UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For the quarterly period ended June 30, 2003

Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

Commission File Number 0-9859

BANCTEC, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		75-1559633
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2701 E. Grauwyler Road, Irving, Texas		75061
(Address of principal executive offices)		(Zip Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title of Each Class		Number of Shares Outstanding at August 12, 2003

Common Stock, $0.01 par value		17,003,838
Class A Common Stock, $0.01 par value		1,181,946

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

BANCTEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30, 2003			December 31, 2002
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $27,979 and $88 at June 30, 2003 and December 31, 2002	$	52,977		$	31,595
Accounts receivable, less allowance for doubtful accounts of $1,734 and $2,216 at June 30, 2003 and December 31, 2002	51,867			60,891
Inventories, net	27,219			25,528
Prepaid expenses	6,975			5,177
Other current assets	206			334

Total current assets	139,244			123,525

PROPERTY, PLANT AND EQUIPMENT, net	51,739			54,782

OTHER ASSETS:
Goodwill	41,476			41,476
Other assets	10,830			11,612

Total other assets	52,306			53,088
TOTAL ASSETS	$	243,289		$	231,395

CURRENT LIABILITIES:
Current obligations under capital leases	$	1,071		$	—
Trade accounts payable	12,702			12,891
Other accrued expenses and liabilities	43,493			46,883
Deferred revenue	27,971			24,107
Maintenance contract deposits	54,935			47,685
Income taxes	3,430			836
Total current liabilities	143,602			132,402

OTHER LIABILITIES:
Long-term debt, less current maturities	197,823			201,723
Non-current maintenance contract deposits	28,159			25,933
Other liabilities	11,455			9,881
Total other liabilities	237,437			237,537

COMMITMENTS AND CONTINGENCIES

MANDATORY REDEEMABLE PREFERRED STOCK-Series A	15,694			14,856

STOCKHOLDERS’ DEFICIT:
Cumulative convertible preferred stock - authorized, 1,000,000 shares of $0.01 par value at June 30, 2003 and December 31, 2002
Series B preferred stock - issued and outstanding, 35,520 shares at June 30, 2003 and December 31, 2002	9,388			8,324
Common stock authorized, 22,000,000 shares of $0.01 par value at June 30, 2003 and 32,000,000 shares at December 31, 2002:
Common stock-issued and outstanding 17,003,838 shares at June 30, 2003 and December 31, 2002	170			170
Class A common stock-issued and outstanding 1,181,946 shares at June 30, 2003 and December 31, 2002	12			12
Subscription stock warrants	3,726			3,726
Additional paid-in capital	129,133			131,035
Accumulated deficit	(286,689		)	(286,846		)
Accumulated other comprehensive loss	(9,184		)	(9,821		)
Total stockholders’ deficit	(153,444		)	(153,400		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	243,289		$	231,395

See notes to unaudited condensed consolidated financial statements.

BANCTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(In thousands)			(In thousands)			(In thousands)
REVENUE
Equipment and software	$	38,239		$	33,735		$	72,998		$	68,920
Maintenance and other services	58,804			61,839			114,797			123,935
	97,043			95,574			187,795			192,855
COST OF SALES
Equipment and software	25,497			28,564			48,715			55,371
Maintenance and other services	46,663			46,130			91,709			93,634
	72,160			74,694			140,424			149,005
Gross profit	24,883			20,880			47,371			43,850

OPERATING EXPENSES
Product development	3,675			3,869			7,392			7,172
Selling, general and administrative	15,448			13,247			30,172			28,663
	19,123			17,116			37,564			35,835
Income from operations	5,760			3,764			9,807			8,015

OTHER INCOME (EXPENSE):
Interest income	352			52			409			84
Interest expense	(4,846		)	(7,634		)	(9,668		)	(15,226		)
Sundry, net	195			4,452			1,398			4,002
	(4,299		)	(3,130		)	(7,861		)	(11,140		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	1,461			634			1,946			(3,125		)
INCOME TAX EXPENSE	1,158			559			1,789			773
INCOME (LOSS) FROM CONTINUING OPERATIONS	303			75			157			(3,898		)
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX EXPENSE	—			880			—			1,851
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE	303			955			157			(2,047		)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE	—			—			—			(6,960		)

NET INCOME (LOSS)	303			955			157			(9,007		)
PREFERRED STOCK DIVIDENDS AND ACCRETION OF DISCOUNT	(975		)	(829		)	(1,902		)	(1,619		)

NET LOSS APPLICABLE TO COMMON STOCK	$	(672	)	$	126		$	(1,745	)	$	(10,626	)

See notes to unaudited condensed consolidated financial statements.

BANCTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2003			2002
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	157		$	(9,007	)
Income from discontinued operations	—			1,851
Income (loss) from continuing operations	157			(10,858		)
Adjustments to reconcile to cash flows provided by operations:
Cumulative effect of accounting change	—			6,960
Depreciation and amortization	10,238			12,486
Provision for doubtful accounts	(449		)	(1,416		)
Loss on disposition of property, plant and equipment	299			478
Gain on extinguishment of long-term debt	(1,129		)	(2,842		)
Other non-cash items	157			238
Changes in operating assets and liabilities
Decrease in accounts receivable	9,473			19,366
(Increase) decrease in inventories	(3,721		)	4,433
Increase in other assets	(421		)	(570		)
Increase (decrease) in trade accounts payable	(189		)	(2,512		)
Increase (decrease) in deferred revenue & maintenance contracts deposits	11,114			(3,732		)
Increase (decrease) in other accrued expenses and liabilities	2,234			(2,248		)
Cash flows provided by continuing operations	27,763			19,783
Cash flows provided by discontinued operations	—			3,100
Cash flows provided by operating activities	27,763			22,883

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment	(3,255		)	(3,564		)
Cash flows used in continuing operations	(3,255		)	(3,564		)
Cash flows used in discontinued operations	—			(483		)
Cash flows used in investing activities	(3,255		)	(4,047		)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments of current maturities of long-term debt and capital lease obligations	(599		)	—
Payments on long-term borrowing	(2,752		)	(1,783		)
Payments on short-term borrowings, net	—			(17,040		)
Debt issuance costs	(95		)	(120		)
Cash flows used in continuing operations	(3,446		)	(18,943		)
Cash flows used in discontinued operations	—			(3,798		)
Cash flows used in financing activities	(3,446		)	(22,741		)

EFFECT OF EXCHANGE RATE CHANGES ON CASH	320			1,895
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	21,382			(2,010		)
CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR	31,595			22,384

CASH AND CASH EQUIVALENTS—END OF PERIOD	$	52,977		$	20,374

SUPPLEMENTAL DISCLOSURES INFORMATION:
Cash paid (refunded) during the period for:
Interest	$	10,791		$	14,050
Taxes	$	(844	)	$	2,459

Supplemental schedule of noncash investing and financing transactions:
A capital lease obligation of $2,094 was incurred when the Company entered into a lease for new computer hardware (See Note 7).

See notes to unaudited condensed consolidated financial statements.

BANCTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

BancTec, Inc. is a worldwide systems integration and services company with a 30-year history in imaging technology, financial transaction processing and workflow productivity improvement. Serving a variety of industries, including banking, financial services, insurance, healthcare, governmental agencies and others, the Company offers a portfolio of payment and document processing systems and services, workflow and image management software products, and computer and network support services.

The accompanying unaudited condensed consolidated balance sheet June 30, 2003, and the unaudited condensed consolidated statements of operations and cash flows for the interim periods ended June 30, 2003 and 2002, should be read in conjunction with BancTec, Inc. and subsidiaries (“BancTec” or the “Company”) consolidated financial statements and notes thereto in the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. As disclosed in the notes to that report, the condensed consolidated statements of operations and cash flows for the interim periods ended June 30, 2002 have been restated. In the opinion of management, the accompanying condensed consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting principles and practices used in the preparation of the accompanying financial statements are summarized below:

Cash and Cash Equivalents and Short-Term Investments

Cash and cash equivalents include cash on hand and on deposit, including highly liquid investments with original maturities of three months or less. Short-term investments or similar instruments with original maturities in excess of three months and are valued at cost, which approximates market. Restricted cash at June 30, 2003 of $ 28.0 million represents lockbox cash receipts to be applied to the outstanding borrowings under the Revolver and cash pledged under the terms of the Revolver.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is an estimate prepared by management based on evaluation of the collectibility of specific accounts and the overall condition of the receivable portfolios. The Company analyzes trade receivables, and analyzes historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts. The allowance for doubtful accounts is reviewed periodically and adjustments are recorded as deemed necessary.

Inventories

Inventories are valued at the lower of cost or market and include the cost of raw materials, labor, factory overhead, and purchased subassemblies. Cost is determined using the first-in, first-out and weighted average methods. The Company revised its standard costs for manufacturing inventory to effectively eliminate the purchasing burden component as of October 1, 2002. At least quarterly, the Company evaluates the carrying amount of inventory based on the identification of excess and obsolete inventory. The Company’s evaluation involves a multi-element approach incorporating the stratification of inventory by time held and the stratification of inventory by risk category, among other elements. The approach incorporates both recent historical information and management estimates of trends. The Company’s approach is intended to take into consideration potential excess and obsolescence caused by a decreasing installed base, engineering changes and end of manufacture. If any of the elements of the Company’s estimate were to deteriorate, write-downs may be required. The inventory write-down calculations are reviewed periodically and additional write-downs are recorded as deemed necessary. Inventory reserves establish a new cost basis for inventory and are not reversed in future periods.

Property, Plant, and Equipment

Property, plant, and equipment are recorded at cost and are depreciated or amortized principally on a straight-line basis over the estimated useful lives of the related assets. Estimated useful lives range from three to five years for field support spare parts, three to eight years for systems and software, five to seven years for machinery and equipment, leasehold improvements, and furniture and fixtures. Buildings are depreciated over 40 years.

Revenue Recognition

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

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

The Company recognizes revenue from sales of equipment and supplies upon delivery and transfer of title or upon customer acceptance.

Maintenance contracts are primarily one year in duration and the revenue generated is recognized ratably over the term of the contract or as service calls are performed.

The Company recognizes hardware and software revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. At the time of the transaction, the Company determines whether the fee associated with revenue transactions is fixed or determinable and whether or not collection is reasonably assured. The Company determines whether the fee is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after the normal payment terms, which are generally 30 days from invoice date, the Company recognizes revenue as the fees are collected. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from customers. If the Company determines that collection of the fee is not reasonably assured, the Company defers the revenue and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. For all sales, the Company generally uses either a binding purchase order or signed sales agreement as evidence of an arrangement.

The Company’s services revenue is primarily billed based on contractual rates and terms, and the Company generally recognizes revenue as these services are performed which, in some cases is ratably over the contract term. Certain customers advance funds prior to the performance of the services. The Company recognizes revenue related to these advances either ratably over the contract term, or as services are performed on a “per call” basis. The current and non-current portions of these advances are shown as Deferred Revenue or Maintenance Contract Deposits on the Consolidated Balance Sheets.

Research and Development

Research and development costs are expensed as incurred.

Income Taxes

The Company and its domestic subsidiaries file a consolidated Federal income tax return with BancTec Intermediate Holding as the parent company. The Company’s foreign subsidiaries file separate income tax returns in the countries in which their operations are based.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The Company records valuation allowances related to its deferred income tax assets when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Foreign Currency Translation

Foreign assets and liabilities are translated using the exchange rate in effect at the balance sheet date, and results of operations are translated using an average rate for the period. Translation adjustments are accumulated and reported as a component of stockholders’ deficit and comprehensive income. Transaction gains and losses are included in results of operations in “Sundry, net”.

Stock-Based Compensation

The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB No. 25”), Accounting for Stock Issued to Employees. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (“SFAS No. 123”), “Accounting for Stock-Based Compensation” as specified in SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123”

2000 Stock Plan:

Effective July 1, 2000, the Company adopted the 2000 Stock Plan (the Plan), which provides for the grant to employees of incentive options, non-qualified stock options, and restricted stock awards. Effective March 19, 2003, all options outstanding under the 2000 Stock Plan were cancelled pursuant to an offer to exchange outstanding options dated February 14, 2003. The offer provides that new options will be granted not less than six months and one day following the closing of the exchange offer. The new options will be granted at the fair market value of the common stock on the date the date of grant. Because of unanticipated accounting consequences, the Company has cancelled plans to issue the new options and intends to offer an opportunity to rescind the exchange offer to all current employees of the Company who surrendered options in the exchange offer. It is expected that employees who rescind will receive options that are substantially identical to those they surrendered with respect to the number of subject shares, exercise price, and vesting schedule.

Incentive Options. During the year ended December 31, 2000, 1,303,460 incentive options were granted by the Company. During 2001, 2002 and 2003, no additional incentive options were granted. Under the Plan, incentive options are granted at a fixed exercise price not less than 100% of the fair market value of the shares of stock on the date of grant (or 110% of the fair market value in certain circumstances). A portion of the incentive options vest over a four-year period at 25% per year beginning January 2, 2001; the remainder vest based on the performance of the Company. As a part of an employee retention program, vesting of 20.0% of the performance-based incentive options was accelerated in October 2000. As described above, these options were cancelled on March 19, 2003.

Non-qualified stock options. During the year ended December 31, 2000, 377,040 non-qualified stock options were granted by the Company. During 2001, 2002 and 2003, no additional non-qualified options were granted. Under the Plan, non-qualified options are granted at a fixed exercise price equal to, more than, or less than 100% of the fair market value of the shares of stock on the date of grant. A portion of the non-qualified options vest over a four-year period at 25% per year beginning January 2, 2001; the remainder vest based on the performance of the Company. As a part of an employee retention program, vesting of 20.0% of the performance-based incentive options was accelerated in October 2000. As described above, these options were cancelled on March 19, 2003.

Restricted stock awards. The amount, if any, to be paid by the award recipient to acquire the shares of stock pursuant to a restricted stock-award is a fixed exercise price equal to, more than, or less than 100% of the fair market value of the shares of stock subject to the award on the date of grant. The restricted stock awards are subject to vesting provisions determined by the Company’s Board of Directors. At June 30, 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
Forfeited	—		—		9.25
Cancelled	(497,240	)	(31,760	)	9.25
Options outstanding–June 30, 2003	—		—		—

Under the intrinsic-value method, compensation expense is recorded only to the extent that the strike price is less than market price on the measurement date. There were no stock options granted in 2002 or 2003.

The following table illustrates the effect on net income had compensation for the Company’s stock option plans been determined consistent with SFAS No. 123:

	Three Months Ended March 31,				Six Months Ended June 30,
	2003		2002		2003		2002
Net Income (loss) as reported	$	303	$	955	$	157	$	(9,007	)
Total stock-based employee compensation benefit (expense) determined under fair-value-based method for all rewards, net of tax	—		330		—		660
Pro-Forma net income (loss)	$	303	$	625	$	157	$	(9,667	)

3. DISCONTINUED OPERATIONS

On November 27, 2002, the Company completed the sale of its wholly-owned subsidiary, BancTec Japan (“BTJ”), to JAFCO MBO Co., Ltd. (“JAFCO”) pursuant to a Stock Purchase Agreement dated as of November 27, 2002, between the Company and JAFCO. The sale involved two separate transactions: (1) the purchase by JAFCO of 100% of the outstanding shares of BTJ for 6.5 billion yen, and (2) a one-time, up-front payment by BTJ to the Company of 4.0 billion yen under certain distribution and licensing agreements. Under such agreements, BTJ will continue to operate under the name “BancTec Japan”. After foreign currency conversions and transaction costs, the Company received approximately US $82.5 million in aggregate net proceeds. For financial statement purposes, the Company treated the sale as a discontinued operation under SFAS No. 144, and accordingly, financial statement presentation was made in accordance with APB Opinion No. 30. BTJ’s operating results have been segregated and reported as discontinued operations in the accompanying consolidated statements of income and cash flows, and related notes. Revenue from the discontinued operations of BTJ for the three months and six months ended June 30, 2002 was $17.6 million and $36.5 million, respectively. Pretax income from the discontinued operations of BTJ for the three months and six months ended June 30, 2002 was $1.4 million and $3.2 million, respectively. The assets related to BTJ were previously classified in the International segment.

4. INVENTORIES

Inventory consists of the following:

	June 30, 2003		December 31, 2002
	(In thousands)
Raw materials	$	5,481	$	5,374
Work-in-progress	11,583		9,995
Finished goods	10,155		10,159
	$	27,219	$	25,528

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	June 30, 2003		December 31, 2002
	(In thousands)
Land	$	2,860	$	2,860
Field support spare parts	59,200		58,339
Systems and software	66,868		64,604
Machinery and equipment	52,641		50,053
Furniture, fixtures and other	24,116		22,953
Buildings	29,028		29,006
	234,713		227,815
Accumulated depreciation and amortization	182,974		173,033
Property, plant and equipment, net	$	51,739	$	54,782

6. OTHER ACCRUED EXPENSES AND LIABILITIES

Other accrued expenses and liabilities consist of the following:

	June 30, 2003		December 31, 2002
	(In thousands)
Salaries, wages and other compensation	$	15,079	$	12,169
Accrued taxes, other than income taxes	5,387		8,794
Advances from customers	1,770		586
Accrued interest payable	3,214		4,951
Accrued invoices and costs	2,084		2,395
Accrued contract completion costs	3,132		4,590
Other	12,827		13,398
	$	43,493	$	46,883

7. DEBT AND OTHER OBLIGATIONS

Debt and other obligations consist of the following:

	June 30, 2003		December 31, 2002
	(In thousands)
7.5% Senior Notes, due 2008	$	93,975	$	97,875
Subordinated Sponsor Note, unsecured, due 2009	103,848		103,848
	197,823		201,723
Less: Current portion	—		—
	$	197,823	$	201,723

Revolving Credit Facility. The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which will mature on May 30, 2006. Effective May 7, 2003, the Company and Heller entered into an amendment to the Revolver which reduced the committed amount from $60 million to $40 million, while increasing the letter-of-credit sub-limit from $30 million to $40 million. The Revolver is secured by substantially all the assets of the Company, subject to the limitations on liens contained in the Company’s existing Senior Notes. On November 27, 2002, the Company and Heller entered into an amendment to the Revolver that added pledged cash to the borrowing base. Funds availability under the Revolver is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory and pledged cash. At June 30, 2003, the Company had no balance outstanding under the Revolver and an outstanding balance on letters-of-credit totaling $26.8 million. The balance remaining under the Revolver that the Company can draw was $13.1 million at June 30, 2003. A commitment fee of 0.5% per annum on the unused portion of the Revolver is payable quarterly.

The interest rate on loans under the Revolver is, at the Company’s option, either (1) 1.50% over prime or (2) 3.00% over LIBOR. The interest-rate margins over prime and LIBOR may be increased by 0.25% increments when borrowing availability falls below (1) $12.5 million or decreased by 0.25% increments when borrowing capacity exceeds (1) $17.5 million, (2) $22.5 million, and (3) $27.5 million (total rate decrease of 0.75%). At June 30, 2003, the Company’s weighted average rate on the Revolver was 5.00%.

The Revolver contains various representations, warranties and covenants, including financial covenants as to maximum capital expenditures, minimum fixed-charge coverage ratio and minimum average borrowing availability. At June 30, 2003, the Company was in compliance with all covenants under the Revolver.

Senior Notes. Interest on the Senior Notes is fixed at 7.5% and is due and payable in semi-annual installments. Payments began December 1, 1998. The Notes contain covenants placing limitations on the Company’s ability to permit subsidiaries to incur certain debts, incur certain loans, and engage in certain sale and leaseback transactions. During the first six months of 2003, the Company repurchased Senior Notes with a face amount of $3.9 million. The Company wrote off a proportionate share of deferred financing-fees, resulting in a gain of approximately $1.1 million, which was reported as sundry (other) income in the condensed consolidated statements of operations for the interim periods ended June 30, 2003. The estimated fair value of the Senior Notes as of June 30, 2003, is approximately $60.5 million based on an average value of recently completed market trades, resulting in a yield-to-maturity of approximately 19%. The number of actual trades is limited; therefore the result may vary if a widely-traded market environment existed.

Subordinated Unsecured Sponsor Note. The Company’s Sponsor Note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid. The payments began September 30, 1999. As provided under the agreement, however, the Sponsor Note holder, WCAS, elected to defer quarterly interest payments of $4.0 million for each of the September 2000 through September 2001 quarterly periods resulting in an increase in the principal amount of the Sponsor Note totaling $33.8 million. Such election required a deferred financing-fee of 30.0% of each of the interest payments being deferred. The Company accounts for the additional financing fees as a change in the effective interest rate of the debt. WCAS may, at its election, defer each future quarterly payment under similar terms. WCAS has not elected to defer the quarterly payments since September 2001. In accordance with the terms of the Sponsor Note, on December 6, 2002, the Company made a $90.0 million principal payment on the Sponsor Note. A holder of the Senior Notes is contesting this payment. See discussion under Legal Proceedings. The estimated fair-value of the Sponsor Note and deferred interest and fees as of June 30, 2003, is approximately $60.2 million assuming a yield-to-maturity of 24%.

The Company had no outstanding balances on foreign credit agreements at June 30, 2003.

Capital Leases. During the first quarter of 2003, the Company entered into a capital lease for $2.0 million that pertained to computer hardware. Amounts due under capital leases are recorded as liabilities. The Company’s interest in assets acquired under capital leases is recorded as property and equipment on the Condensed Consolidated Balance Sheets. Amortization of assets recorded under capital leases is included in depreciation expense. The current obligations under capital leases are classified in the current liabilities section of the Condensed Consolidated Balance Sheets and the non-current portion of capital leases are included in Other Liabilities.

8. GOODWILL AND INTANGIBLE ASSETS

Beginning January 1, 2002, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and

Other Intangible Assets” (See “New Accounting Pronouncements”). SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values.

SFAS No. 142 requires a two-step process for testing impairment. First, the fair-value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If impairment is indicated, then under the second step the fair-value of the reporting unit’s goodwill is determined by allocating the unit’s fair-value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill is measured as the excess of its carrying value over its fair-value. During the first quarter of 2002, the Company recorded as a 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 the carrying value of goodwill.

Components of the Company’s goodwill include amounts that are foreign-currency denominated. These goodwill amounts are subject to translation at each balance sheet date. The Company records the change to its Accumulated Other Comprehensive Loss on the balance sheet. Goodwill previously classified as unallocated has been allocated to the reporting units as required by SFAS No. 142. The following is a summary of changes in the carrying amount of goodwill by segment for the six months ended June 30, 2003:

	US Solutions		Computer & Network Services		International		Unallocated		Total
	(In thousands)
Balance at December 31, 2002	$	41,236	$	—	$	240	$	—	$	41,476
Goodwill impairment	—		—		—		—		—
Balance at June 30, 2003	$	41,236	$	—	$	240	$	—	$	41,476

	US Solutions		Computer & Network Services		International			Unallocated			Total
	(In thousands)
Balance at December 31, 2001	$	40,211	$	—	$	2,229		$	5, 841		$	48,281
Allocation of previously unallocated goodwill	1,025		—		4,816			(5,841		)	—
Goodwill impairment	—		—		(6,960		)	—			(6,960		)
Changes due to foreign currency translation	—		—		155			—			155
Balance at June 30, 2002	$	41,236	$	—	$	240		$	—		$	41,476

9. WARRANTY LIABILITY

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

Changes to the Company’s warranty liability during the six months ended June 30, 2003 are summarized as follows:

	(In thousands)
Balance at December 31, 2002	$	139
Warranties issued	75
Claims paid/settlements	(174		)
Changes in liability for pre-existing warranties	—
Balance at June 30, 2003	$	40

10. COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003			2002
	(In thousands)				(In thousands)
Net income (loss)	$	303	$	955	$	(146	)	$	(9,007	)
Foreign currency translation adjustments	740		2,149		637			2,453
Total comprehensive income (loss)	$	1,043	$	3,104	$	491		$	(6,554	)

11. BUSINESS SEGMENT DATA

The Company segments its operations based on geographical areas (U.S. Solutions (“USS”) and International Solutions (“INTL”)) and product lines (Computer and Network Services (“CNS”)). INTL offers similar products as USS and consists primarily of operations throughout the world excluding the United States.

	US Solutions			Computer & Network Services		International		Corp/Elims			Total
	(In thousands)
For the three months ended June 30, 2003

Revenue from external customers	$	38,591		$	32,947	$	25,505	$	—		$	97,043
Intersegment revenues	562			—		1,868		(2,430		)	—
Segment gross profits	8,613			6,895		9,110		265			24,883
Segment operating income (loss)	2,378			4,644		2,010		(3,272		)	5,760

For the three months ended June 30, 2002

Revenue from external customers	$	36,679		$	35,928	$	22,967	$	—		$	95,574
Intersegment revenues	544			—		2,971		(3,515		)	—
Segment gross profits	5,087			8,828		6,206		759			20,880
Segment operating income (loss)	(3,367		)	7,188		721		(778		)	3,764

	US Solutions			Computer & Network Services		International		Corp/Elims			Total
	(In thousands)
For the six months ended June 30, 2003

Revenue from external customers	$	70,614		$	63,767	$	53,414	$	—		$	187,795
Intersegment revenues	1,106			—		3,070		(4,176		)	—
Segment gross profits	15,697			12,862		18,537		275			47,371
Segment operating income (loss)	2,625			8,477		4,361		(5,656		)	9,807
Segment identifiable assets	100,006			28,518		53,644		61,121			243,289
Capital appropriations	1,349			587		2,761		2,463			7,160

For the six months ended June 30, 2002

Revenue from external customers	$	75,478		$	72,167	$	45,210	$	—		$	192,855
Intersegment revenues	1,037			—		7,935		(8,972		)	—
Segment gross profits	13,499			16,454		13,566		331			43,850
Segment operating income (loss)	(2,828		)	10,976		2,730		(2,863		)	8,015
Segment identifiable assets	108,883			33,317		53,334		41,410			236,944
Capital appropriations	1,989			588		768		219			3,564

12. PREFERRED STOCK

MANDATORY REDEEMABLE PREFERRED STOCK

The Company allocated the proceeds from its Series A preferred stock issuance based upon the relative fair-value of the preferred stock and warrants issued. The related discount is being accreted such that the carrying amount of the mandatory redeemable preferred stock will equal the mandatory redemption amount at September 22, 2008. For the six months ended June 30, 2003, accretion of the related discount and accrued but unpaid dividends totaled $0.8 million, increasing the carrying amount to $15.7 million. As of June 30, 2003, the stated value of the Series A preferred stock, including accumulated but unpaid dividends, was $181.36 per share. Beginning with the quarter ended March 31, 2004, the mandatory redeemable preferred stock issued by the Company will be reclassified to the liability section of the balance sheet as required by SFAS 150 and will initially be measured at fair value.

SERIES B PREFERRED STOCK

For the six months ended June 30, 2003, the Company accrued additional unpaid dividends for its Series B preferred stock totaling $1.1 million, increasing the carrying amount to $9.4 million. As of June 30, 2003, the stated value of the Series B preferred stock, including accumulated but unpaid dividends, was $264.30 per share.

13. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which 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 October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The Company adopted the provisions of SFAS No. 144, without effect, on January 1, 2002. Under the provision of SFAS No. 144, the Company has reported the disposition of the sale of its wholly-owned subsidiary, BancTec Japan, as a discontinued operation (See Note 2 – Discontinued Operations).

In May 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections”. Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction”, are met. The Company adopted the provisions SFAS 145 regarding early extinguishment of debt during the second quarter of 2002 and such gains are recorded in the Statement of Income under Sundry, net.

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

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company implemented SFAS No. 148 on January 1, 2003, regarding disclosure requirements for condensed financial statements for interim periods. The Company has not yet determined whether it will voluntarily change to the fair-value based method of accounting for stock-based employee compensation

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). It clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of the liability is the fair value of the guarantee at its inception. The initial recognition and initial measurement provisions of FIN 45 are effective on a prospective basis to guarantees issued after December 31, 2002. However,

the disclosure requirements are effective for interim and annual financial-statement periods ending after December 15, 2002. The Company has adopted FIN 45 with no impact on the 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 consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity’s expected losses or residual benefits. FIN 46 applies immediately to variable-interest entities created after January 31, 2003 and to existing variable-interest entities in the periods beginning after June 15, 2003. Based on preliminary evaluation, Fin 46 is not anticipated to have a material effect on the Company’s results of operations or financial position.

In November 2002, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which must be applied 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 that are to be delivered separately in a bundled sales arrangement should be accounted for separately. The appropriate accounting literature for revenue recognition would then be applied to each unit. The Company is currently evaluating the impact of adoption of EITF 00-21, and does not believe that it will have a material impact on the financial statements.

In June 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity. For mandatorily redeemable financial instruments of a nonpublic entity, this statement shall be effective for fiscal periods beginning after December 15, 2003. The mandatory redeemable preferred stock issued by the Company will be reclassified to the liability section of the balance sheet as required by SFAS 150 during the quarter ended March 31, 2004. It is not anticipated that the adoption of this statement, however, will have a material effect on our results of operations.

14. SUBSEQUENT EVENTS

None

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS.

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN THIS DOCUMENT.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including Factors Affecting the Company’s Business and Prospects set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure About Market Risk, contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of BancTec, Inc. and its consolidated subsidiaries (the “Company”) to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operations; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the ability of the Company to retain and motivate key employees; the timely development, production and acceptance of products and services and their feature sets; the challenge of managing asset levels, including inventory; the flow of products into third-party distribution channels; the difficulty of keeping expense growth at modest levels while increasing revenues; and other risks that are described from time to time in the Company’s Securities and Exchange Commission reports, including but not limited to the items discussed in “Factors Affecting the Company’s Business and Prospects” set forth in this report, and items described in the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated results or changes to future operating results over time.

The Company believes several factors continued to create a challenging and competitive sales and cost containment environment during the six months ended June 30, 2003. These factors include: general economic conditions and reduced corporate customer technology spending, ongoing competitive pressures, and a highly leveraged financial position.

Expected economic and business conditions for the remainder of 2003 indicate a cautious outlook regarding the Company’s near-term revenue and earnings growth prospects. Most of the Company’s product offerings represent a significant capital expenditure for its customers. The Company has concentrated its emphasis on cost reductions and on existing offerings. Product-development efforts are

currently focused on payment, check and document processing technologies, in addition to investments in Electronic Document Management (“EDM”) vertical solutions and an investment in archiving solutions for all markets, as well as hardware enhancements. By incorporating more third-party products into the Company’s solutions rather than developing the products, the Company can more easily target its efforts and expenditures to these core products and solutions.

RESULTS OF OPERATIONS

Comparison of Three Months Ended June 30, 2003 and Three Months Ended June 30, 2002

Consolidated revenue of $97.0 million for the three months ended June 30, 2003 increased by $1.4 million or 1.5% from the comparable prior-year period. Increases in USS of $1.9 million resulted primarily from strengthening demand for the Company’s system integration services, partially offset by declines in maintenance revenue due to Company installed products reaching the end of their useful lives and from increased competition. Increases in INTL of $2.5 million are the result of increases in some areas of Europe and the UK in maintenance revenue as well as the introduction in the UK of document processing services. These increases were somewhat offset by continued economic weakness in some areas of Europe. In addition, the impact of the weakening dollar on the conversion of revenue stated in foreign currencies accounted for some of the increase. A decrease in CNS of $3.0 million resulted from pricing decreases resulting from competitive pressure, as well as decreased volume under certain maintenance programs. The Company expects these trends to continue in the foreseeable future. Factors impacting future revenue include corporate-customer spending for large systems-solutions, customer and prospective customer mergers, on-going competitive pressures, and fluctuations in international currencies.

Consolidated gross profit of $24.9 million increased by $4.0 million or 19.1% from the comparable prior-year period. Increases in USS of $3.5 million and in INTL of $2.9 million were partially offset by a decrease in CNS of $1.9 million. A portion of the gross profit increase in USS and INTL resulted from increased revenues while a portion resulted from an increase in the gross profit percentage. The USS percentage increased from 13.9% to 22.3% while the INTL percentage increased from 27.0% to 35.7% mainly resulting from the Company’s cost-containment efforts. CNS’ gross profit decrease resulted primarily from decreased revenues as well as margin pressure caused by increased competition. The Company is in the process of transitioning its product offering focus to proven deliverables and new targeted offerings, including EDM solutions, its other archive solutions and hardware enhancements. Incorporating more third-party products into the Company’s solutions rather than developing the products has enabled the concentration of efforts and expenditures on the targeted items which, along with the Company’s ongoing cost-containment efforts, allowed for cost reductions to strengthen the Company’s margins.

Operating expenses of $19.1 million increased $2.0 million compared to the prior-year period. Operating expenses, by component, changed as follows: Product-development expenses decreased by $0.2 million or 5.1% primarily due to the use of outsourced product-development services. Selling, general, and administrative expenses increased by $2.2 million or 16.7% due to increased SG&A depreciation expense and the impact of the weakening dollar on the conversion of expenses stated in foreign currencies.

Interest expense for the three months ended June 30, 2003 decreased to $4.8 million from $7.6 million in the comparable prior-year period. The decrease was due mainly to the payment of $90.0 million on the Sponsor Note in December 2002, the repurchase of a portion of the Senior Notes, and declining interest rates.

Sundry items resulted in a net income of $0.2 million during the three months ended June 30, 2003 as compared to a net income of $4.5 million during the comparable prior-year period. This decrease is primarily due to a gain of approximately $0.1 million from the Company’s repurchase of Senior Notes and foreign-exchange gains of $0.1 million during the current-year period, compared to a gain from the repurchase of Senior Notes of $2.8 million and foreign-exchange gains of $1.6 million in the prior-year period.

Pre-tax income in foreign tax jurisdictions resulted in an income tax provision of $1.2 million for the three months ended June 30, 2003 compared to a corresponding prior-year period income tax provision of $0.6 million. The income tax provisions for both periods related primarily to income from the Company’s international subsidiaries. The Company’s effective tax rate was approximately 79.3% for the three months ended June 30, 2003 as compared to 88.2% for the corresponding prior-year period.

Comparison of Six Months Ended June 30, 2003 and Six Months Ended June 30, 2002

Consolidated revenue of $187.8 million for the six months ended June 30, 2003 decreased by $5.1 million or 2.6% from the comparable prior-year period. Decreases in USS of $4.9 million resulted primarily from the overall weakness in hardware sales during the first quarter of 2003. In addition, USS experienced declines in maintenance revenue due to Company installed products reaching the end of their useful lives and from increased competition. Increases in INTL of $8.2 million are a result of strengthening demand in Europe and the UK for the Company’s software products, increases in maintenance revenue, and the introduction in the UK of document processing services during 2003. A decrease in CNS of $8.4 million resulted from pricing decreases resulting from competitive pressure, as well as decreased volume under certain maintenance programs. Factors that most impact future revenue include corporate-customer spending for large systems-solutions, customer and prospective customer mergers, on-going competitive pressures, and fluctuations in international currencies.

Consolidated gross profit of $47.4 million increased by $3.5 million or 8.0% from the comparable prior-year period. Increases in USS of $2.2 million and in INTL of $5.0 million were partially offset by decreases in CNS of $3.6 million. Although decreased revenues impacted USS gross profit, the gross profit percentage increased from 17.9% to 22.2% resulting from the Company’s cost-containment efforts. CNS’ gross profit decrease resulted primarily from decreased revenues as well as margin pressure caused by increased competition. The INTL increase resulted primarily from increased revenues and an increase in gross profit percentage resulting from cost-containment efforts. The Company is in the process of transitioning its product offering focus to proven deliverables and new targeted offerings, including EDM solutions, its other archive solutions and hardware enhancements. Incorporating more third-party products into the Company’s solutions rather than developing the products has enabled the concentration of efforts and expenditures on the targeted items which, along with the Company’s ongoing cost-containment efforts, allowed for cost reductions to help offset revenue declines.

Operating expenses of $37.6 million increased $1.8 million compared to the prior-year period. Operating expenses, by component, changed as follows: Product-development expenses increased by $0.2million or 2.8% primarily due to concentration on developing targeted new applications for the Company’s product lines and the selective expansion of existing products. Selling, general, and administrative expenses decreased by $1.5 million or 5.2% due to the Company’s ongoing cost-containment efforts.

Interest expense for the six months ended June 30, 2003 decreased to $9.7 million from $15.2 million in the comparable prior-year period. The decrease was due mainly to the payment of $90.0 million on the Sponsor Note in December 2002, the repurchase of a portion of the Senior Notes, and declining interest rates.

Sundry items resulted in a net income of $1.4 million during the six months ended June 30, 2003 as compared to a net income of $4.0 million during the comparable prior-year period. This decrease is primarily due to a gain of approximately $1.1 million from the Company’s repurchase of Senior Notes and foreign-exchange gains of $0.3 million during the current-year period, compared to a gain on the repurchase of Senior Notes of $2.8 million and foreign-exchange gains of $1.1 million in the prior-year period.

Pre-tax income in foreign tax jurisdictions resulted in an income tax provision of $1.8 million for the six months ended June 30, 2003 compared to a corresponding prior-year period income tax provision of $0.8 million. The income tax provisions for both periods related primarily to income from the Company’s international subsidiaries. The Company’s effective tax rate was approximately 91.9% for the six months ended June 30, 2003 as compared to (24.7)% for the corresponding prior-year period.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s working capital requirements are generally provided by cash and cash equivalents, funds available under the Company’s revolving credit agreement, as discussed below, which matures May 30, 2006, and by internally generated funds from cash flows from operations. Funds availability under the revolving credit agreement is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory and pledged cash. General economic conditions, the current weakness in demand for the Company’s systems solutions products offered by USS and the requirement to obtain performance bonds or similar instruments could have an impact on the Company’s future liquidity.

The Company’s cash and cash equivalents totaled $53.0 million at June 30, 2003, compared with $31.6 million at December 31, 2002. Working capital increased $4.8 million during the six months ended June 30, 2003 to a working-capital deficit of $4.1 million compared to a working-capital deficit of $8.9 million at December 31, 2002. The change in working capital included a current liability increase of $13.4 million from increased deferred revenue and accrued expenses, an accounts receivable decrease of $9.5 million and an inventory increase of $3.7 million.

During the six months ended June 30, 2003, the Company relied primarily on cash flows generated from operating activities and short-term borrowings under its revolving credit agreement to fund operations. At June 30, 2003, the Company had available $39.9 million of borrowing capacity under the Revolver, of which the Company can draw $13.1 million.

Operating activities provided $27.8 million and $22.9 million of cash in the six months ended June 30, 2003 and 2002, respectively, an increase of $4.9 million. Although net income from continuing operations increased $11.1 million, $6.8 million of this improvement resulted from lower depreciation and amortization and other non-cash transactions. In addition, cash generated by changes in working capital assets and liabilities was $3.8 million more than in the prior-year period.

Investing activities used net cash of $3.3 million and $4.0 million in the six months ended June 30, 2003 and 2002, respectively. Both uses of cash related to purchases of property, plant and equipment.

Financing activities used $3.4 million and $22.7 million of net cash in the six months ended June 30, 2003 and 2002, respectively. The $19.3 million change related primarily to the reduction of the Company’s debt.

At June 30, 2003, the Company’s principal outstanding debt instruments consisted of (i) no balance outstanding under the revolving credit facility maturing May 30, 2006 (which is more fully described below), (ii) $94.5 million of 7.5% Senior Notes due 2008, and (iii) $103.8 million of Sponsor Notes due 2009. The Company or its affiliates may from time to time purchase, redeem or pay deferred interest on some of its outstanding debt or equity securities. The Company would only make these payments in compliance with the covenants of its debt instruments.

The Company continually reviews its various lines of business to assess their contribution to the Company’s business plan and from time to time considers the sale of certain assets in order to raise cash or reduce debt. Accordingly, the Company from time to time has explored and may explore possible asset sales by seeking expressions of interest from potential bidders. However, the Company has not entered into any binding agreements or agreements in principle to sell any assets and there can be no assurance that any such asset sales will occur or, if they occur, as to the timing or amount of proceeds that such asset sales may generate.

Revolving Credit Facility. The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which will mature on May 30, 2006. Effective May 7, 2003, the Company and Heller entered into an amendment to the Revolver which reduced the committed amount from $60 million to $40 million, while increasing the letter-of-credit sub-limit from $30 million to $40 million. The Revolver is secured by substantially all the assets of the Company, subject to the limitations on liens contained in the Company’s existing Senior Notes. On November 27, 2002, the Company and Heller entered into an amendment to the Revolver that added pledged cash to the borrowing base. Funds availability under the Revolver is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory and pledged cash. At June 30, 2003, the Company had no balance outstanding under the Revolver and an outstanding balance on letters-of-credit totaling $26.8 million. The balance remaining under the Revolver that the Company can draw was $13.1 million at June 30, 2003. A commitment fee of 0.5% per annum on the unused portion of the Revolver is payable quarterly.

Under the Revolver, substantially all of the Company’s domestic cash receipts (including proceeds from accounts receivable and asset sales) must be applied to repay the outstanding loans, which may be re-borrowed subject to availability in accordance with the borrowing-base formula. The Revolver contains restrictions on the use of cash for dividend payments or non-scheduled principal payments on certain indebtedness. Restricted cash at June 30, 2003 of $28.0 million represents lockbox cash receipts to be applied to the outstanding borrowings under the Revolver and cash pledged under the terms of the Revolver. The Revolver contains various representations, warranties and covenants, including financial covenants as to maximum capital expenditures, minimum fixed-charge coverage ratio and minimum average borrowing availability. At June 30, 2003, the Company was in compliance with all covenants under the Revolver. On July 30, 2002, the Company and Heller amended the Revolver, which reduced the Company’s fixed-charge coverage ratio covenant during quarters 1, 2 and 3 of 2002, and reduced the minimum undrawn availability requirement from $10.0 million to $4.0 million

Senior Notes. In August 1998, the Company exchanged the public Senior Notes (the “Senior Notes”) for the notes sold in a May 1998 Rule 144A private offering. Interest is fixed at 7.5% and is due and payable in semi-annual installments, which began December 1, 1998. The Senior Notes contain covenants placing limitations on the Company’s ability to permit subsidiaries to incur certain debts, incur certain loans, and engage in certain sale and leaseback transactions. During the six months ended June 30, 2003, the Company repurchased Senior Notes with a face amount of $3.9 million. The Company wrote off a proportionate share of deferred financing-fees, resulting in a gain of approximately $1.1 million, which was reported as sundry (other) income in the condensed consolidated statements of operations for the six months ended June 30, 2003.

Subordinated Unsecured Sponsor Note. The Company’s Sponsor Note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid. The payments began September 30, 1999. As provided under the agreement, however, the Sponsor Note holder, WCAS, elected to defer quarterly interest payments of $4.0 million for each of the September 2000 through September 2001 quarterly periods resulting in an increase in the principal amount of the Sponsor Note totaling $33.8 million. Such election required a deferred financing-fee of 30.0% of each of the interest payments being deferred. The Company accounts for the additional financing fees as a change in the effective interest rate of the debt. WCAS may, at its election, defer each future quarterly payment under similar terms. WCAS has not elected to defer the quarterly payments since September 2001. In accordance with the terms of the Sponsor Note, on December 6, 2002, the Company made a $90.0 million principal payment on the Sponsor Note. A holder of the Senior Note is contesting this payment. See discussion under Legal Proceedings.

Preferred Stock – Series A. The Company allocated the proceeds from its Series A preferred stock issuance based upon the relative fair-value of the preferred stock and warrants issued. The related discount is being accreted such that the carrying amount of the mandatory redeemable preferred stock will equal the mandatory redemption amount at September 22, 2008. For the six months ended

June 30, 2003, accretion of the related discount and accrued but unpaid dividends totaled $0.8 million, increasing the carrying amount to $15.7 million. As of June 30, 2003, the stated value of the Series A preferred stock, including accumulated but unpaid dividends, was $181.36 per share.

Preferred Stock – Series B. For the six months ended June 30, 2003, the Company accrued additional unpaid dividends for its Series B preferred stock totaling $1.1 million, increasing the carrying amount to $9.4 million. As of June 30, 2003, the stated value of the Series B preferred stock, including accumulated but unpaid dividends, was $264.30 per share.

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

Contractual Obligations and Commercial Commitments.

In the normal course of business, the Company enters into various contractual and other commercial commitments that impact, or could impact, the liquidity of operations. The following table outlines the commitments at June 30, 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	1.8		1.0		0.8		—		—
Operating leases (non-cancelable)	19.5		6.4		6.9		5.0		1.2
Total Contractual	219.1		7.4		7.7		99.0		105.0

Unused lines of credit	$	13.1	$	13.1	$	—	$	—	$	—
Standby letters of credit	26.8		26.8		—		—		—
Total Commercial	$	39.9	$	39.9	$	—	$	—	$	—

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an

amendment of SFAS No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company implemented SFAS No. 148 on January 1, 2003, regarding disclosure requirements for condensed financial statements for interim periods. The Company has not yet determined whether it will voluntarily change to the fair-value based method of accounting for stock-based employee compensation.

FACTORS AFFECTING THE COMPANY’S BUSINESS AND PROSPECTS

There are many factors that affect the Company’s business and the results of its operations. The following is a description of some of the important factors that may cause the actual results of the Company’s operations in future periods to differ materially from those currently expected or desired. See “Forward Looking Statements”.

General Economic Conditions

The Company’s business partially depends on general economic and business conditions. The Company’s sales are to businesses in a wide variety of industries, including banking, financial services, insurance, health care, high technology and governmental agencies. General economic conditions that cause customers in such industries to reduce or delay their investments in products and solutions such as those offered by the Company could have a material adverse effect on the Company.

Delays or reductions in technology spending could have a material adverse effect on demand for the Company’s products and services, and consequently on the Company’s business, operating results, financial condition, and prospects.

Dependence on Suppliers

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

The Company has several single-sourced supplier relationships, either because alternative sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity or price considerations. If these sources are unable to provide timely and reliable supply, the Company could experience manufacturing interruptions, delays or inefficiencies, adversely affecting its results of operations. Even where alternative sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could affect operating results adversely.

Declining Financial Operating Results and Indebtedness

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

International Activities

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

Fluctuations in Operating Results

The Company’s operating results may fluctuate from period to period and will depend on numerous factors, including: customer demand and market acceptance of the Company’s products and solutions, new product introductions, product obsolescence, varying product mix, foreign-currency exchange rates, competition and other factors. The Company’s business is sensitive to the spending patterns of its customers, which in turn are subject to prevailing economic conditions and other factors beyond the Company’s control. Any unfavorable change in one or more of these factors could have a material adverse effect on the Company.

Technological Changes and Product Transitions

The Company’s industry is characterized by continuing improvement in technology, which results in the frequent introduction of new products, short product life cycles and continual improvement in product price/performance characteristics. The Company must incorporate these new technologies into its products and solutions in order to remain competitive. There can be no assurance that the Company will be able to continue to manage technological transitions. A failure on the part of the Company to effectively manage these transitions of its product lines to new technologies on a timely basis could have a material adverse effect on the Company. In addition, the Company’s business depends on technology trends in its customers’ businesses. Many of the Company’s traditional products depend on the efficient handling of paper-based transactions. To the extent that technological changes impact the future volume of paper transactions, the Company’s traditional business may be adversely impacted.

Product Development Activities

The strength of the Company’s overall business is partially dependent on the Company’s ability to develop products and solutions based on new or evolving technology and the market’s acceptance of those products. There can be no assurance that the Company’s product-development activities will be successful, that new technologies will be available to the Company, that the Company will be able to deliver commercial quantities of new products in a timely manner, that those products will adhere to generally accepted industry standards or that products will achieve market acceptance. The Company believes that it is necessary for its products to adhere to generally accepted industry standards, which are subject to change in ways that are beyond the control of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company utilizes a revolving credit facility to support working capital needs. The interest rate on loans under the Revolver is, at the Company’s option, either (i) 1.50% over prime or (ii) 3.00% over LIBOR. Although no actual balances were outstanding under the Revolver at June 30, 2003, assuming $1.0 million in borrowings under the Revolver, a one hundred basis point change in the bank’s prime or LIBOR rate would impact net interest expense by $10,000 over a twelve-month period.

ITEM 4. CONTROLS AND PROCEDURES.

During the audit of the Company’s 2000 financial statements, the Company’s certifying accountant, Deloitte & Touche LLP (D&T) noted what D&T considered to be material weaknesses in internal control design and in the operation of internal controls. See Current Report on Form 8-K filed with the Securities and Exchange Commission on November 13, 2001 for additional information regarding this item and the subsequent change in the Company’s independent accountant. The Company’s current independent accountant, KPMG, LLP (KPMG), also informally noted certain internal control weaknesses as a result of the 2001 and 2002 audit, some of which are the same weaknesses as noted by D&T in their report.

The Company has addressed the individual internal control weaknesses noted by D&T and KPMG. Steps that have been implemented to address internal control weaknesses include policies covering loss contracts, inventory reserves, allowance for doubtful accounts, revenue recognition, and project costing. In addition, as a result of Exchange Act Rule 13a-14, the Company has begun to put in place procedures addressing the adequacy of disclosure controls, including obtaining certifications from each member of management involved in the preparation and review of this Form 10-Q. The Company is continuing its efforts to evaluate and correct internal control weaknesses noted by D&T and KPMG, as well as document the system of internal controls. Although the Company believes that it has implemented adequate controls and procedures for the preparation of this report, the adequacy of the actions taken by the Company to correct certain of the previously identified weaknesses will not be fully known until the completion of documentation of the Company’s system of internal controls.

The Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Company’s management, continue to carry out an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon the evaluation completed to date, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.

There was no change in the Company’s internal control over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

BANCTEC, INC.

PART II

OTHER INFORMATION

ITEM 1. 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 York naming as defendants the Company and certain of its affiliates. The complaint alleges that the Company improperly made a payment to the holder of the Sponsor Note. The complaint seeks damages of not less than $89 million as a result of the alleged improper payment and the imposition of a constructive trust 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 was disclosed in the Company’s Current Report on Form 8-K dated November 27, 2002. The Company and the plaintiff have each submitted a motion for summary judgment, on which the court has not yet ruled. The Company believes that the allegations of the complaint are without merit and intends to defend against them vigorously.

If the lawsuit were to result in a determination that the payment to reduce the principal amount of the Sponsor Note was in contravention of the terms of the Sponsor Note, a position strongly opposed by the Company, under its terms, such payment shall be held in trust to be paid over to the holders of the Senior Notes, to the extent they remain unpaid. Therefore, in the event of an unfavorable outcome in this litigation, there will be no adverse effect on the Company’s financial statements.

The Company is a party to various other legal proceedings. None of those current proceedings is expected to have an outcome that is material to the financial condition or operations of the Company.

ITEM 2. Changes in Securities and Use of Proceeds

None

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Submission of Matters to a Vote of Security Holders

None

ITEM 5. Other Information

None

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

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

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

32.1 – Certificate of Chief Executive Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under the Sarbanes-Oxley Act

32.2 – Certificate of Chief Financial Officer pursuant to 18 USC 1350 and Rule 15d-14(a) under the Sarbanes-Oxley Act

(b) Reports on Form 8-K:

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BancTec, Inc.


	By	/s/	Brian R. Stone
			Brian R. Stone
			Senior Vice President on behalf of the registrant and as Chief Financial Officer

Dated: August 14, 2003