExecutiveOfficer of Applied Magnetics Corporation and from November 1995 through April2001, also served as Chairman of theBoard. In January 2000, Applied MagneticsCorporation filed for protection under Chapter 11 of the United StatesBankruptcy Code, from which it was discharged in November 2001.

 

Mr. Stonehas been Senior Vice President and Chief Financial Officer since May 2001.  From September 1999 through May 2001, Mr.Stone provided management consulting services to several U.S. companies. FromMarch 1996 through August 1999, Mr. Stone served as Chief Executive Officer ofMagnetic Data Technologies, LLC.

 

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. Clarkhas been a director of the Company since March 2004.  Mr. Clark joined EDS in 1971 and has been president of EDSFinancial Global Industry Solutions since 1996.  Mr. Clark is also director of Solcorp, Ltd., a provider ofsoftware products to the global life insurance industry and FundsXpress, asoftware provider to the financial industry. He is also advisory director of Waveset, a secure identity managementsolutions provider.

 

Mr.Fernandes retired as Vice Chairman of Electronic Data SystemsCorporation (EDS), a global services company, in 1998, after serving on theBoard of Directors of EDS since 1981. After retiring from EDS, Mr. Fernandes founded Convergent Partners, aventure-capital fund focusing on buyouts of technology-related companies.  He also served as Chairman and CEO ofGroceryWorks, Inc, an internet grocery-fulfillment company until 2001.  He currently serves on the Boards ofDirectors of 7-Eleven, Inc., a worldwide operator, franchisor and licensor ofconvenience stores, webMethods, Inc., a software-integration company listed onNASDAQ, and Anacomp, Inc.  Mr. Fernandesis currently the Chairman and President of FLF Real Estate Ventures.

 

Mr. Leehas 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 healthcareindustries.  From July 1995 to June1999, Mr. Lee was employed by Goldman, Sachs & Company where he worked inthe High Technology and Mergers & Acquisitions groups.

 

Mr. Swanihas been a director of the Company since December 2000. Mr. Swani joined Welsh,Carson, Anderson & Stowe in July 1999 and became a General Partner inOctober 2001. Mr. Swani also served as a principal of Fox Paine & Company(a San Francisco-based buyout firm) from June 1998 to June 1999 and worked inthe mergers and acquisitions department of Morgan Stanley & Co. (a globalfinancial services firm) from August 1994 to June 1998. Mr. Swani is also adirector of Global Knowledge Networks, Inc. and Valor Telecommunications, LLC.

 

## *Audit Committee*

## * *

On March 15, 2004, the AuditCommittee consisted of Sanjay Swani, EricJ. Lee, and Gary J. Fernandes.  Nomember of the Audit Committee was an officer of the Company.  No member of the Audit Committee wasformerly an officer of the Company.

 

47

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## *Section 16(a) Beneficial Ownership ReportingCompliance*

 

Notapplicable.

 

**ITEM 11****. EXECUTIVE COMPENSATION**

 

**Summary CompensationTable**

 

Thefollowing table sets forth certain information regarding compensation earnedduring the fiscal years ended December 31, 2003, 2002 and 2001, by theCompany’s Chief Executive Officer and each of the Company’s four other mosthighly compensated executive officers earning in excess of $100,000 per year(based upon salary and bonus earned during the fiscal year ended December 31,2003).

 

 
|                                                                   |   |             |   | **Annual Compensation**   |   | **Long Term Compensation Awards** |   |
|------------------------------------------------------------------------|--------|------------------|--------|---------------------------|--------|-----------------------------------|--------|
| **Name and  Principal Position(s)**                                    |   | **Fiscal  Year** |   | **Salary($)**             |   | **Bonus****($) (1)**              |   | **Restricted  Stock  Awards($)** |   | **Securities  underlying  options****(#) (2)** |   | **All Other****Compensation  ($)  (3)** |   |
| Craig D. Crisman  President and Chief  Executive Officer               |   | 2003  2002  2001 |   | 450,000  432,675  294,219 |   | 158,063  357,563  267,750         |   | 0  0  0 |   | 0  0  0 |   | 0  0  0 |   |
| Brian R. Stone (6)  Senior Vice President and  Chief Financial Officer |   | 2003  2002  2001 |   | 325,000  310,831  214,583 |   | 114,156  255,612  193,460         |   | 0  0  0 |   | 0  0  0 |   | 0  0  0 |   |

 

----

(1)          Reflects bonus earnedduring each fiscal year.

 

(2)          Options to acquireshares of Common Stock.

 

(3)          Includes cashcompensation received for severance payments to Mr. Staedke and Mr. Kildebeck(2002).

 

(4)          Mr. Staedke served aspresident and Chief Executive Officer from December 1999 to May 2001, Directorfrom December 2000 to May 2001 and Chairman of the Board of Directors from May2001 to December 2001.  Mr. Staedketerminated employment effective December 31, 2001.

 

(5)          Mr. Kildebeck terminatedemployment effective January 31, 2002.

 

(6)          Salaryand bonus includes compensation paid to ACR/BI Limited Partnership.

 

**Option Grants in 2003**

 

TheCompany did not grant options to any of the named executive officers during2003.

 

**Aggregated OptionExercises in 2003 and Fiscal Year-End Option Values**

 

None ofthe named executive officers hold options in the Company.

 

**Compensation ofDirectors**

 

Directorsof the Company are not compensated for their services.

 

**Employment Agreements**

 

During2003, Mr. Crisman was compensated at an annualized salary rate of$450,000.  Mr. Crisman also received abonus of $158,063 for his services during 2003. Effective July 1, 2002, theCompany entered into an employment agreement with Mr. Crisman which providesfor the payment of an annual base salary of $450,000, subject to annual reviewby the Board of Directors, and a discretionary bonus. The agreement initiallyexpired on December 31, 2002 and automatically renews for successive one-yearperiods unless terminated by either party. The agreement provides for severancein an amount equal to the sum of the then-current salary and the bonus awardedin the preceding 12-month period, in the case of termination for reasons otherthan cause or without good reason.

 

During2001, the Company retained the services of Brian R. Stone, a consultant ofACR/BI Limited Partnership, as Chief Financial Officer of the Company. During2002, the Company paid to ACR/BI Limited Partnership a monthly fee of $27,083

 

48

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throughJuly 2002.  The Company entered into anemployment agreement with Mr. Stone, dated July 1, 2002, which provides for thepayment of an annual base salary of $325,000, subject to annual review by theBoard of Directors, and a discretionary bonus. Mr. Stone was compensated at an annualized rate of $325,000 and a bonusof $114,156 for his services during 2003. The agreement initially expired on December 31, 2002 and automaticallyrenews for successive one-year periods unless terminated by either party. Theagreement provides for severance in an amount equal to the sum of thethen-current salary and the bonus awarded in the preceding 12-month period, inthe case of termination for reasons other than cause or without good reason.

 

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

 

TheCompany did not have a Compensation Committee from the July 23, 1999 mergerdate through December 3, 2000. From December 4, 2000 through December 31, 2001,the Compensation Committee was composed of Robert A. Minicucci and Anthony J.de Nicola (a former director of the Company). From January 1, 2002 through December 31, 2003, the CompensationCommittee was composed of Robert A. Minicucci.

 

From July1, 2000 through December 3, 2000, the Option Committee was composed of RobertA. Minicucci, Anthony J. de Nicola, and Murray Holland (a former director ofthe Company) and from December 4, 2000 through December 31, 2001, the OptionCommittee was composed of Robert A. Minicucci and Anthony J. de Nicola.  From January 1, 2002 through December 31,2003, the Option Committee was composed of Robert A. Minicucci.

 

No memberof 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 THECOMPENSATION COMMITTEE**

### ** **

### **Compensation Policy and Executive Compensation.**  The Compensation Committee is responsible for reviewing andmaking recommendations as to the annual compensation of the Company’s executiveofficers, including such components as annual cash compensation, short andlong-term incentives, and supplemental benefits.

### ** **

The Company’s compensationpolicy is based on linking executive compensation to the Company’s objectivesof growth through increased earnings and maximizing long-term stockholdervalue.  This policy traditionally hasbeen carried out through a compensation program consisting of salaries andincentives.  In determining thecompensation of the executive officers, the Committee considered compensationpractices of similar companies and the relative performance of BancTec, Inc. tothose companies.  The Committee alsoconsidered the contribution of each executive officer toward achieving theCompany’s prior-year and long-term strategic objectives.

 

In its considerations, theCommittee did not assign quantitative relative weights to different factors orfollow mathematical formulae.  Rather,the Committee exercised its discretion and made a judgment after consideringthe factors it deemed relevant.  TheCommittee’s decisions regarding 2003 executive compensation were designed to:(1) align the interest of executive officers with the interests of thestockholders by providing performance-based awards; and (2) allow the Companyto compete for and retain executive officers critical to the Company’s successby providing an opportunity for compensation that is comparable to the levelsoffered by similar companies.

 

The Company has entered intowritten employment agreements with each of its executive officers.  See “Employment Agreements.”

 

**2003 TotalCompensation for the Chief Executive Officer. **Craig D. Crisman*.*When Mr. Crisman became thecompany’s Chief Executive Officer, the Committee designed a compensation planwhich was consistent with that provided to the company’s other executiveofficers. Although a significant portion of Mr. Crisman’s 2003 compensationconsisted of bonus plan payments based on company performance, the Committeedid not rely entirely on predetermined formulas or a limited set of criteriawhen it evaluated the performance of the company’s Chief Executive Officer. TheCommittee considered:

 

•                  Management’s overallaccomplishments;

 

•                  Mr. Crisman’sindividual accomplishments; and

 

•                  The company’s financialperformance.

 

The Committee designed a compensation package forMr. Crisman that provided a competitive salary with the potential ofsignificant bonus plan compensation in the event the company performed wellunder his leadership. For 2003, Mr. Crisman’s annual salary level as ChiefExecutive Officer was $450,000 and his total bonus compensation was $158,063.

 

49

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

 

**Variable Incentive Awards.**  To reinforce the attainment of 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.  During 2003, these objectives weredetermined on a quarterly basis, and as a result of the Company meeting aportion of those objectives, awards were paid to Messrs. Crisman and Stone inthe amounts discussed under “Employment Agreements.”

 

50

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**ITEM 12****. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

Thefollowing table sets forth certain information as of March 15, 2004 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, 2004.

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

 

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*                 Lessthan one percent.

(1)          BancTec Intermediate Holding, Inc. has sole investment and sole votingpower with respect to the shares of Stock shown.

 

51

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

(3)          100,000shares of Series A Preferred includes a warrant to purchase between 2.5 and7.75 shares of Common Stock. Common Stock exercisable by the warrants totals750,000 shares.

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

(5)          BancTec Upper-Tier Holding, LLC holds 100% of the outstanding capitalstock of BancTec Intermediate Holding, Inc., which in turn holds 100% of allclasses of capital stock, including warrants.

(6)          Welsh, Carson, Anderson & Stowe VIII, L.P holds the majority interestin BancTec Upper-Tier Holding, LLC.

(7)          WCAS Capital Partners III, L.P. holds a minority interest in BancTecUpper-Tier Holding, LLC.

(8)          WCAS Information Partners, L.P. holds a minority interest in BancTecUpper-Tier Holding, LLC.

(9)          Mr. Minicucci is a managing member of WCAS VIII Associates LLC, thegeneral partner of Welsh, Carson, Anderson & Stowe VIII, L.P. Mr. Minicuccidisclaims beneficial ownership of such shares.

(10) Mr. Lee is not a general partner ofWelsh, Carson, Anderson & Stowe VIII.

(11) Mr. Fernandes holds a minority interestin BancTec Upper-Tier Holding, LLC. Mr. Fernandes disclaims beneficialownership of such shares.

(12) Mr. Swani is a managing member of WCASVIII Associates LLC, the general partner of Welsh, Carson, Anderson & StoweVIII, L.P. Mr. Swani disclaims beneficial ownership of such shares.

(13) Mr. Crisman and Mr. Stone hold minority interestsin BancTec Upper-Tier Holding, LLC.  Mr.Crisman and Mr. Stone disclaim beneficial ownership of such shares.

 

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

 

None.

 

**ITEM 14****.  PRINCIPALACCOUNTANT FEES AND SERVICES**

 

KPMG LLP, and their respective affiliates(collectively, the “KPMG Entities”) have been retained as the company’sindependent auditors for the 2003 fiscal year. The following table presents theaggregate fees billed by the KPMG Entities, for services provided during 2002and 2003: 

 

|               |   | **2002(4)** |   | **2003(3)(4)** |   |
|--------------------|--------|-------------|--------|----------------|--------|
| Audit Fees (1)     |   | $           | 486    |           | $      | 515 |   |
| Audit-Related Fees |   | —      |   | —         |   |
| Tax Fees (2)       |   | 601         |   | 1,330          |   |
| All Other Fees     |   | 7           |   | 9              |   |
| Total              |   | $           | 1,094  |           | $      | 1,854 |   |

 

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(1)               Auditfees consisted of audit work performed in the preparation of the financialstatements, as well as work that generally only the independent auditor canreasonably be expected to provide, such as statutory audits and reviews ofinterim financial information.

 

(2)               Tax fees consistprincipally of assistance related to tax compliance and reporting.

 

(3)               All audit andaudit-related fees were approved by the Audit Committee.

 

(4)               The Audit Committeeapproves in advance all audit services, audit-related services and tax-relatedservices provided by the Company’s independent public accountants. Pursuant tothe pre-approval policy adopted by the Board of Directors in 2003, the AuditCommittee also approves all other services provided by the independent publicaccountants in advance on a case-by-case basis. All engagements of theindependent public accountants in 2003 were pre-approved pursuant to thepolicy.

 

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**PART IV**

 

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

 

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

 

(b)         Reports on Form 8-K:

 

None

 

(c)Exhibits:

 

3.1 —Amended and Restated Certificate of Incorporation, incorporated by reference toExhibit 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 B PreferredStock, incorporated by reference to Exhibit 4.3 to the Company’s Annual Reporton 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 First NationalBank of Chicago, incorporated by reference to Exhibit 4.2 to the Company’sRegistration Statement on Form S-4 dated August 28, 1998.

 

4.6 —Exchange and Registration Rights Agreement dated May 22, 1998 by and among theCompany, 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 Acquisition Corp.,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, asAgent, 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, incorporatedby reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q forthe 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 to theCompany’s Quarterly Report on Form 10-Q for the period ended September 30,2000.

 

10.7 — Loanand Security Agreement, dated as of May 30, 2001, between Heller Financial,Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.1 to theCompany’s Quarterly Report on Form 10-Q for the period ended June 30,

 

53

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2001.

 

10.8 — FirstAmendment to Loan and Security Agreement, dated as of November 8, 2001, betweenHeller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit10.2 to the Company’s Quarterly Report on Form 10-Q for the period endedSeptember 30, 2001.

 

10.9 — SecondAmendment to Loan and Security Agreement, dated as of February 5, 2002, betweenHeller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit10.9 to the Company’s Annual Report on Form 10-K for the year ended December31, 2001.

 

10.10 — ThirdAmendment to Loan and Security Agreement, dated as of July 30, 2002, betweenHeller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit10.9 to the Company’s Annual Report on Form 10-K for the year ended December31, 2001.

 

10.11 — Fourth Amendment toLoan 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 byreference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q forthe period ended September 30, 2003.

 

21.1 — Subsidiariesof Registrant

 

31.1 — Certificateof Chief Executive Officer pursuant to Rule 15d-14(a) under the Securities ExchangeAct.

 

31.2 — Certificateof Chief Financial Officer pursuant to Rule 15d-14(a) under the SecuritiesExchange Act.

 

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

 

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

 

**EXECUTIVECOMPENSATION PLANS AND ARRANGEMENTS**

 

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

 

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

 

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

 

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**SCHEDULE II**

 

**BANCTEC,INC.**

 

**VALUATIONAND QUALIFYING ACCOUNTS**

 

For theYears Ended December 31, 2003, 2002 and 2001

 
| **Column A**                    |   | **Column B**                         |   | **Column C**                                    |   | **Column D**                |   | **Column E**                   |   |
|---------------------------------|--------|--------------------------------------|--------|-------------------------------------------------|--------|-----------------------------|--------|--------------------------------|--------|
|                            |   | **Balance at  beginning of  period** |   | **Additions  charged to  costs and   expenses** |   | **Deductions  (a) (b) (c)** |   | **Balance at  end of  period** |   |
| Allowance for Doubtful Accounts |   |                                 |   |                                            |   |                        |   |                           |   |
| Year ended December 31, 2003    |   | $                                    | 2,216  |                                            | $      | (999                        | )      | $                              | (91    | )(a) | $ | 1,126 |   |
| Year ended December 31, 2002    |   | 7,636                                |   | (5,215                                          | )      | $                           | (205   | )(a)                           | 2,216  |   |
| Year ended December 31, 2001    |   | 8,256                                |   | 3,891                                           |   | (4,511                      | )(a)   | 7,636                          |   |
|                            |   |                                 |   |                                            |   |                        |   |                           |   |
| Reorganization Accrual          |   |                                 |   |                                            |   |                        |   |                           |   |
| Year ended December 31, 2003    |   | $                                    | — |                                            | $      | —                      |   | $                              | — |  (b) | $ | — |   |
| Year ended December 31, 2002    |   | 48                                   |   | —                                          |   | (48                         | )(b)   | —                         |   |
| Year ended December 31, 2001    |   | 115                                  |   | —                                          |   | (67                         | )(b)   | 48                             |   |

 

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(a)          Write-off of uncollectible accounts.

(b)         Severance and related payments.

(c)          Payment of recapitalization charges.

 

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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/ Craig D.  Crisman* |   |
|              | *Craig D. Crisman* |
|              | *President and Chief Executive Officer* |
|                   |  |  |  |  |

 

 

Dated:April 2, 2004

 

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

 
| **Signature**                 |   | **Title**                        |   | **Date**      |
|-------------------------------|--------|----------------------------------|--------|---------------|
| /s/  Craig D. Crisman    |   | President and Chief Executive    |   | April 2, 2004 |
| Craig D. Crisman              |   | Officer (Principal Executive     |   |          |
|                          |   | Officer); and Director           |   |          |
|                          |   |                             |   |          |
| /s/  Brian R. Stone      |   | Senior Vice President, Chief     |   | April 2, 2004 |
| Brian R. Stone                |   | Financial Officer, and Treasurer |   |          |
|                          |   | (Principal Accounting Officer);  |   |          |
|                          |   | and Director                     |   |          |
|                          |   |                             |   |          |
| /s/  Robert A. Minicucci |   | Chairman of the Board and        |   | April 2, 2004 |
| Robert A. Minicucci           |   | Director                         |   |          |
|                          |   |                             |   |          |
| /s/  Eric J. Lee         |   | Director                         |   | April 2, 2004 |
| Eric J. Lee                   |   |                             |   |          |
|                          |   |                             |   |          |
| /s/  Gary J. Fernandes   |   | Director                         |   | April 2, 2004 |
| Gary J. Fernandes             |   |                             |   |          |
|                          |   |                             |   |          |
| /s/  Sanjay Swani        |   | Director                         |   | April 2, 2004 |
| Sanjay Swani                  |   |                             |   |          |
|                          |   |                             |   |          |
| /s/  Coley Clark         |   | Director                         |   | April 2, 2004 |
| Coley Clark                   |   |                             |   |          |

 

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