UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003

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

Commission File Number 0-9859

BANCTEC, INC.

(Exact Name of Registrant as Specified in its Charter)

DELAWARE		75-1559633
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2701 East Grauwyler, Irving, Texas		75061
(Address of Principal Executive Offices)		(Zip Code)

(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) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Not applicable.

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

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date.

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 held by non-affiliates: Not applicable

BancTec, Inc.

Annual Report

Form 10-K

Year Ended December 31, 2003

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Quantitative and Qualitative Disclosure About Market Risk in Item 7A, 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below in this report, and items described in the Company’s other filings with the Securities and Exchange Commission. The Company assumes no obligation to update these 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

PART I

ITEM 1. BUSINESS.

Overview

BancTec, Inc. (BancTec or the Company), a Delaware corporation, is a worldwide systems integration and services company that delivers solutions that address complex data and paper-intensive work processes. The Company provides comprehensive solutions by combining advanced web-enabled imaging and workflow technologies with both BancTec-manufactured equipment and third-party equipment. These solutions are subsequently maintained and supported by the Company’s service operations. The Company is also a leading provider of personal computer maintenance services for major computer companies, government and corporate customers. Worldwide, the Company employs approximately 3,100 people full-time and is headquartered in Irving, Texas.

Founded in 1972, the Company operates worldwide serving approximately 1,500 customers in over 20 countries, with international revenue in 2003 representing approximately one-third of total revenues.

The Company markets its portfolio of solutions to specific target markets in which it believes it has extensive business process expertise and certain competitive advantages and is able to maintain or achieve a leadership position.

Ownership

In July 1999, BancTec entered into a recapitalization transaction. Welsh, Carson, Anderson & Stowe (“WCAS”), a private investment partnership and Convergent Equity Partners, L.P. (“Convergent”), a private investment partnership, formed Colonial Acquisition Corp., (“Colonial”) with WCAS owning 93.5% and Convergent owning 6.5%. Through the merger of Colonial into BancTec, WCAS acquired 17,003,838 shares of BancTec’s common stock and Convergent acquired 1,181,946 shares of BancTec’s Class A common stock. In connection with the recapitalization, each previously outstanding share of BancTec common stock was converted into the right to receive $18.50 in cash, totaling approximately $360.2 million, and simultaneously canceled. Funding for the distribution to the former BancTec stockholders was provided by a $145.0 million capital contribution from WCAS and Convergent, by the Tranche A Term Loan, the Sponsor Note, and the Revolving Credit Facility. In addition to the funds that were 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 options and the employee stock purchase plan payments were recorded as a reduction to stockholders’ equity. WCAS also owned Series A preferred stock (“Series A Preferred”) which included warrants, and Series B preferred stock (“Series B Preferred”) which included conversion rights.

In 2002, the Company and the owners of all the outstanding capital stock of the Company consummated a series of transactions in order to create a two-tier holding company structure above the Company. As a consequence of the restructuring, all the outstanding capital stock of the Company and warrants to purchase capital stock of the Company (but not employee stock options) are held by BancTec Intermediate Holding, Inc., a Delaware corporation (“Intermediate Holding”). In turn, all the outstanding capital stock of Intermediate Holding is held by BancTec Upper-Tier Holding, LLC, a Delaware limited liability company (“Upper-Tier Holding”), whose members consist of the prior owners of all the outstanding capital stock of the Company and senior management of the Company (or entities controlled by them). As part of the restructuring, WCAS Capital Partners III, L.P. contributed to Upper-Tier Holding the Senior Subordinated Note Due 2009 originally issued to it by the Company, together with pay-in-kind interest thereon, in an aggregate principal amount of approximately $193.8 million (the “Sponsor Note”). In addition, Intermediate Holding contributed $100,000 to the Company in exchange for 667 shares of Series A Preferred Stock of the Company.

WCAS is one of the largest private equity firms in the U.S. and the largest in the world focused exclusively on investments in the healthcare services, information and business services, and communications services industries. Since its founding in 1979, WCAS has organized 12 private investment partnerships with total capital of more than $11 billion and has completed over 200 management buyouts and initial investments. The firm currently invests out of Welsh, Carson, Anderson & Stowe IX, L.P., a $3.8 billion equity fund. WCAS was the founding investor of US Oncology, Inc. in 1992.

Products and Markets

U.S. Solutions and International Solutions. U.S. Solutions (“USS”) and International Solutions (“INTL”) offer similar systems integration and business process solutions and services, and market to similar types of customers. The solutions offered primarily involve high-volume transaction processing using advanced technologies that capture, process and archive paper and electronic documents. Key applications include payment and check processing, document imaging and workflow, as well as related ongoing service and support. The Company’s powerful, high-volume integrated systems deliver important benefits to some of the world’s largest credit card companies and major banks. In addition, these segments provide their products and services to other customers, including financial services companies and insurance providers, telecommunications companies, utility companies, governmental agencies, and transportation firms.

The Company combines its extensive business application knowledge with a full range of software and equipment offerings for complex transaction processing environments. The Company’s integrated systems generally incorporate advanced

applications software developed by the Company and by third parties. These solutions may also include hardware developed and manufactured by the Company as well as by third parties. USS and INTL offer the following process services and solutions:

Payment and Check Processing Solutions. The Company offers a line of payment and check processing solutions that encompass both hardware and software components. The Company’s image software systems capture, digitize, analyze, process and archive checks and other documents, including utility, telephone, retail and credit card bills, mortgage coupons, sales drafts, prescriptions, airline tickets, tax notices and other documents. These imaging systems are also used by banks for high volume check-processing applications such as proof-of-deposit, reject repair and image statement preparation. The Company’s financial document imaging products utilize an open-systems architecture platform, which enables customers to add industry-standard hardware and software components to improve processing capabilities. The Company also manufactures low, medium, and high-speed document reader/sorters and related components that read magnetic ink character recognition and optical character recognition data from financial documents and sort the documents according to established patterns. The hardware components are sold by the company as a bundled solution with software or separately.

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

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

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

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

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

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

Fortune and retail market accounts. The Fortune and retail accounts group serves those customers that have support needs consistent with CNS’ core competencies in desktop/enterprise applications while leveraging the nationwide

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

Information About Industry Segments

Operating segments are defined as components of a company about which separate financial information is available that is evaluated regularly by the company’s chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company reports its operations as three primary segments, US Solutions (“USS”), International Solutions (“INTL”), and CNS. The operations of USS and INTL include manufacturing and supplies, maintenance of Company-manufactured and related products, integrated systems, and Plexus products. The CNS operations include personal computer repair services and administration of third-party extended-service contracts. INTL reporting includes both US and International operations of Plexus products.

On November 27, 2002, the Company sold its operations in Japan. As a result, all segment reporting has been restated to reflect the Japanese operations as discontinued operations. The details of this disposition are discussed in Notes to the Consolidated Financial Statements.

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

Geographical Locations

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

Product Development

The Company is engaged in ongoing software and 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’s product 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		%

Current expenditures are concentrated on developing new applications for the Company’s product lines and improving and expanding existing products. The Company is currently 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 in successful commercial products. Many risks exist in developing new product concepts, adapting new technology and introducing new products to the market.

Electronic Document Management. BancTec’s EDM business is organized around the creation of a set of high-level reusable components that form the basis of vertical solutions for specific markets. The three core modules in the eFIRST™ suite of solutions, generic capture system (eFIRST Capture), business process automation (eFIRST Process), and archiving (eFIRST Archive), can be integrated within the same environment and expanded.

eFIRST Capture recognizes data from many types of interaction such as e-mail, web, scanned documents, faxes and web-forms, and extracts useful data previously thought unsuitable for such purposes as general correspondence, non-standard invoices and delivery notes.

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

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

Payments Products. The Company’s Payments products have been expanded to include a refreshed Wholesale System to replace the legacy system that 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 and List ‘ product for automatically capturing invoice data from semi-structured forms.

Hardware Enhancements. In 2004, the Company plans to complete the development of the DocuScan system and improve the reliability of the X-Series Transport. All other products are now effectively in a sustaining mode only of development, and as such require less engineering resources assigned. The new DocuScan system directly addresses the market for mixed financial documents and white mail. The envelope and its contents are scanned, the images are machine read and directed to the appropriate place in the organization based on the content. This will target a new market for the Company and supports the Company’s focus on Document Imaging.

Sales and Distribution

The Company primarily relies on its internal sales force. BancTec’s distribution strategy is to employ multiple delivery channels to achieve the widest possible distribution. The Company’s products are sold to end-users, distributors, OEMs, value-added resellers and systems integrators.

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

Customer Diversification

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

Competition

In marketing its products and services, the Company encounters aggressive competition from a wide variety of companies, some of which have substantially greater resources than BancTec. The Company believes that functionality, performance, quality, service and price are important 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 standard components in its competitive efforts. While the Company believes that its offerings compete favorably based on each of these elements, the Company could be adversely affected if its competitors introduce innovative or technologically superior solutions or offer their products at significantly lower prices than the Company. No assurance can be given that the Company will have the resources, marketing and service capability, or technological knowledge to continue to compete successfully.

Backlog

The Company believes that backlog is not a meaningful indicator in understanding BancTec’s business nor a meaningful indicator of future business prospects due to the large volume of products delivered from shelf inventories and the relative portion of net revenue related to the Company’s services businesses. In addition, any backlog information would exclude CNS contracts, recurring hardware and software maintenance contracts, and contracts for sales of supplies. Further, the Company’s backlog is subject to fluctuation due to various factors, including the size and timing of orders for the Company’s products and exchange rate fluctuations, and accordingly, is not necessarily indicative of the level of future revenue.

Manufacturing - - Suppliers

The Company’s hardware and systems solutions are 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 Company generally has contracts with these suppliers that are renewed periodically. The Company has not experienced, nor does it foresee, any significant difficulty in obtaining necessary components or subassemblies; however, if the supply of certain components or subassemblies was interrupted without sufficient notice, the result could be an interruption of product deliveries.

Patents

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

The validity of any patents issued, or that may be issued, to the Company may be challenged by others and the Company could encounter legal difficulties in enforcing its patent rights against infringement. In addition, there can be no assurance that other technology cannot or will not be developed, or that patents will not be obtained by others, that would render the Company’s patents obsolete. Management does not consider the Company’s patents and licenses to be critical to the ongoing operations of the Company.

Employees

At December 31, 2003, the Company employed approximately 3,100 full-time employees. None of the Company’s employees is represented by a labor union. The Company has never experienced a work stoppage.

ITEM 2. PROPERTIES.

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

The Company consolidated additional personnel at 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 fourth quarter of 2001 and the facility is currently being offered for sale.

As of December 31, 2003, the Company owned or leased numerous facilities throughout the world to support its operations. The Company believes that these facilities are adequate to meet its ongoing needs. The loss of any of the Company’s principal facilities could have an adverse impact on operations in the short term. The Company has the option to renew its facility leases or believes it can replace them with alternate facilities at comparable cost. The Irving manufacturing facility, which the Company owns, is the primary location for the Company’s administration, assembly and manufacturing activities.

ITEM 3. LEGAL PROCEEDINGS.

A lawsuit captioned Cerberus International, Ltd., et al. vs. BancTec, Inc., et al. (Case No. 03600287) was filed on January 28, 2003 in 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. This action is in its earliest stages. The Company believes that the allegations are without merit and intends to defend against them vigorously.

If the lawsuit results 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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 financial data for the periods indicated. The selected historical consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of the Company for the three years ended December 31, 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 completed the sale of its community banking business to Jack Henry and Associates. For financial statement purposes, the sale was treated as a discontinued operation. As a result, the financial data above has been restated for 1999 and prior years to reflect the continuing operations of the Company.

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

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

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

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

Highlights

The Company believes several factors continued to create a challenging and competitive sales and cost-containment environment during the year ended December 31, 2003. These factors include: general economic conditions and reduced corporate customer technology spending; ongoing competitive pressures; an ongoing planned change in revenue mix within the Company’s U.S. Solutions (“USS”) and International Solutions (“INTL”) segments; and a highly leveraged financial position. The change in revenue mix is partially a result of trends in payment processing, including truncation, which impacts domestic and international markets. Additionally, during 2003, the USS and INTL segments experienced revenue declines in the maintenance business, the duration of which the Company cannot predict.

Expected economic and business conditions into 2004 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 general economic conditions have caused a continued weakening in demand for systems solutions products offered by USS and INTL. The Company has concentrated on cost reductions and on existing offerings. Product-development efforts are 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.

Critical Accounting Policies

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

• Revenue recognition

• Allowance for doubtful 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-intensive work processes, including advanced web-enabled imaging and workflow technologies with both BancTec-manufacturedequipment and third-party equipment,and (2) services - 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.

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 invoiced. 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.

Maintenance contracts are primarily one year in duration and the revenue generated is generally recognized ratably over the term of the contract.

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 as services are performed over time or on a “per call” basis.

Allowance for Doubtful Accounts. The Company’s allowance for doubtful accounts relates to trade accounts receivable. The allowance for doubtful accounts is an estimate prepared by management based on identification 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. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Likewise, should the Company determine that it would be able to realize more of its receivables in the future than previously estimated, an adjustment to the allowance would increase income in the period such determination was made. The allowance for doubtful accounts is reviewed periodically and adjustments are recorded as deemed necessary.

Inventory Valuation. The Company periodically 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 inventory turnover 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, additional write-downs may be required. The inventory write-down calculations are reviewed periodically and additional write-downs are recorded as deemed necessary.

Goodwill. Since January 1, 2002, when Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” became effective, the Company has assessed the impairment of goodwill annually, or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company assesses the recoverability of the goodwill by comparing the fair value of the intangible asset to the carrying amount. Any impairment is measured based on a projected discounted cash flow method using a discount rate reflecting the Company’s average cost of funds. Goodwill amounted to approximately $41.5 million as of December 31, 2002. Prior to January 1, 2002, the Company amortized its goodwill. The Company recorded approximately $3.2 million of goodwill amortization during 2001. As required by SFAS No. 142, the Company performed an initial impairment review of goodwill in 2002 as a transition to the current method. As a result of that review, during 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.

Income Taxes. The Company is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating the Company’s actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which would be included within the Company’s consolidated balance sheet. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent that the Company believes recovery is not likely, the Company must establish a valuation allowance. To the extent the Company establishes a valuation allowance in a period, the Company must include an expense within the tax provision in the statement of operations. The Company has recorded a valuation allowance to reduce the carrying amount of recorded deferred tax assets representing future deductions to an amount that is more likely than not to be realizable. In the event the Company were to determine that 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 period such determination was made.

DISCONTINUED OPERATIONS

In 1999, the Company completed the sale of substantially all of the net assets of its community banking business to Jack Henry and Associates (“JHA”). The Company received proceeds of $50.0 million in cash 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 $1.7 million, respectively, was accrued representing changes in the estimates for additional expenses related to the Company’s obligation to complete certain development activities, thereby reducing the net pre-tax gain to $17.9 million. For financial statement purposes, the Company treated the sale as a discontinued operation, and accordingly, financial statement presentation was made in accordance with APB 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 Transactions.”

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 supply the Company products and services in its markets, and 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 and recorded a pre-tax gain of approximately $63.0 million. For financial statement purposes, the Company treated the sale as a discontinued operation, and accordingly, financial statement presentation was made in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

RESULTS OF OPERATIONS

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

Comparison of Years Ended December 31, 2003 and December 31, 2002

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

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

Consolidated gross profit of $90.7 million decreased by $5.5 million or 5.7% from the comparable prior-year period. The decrease 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 was primarily attributable to decreased revenue as well as margin pressure caused by pricing pressures, increased competition, increased labor costs, and a change in revenue mix. The INTL increase resulted from increased revenues and improvements in the gross profit percentage resulting from cost containment efforts. USS gross profit increased despite decreased revenues due to lower cost of sales resulting from the Company’s cost-containment efforts and changes in the Company’s revenue mix. 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 $66.8 million represented a decrease of $4.2 million compared to the comparable prior-year period. Operating expenses, by component, changed as follows: (1) Product development expenses decreased $3.5 million compared to the prior year primarily due to the focused realignment of research and development expenditures against future product strategies and marketing plans and due to the use of outsourced product-development. (2) Selling, general, and administrative expenses decreased by $0.7 million due primarily to on-going efforts to realign the cost structure.

Interest expense for the year ended December 31, 2003 decreased to $19.5 million from $33.1 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 and the repurchase of a portion of the Senior Notes.

Sundry items resulted in a net income of $1.4 million during the year ended December 31, 2003 as compared 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 million and a gain of approximately $1.1 million from the Company’s repurchase of Senior Notes during the current year period, compared to foreign exchange gains of $1.4 million and a gain of $6.8 million as a result of the repurchase of Senior Notes during 2002.

The net tax benefit of $11.4 million for the year ended December 31, 2003, resulted from $2.4 million of income tax expense attributable to current results, net of $13.8 million of income tax benefit related to the release of valuation allowance

compared to a corresponding prior-year period income tax provision of $0.3 million. The Company’s effective tax rate was approximately (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 its wholly-owned subsidiary, BancTec Japan (“BTJ”). 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 and its operating results have been segregated and reported as discontinued operations. The Company recorded a gain on the disposal of the business of $63.0 million (net of income tax expense of $0). Income from the discontinued operations of BTJ 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 an initial review of impairment of goodwill in 2002. As a result of that review, during 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.

Comparison of Years Ended December 31, 2002 and December 31, 2001

Consolidated revenue of $379.4 million for the year ended December 31, 2002 decreased by $47.8 million or 11.2% from the comparable prior-year period. The CNS decrease of $10.0 million resulted from pricing decreases resulting from competitive pressure. The INTL decrease of $19.4 million resulted primarily from the impact of longer acceptance periods on highly customized products in the prior-year period. These products, scheduled for acceptance in 2000, achieved acceptance in 2001 along with those products scheduled for acceptance in 2001. The USS decrease of $18.5 million was principally related to the impact of continued economic weakness, and declines in maintenance revenue due to the Company’s installed products reaching the end of their useful lives and from increased competition. The Company expects these trends to continue in the foreseeable future. Factors impacting future revenue include lower corporate-customer spending for large systems solutions as a result of the continuing weakness in the economy, customer and prospective customer mergers, on-going competitive pressures, and fluctuations in international currencies.

Consolidated gross profit of $96.2 million increased by $40.3 million or 72.1% from the comparable prior-year period. The increase 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 primarily attributable to an improved labor model, with additional benefit provided through a reduction in support costs, including streamlining the number of districts and the expanded automation of its call center operations. The INTL decrease resulted from a margin decline in the Company’s subsidiaries in Europe due primarily to lower revenues without a corresponding percentage decline in fixed expenses. USS gross profit increased despite decreased revenues due to significantly lower cost of sales resulting from the Company’s 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. The Company will continue to monitor the effects of the business climate and its strategic plans on the recoverability of its investment in inventory and long-lived assets, all of which may continue to have a negative impact on gross profit in the future.

Operating expenses of $71.0 million decreased $23.4 million compared to the comparable prior-year period. Operating expenses, by component, changed as follows: Product development expenses were flat compared 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 a result of the implementation of SFAS 142. Goodwill amortization for the year ended December 31, 2001 was $3.2 million.

Interest expense for the year ended December 31, 2002 decreased to $33.1 million from $35.5 million in the comparable prior-year period. The decrease was due mainly to the repurchase of a portion of the Senior Notes, a lower outstanding balance on the revolving credit facilities and declining interest rates, partially offset by a $6.1 million increase in debt related to the Sponsor Note during 2001.

Sundry items resulted in a net income of $8.3 million during the year ended December 31, 2002 as compared 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 million and a gain of approximately $6.8 million from the Company’s repurchase of Senior Notes during 2002, compared to foreign exchange losses of $1.8 million and a net gain of $22.1 million as a result of the repurchase of Senior Notes during 2001, partially offset by the extinguishment of a previous credit facility during 2001.

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

income tax provisions for both periods related to income from the Company’s international subsidiaries and a valuation allowance provided to reduce the Company’s deferred tax assets to an amount management believes is more likely than not to be realized. The Company’s effective tax rate was approximately 5.1% for the year ended December 31, 2002 as compared to (17.2%) 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 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, decreased revenues from the Company’s maintenance contracts, and the requirement to obtain performance bonds or similar instruments could have a material impact on the Company’s future liquidity.

The Company’s cash and cash equivalents totaled $61.6 million at December 31, 2003, compared to $31.6 million at December 31, 2002. Working capital increased $18.8 million to working capital of $9.9 million at December 31, 2003. The change in working capital included a current liability decrease of $12.8 million resulting from a decrease in accrued liabilities of $10.0 million, partially offset by an increase 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 $21.7 million and an inventory decrease of $1.6 million. The Company used cash generated from the improved collections and cash conserved from decreased spending on inventories to reduce the Company’s long-term debt, as further described below.

During 2003, the Company relied primarily on cash flows generated from operating activities to fund operations. At December 31, 2003, the Company’s borrowing base under the Revolver, as hereinafter defined, was $21.2 million, of which the Company could draw $17.2 million.

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

Investing activities used net cash of $6.3 million 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 discontinued operations of $82.5 million received in 2002 and lower purchases of property, plant and equipment in 2003.

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

At December 31, 2003, the Company’s principal outstanding debt instruments consisted of (i) no balance under the Revolving credit facility maturing May 30, 2006 (which is more fully described below) (ii) $94.0 million of 7.5% Senior Notes due 2008, and (iii) $103.8 million Sponsor Notes due 2009. As of December 31, 2003, the Company’s foreign subsidiaries had no outstanding borrowings. 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 assets sales may generate.

Revolving Credit Facility. The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which will mature on May 30, 2006. Effective May 7, 2003, the Company and Heller entered into an amendment to the Revolver which 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 December 31, 2003, the Company had no balance outstanding under the Revolver and an outstanding balance on letters-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 $4.0 million reserve). 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) 0.75% over prime or (2) 2.25% over LIBOR. Under an amendment effective September 1, 2003, the interest rate margins over prime and LIBOR may be increased by 0.25% increments when the fixed charge coverage ratio falls below (1) 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%). The interest rate was remeasured as of the effective date of September 1, 2003 under this amendment. At December 31, 2003, the Company’s weighted average rate on the Revolver was 4.75%.

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 December 31, 2003 of $19.6 million represents 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. On July 30, 2002, the Company and Heller amended the Revolver, which reduced the Company’s fixed charge coverage 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. 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 year ended December 31, 2003, the Company repurchased Senior Notes with a face amount of $3.9 million. The Company wrote off a proportionate share of deferred financing fees, resulting in a gain of approximately $1.1 million, which was reported as sundry (other) income in the condensed consolidated statements of operations for 2003.

Senior Subordinated Unsecured Sponsor Note. The Company’s $160.0 million 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 June 2000 through September 2001 quarterly periods resulting in an increase in the Sponsor Note totaling $33.8 million. Such election required a deferred financing fee of 30.0% of each of 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 elected not to defer the quarterly payments since September 2001 and currently does not intend to elect deferral of the quarterly payments in the near future. In accordance with the terms of the Sponsor Note, on December 6, 2002, the Company made a $90 million principal payment on the Sponsor Note. A holder of the Senior Notes is contesting this payment. See discussion under Item 3, Legal Proceedings. The Company wrote off a proportionate share of deferred financing fees totaling $3.8 million.

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 over a period of 8 years. For the year ended December 31, 2003, accretion of the 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 A preferred stock, including accumulated but unpaid dividends, was $187.82 per share.

Preferred Stock – Series B. For the year ended December 31, 2003, the Company accrued additional unpaid dividends for its Series B preferred stock totaling $2.3 million, increasing the carrying amount to $10.6 million. As of December 31, 2003, the stated value of the Series B preferred stock, including accumulated but unpaid dividends, was $298.66 per share.

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

Inflation. 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 December 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	$	—	$	—	$	—

NEW 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 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. 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:

	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 fair value of each stock-option grant under the stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions 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’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. 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. The Company has adopted FIN 46 with no 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 has adopted the consensus reached in EITF 00-21 with no impact on the Company’s results of operations or financial position.

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. It is not anticipated that the adoption of this statement will have a material effect on the Company’s results of operations or financial position.

FACTORS AFFECTING THE COMPANY’S BUSINESS AND PROSPECTS

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

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 and high technology, and to governmental agencies. General economic conditions that cause customers 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, including its business, operating results, financial condition and prospects.

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.

Dependence on Suppliers

The Company’s solutions products depend on the quality of 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.

Indebtedness and Impact on Operating Results

As a result of the Company’s high debt to equity ratio, the Company is required to devote significant cash to debt service. This limits the Company’s future operating flexibility and could make the Company more vulnerable to 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 depends in part 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. Many of the Company’s customers use its products in highly regulated or technologically demanding industries. As a result of products introduced by the Company’s competitors, generally accepted industry standards can change rapidly in ways that are beyond the control of the Company.

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

The Company is subject to certain market risks arising from transactions in the normal course of its business, and from obligations under its debt instruments. Such risk is principally associated with interest rate and foreign exchange fluctuations, as explained below.

Interest Rate Risk

The Company utilizes long-term fixed rate and short-term variable rate borrowings to finance the working capital and capital requirements of the business. At December 31, 2003 and 2002, the Company had 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 and 2002, the Company also had the Sponsor Note, due 2009, with a balance of $103.8 million. The Sponsor Note bears interest at a fixed rate of 10.0%.

The Company also 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 (1) 0.75% over prime or (2) 2.25% over LIBOR. Under an amendment effective September 1, 2003, the interest rate margins over prime and LIBOR may be increased by 0.25% increments when the fixed charge coverage ratio falls below (1) 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%). The interest rate was remeasured as of the effective date of September 1, 2003 under this amendment. At December 31, 2003, the Company’s weighted average rate on the Revolver was 4.75%. No borrowings were outstanding under the Revolver at December 31, 2003.

The estimated fair values of the outstanding Senior Notes and the Sponsor Note, based upon recently completed market trades, comparable borrowing rates and the relative seniority preference of the instruments 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 and 2002 for the Sponsor Note. The increase in fair value of the Senior Notes includes the effect of increases in the traded values of the Senior Notes, partially offset by the repurchase of approximately $3.9 million face value of the Senior Notes during 2003. The increase in fair value of the Sponsor Note reflects an estimated decrease in the yield to maturity coinciding with the decreased yield to maturity on the Senior Notes. The Company does not expect changes in fair value of the Senior Notes or the Sponsor Note to have a significant effect on the Company’s operations, cash flow or financial position.

Foreign Currency Risk

The Company’s international subsidiaries operate in approximately 11 countries and use the local currencies as the functional currency and the U.S. dollar as the reporting currency. Transactions between the Company and the international subsidiaries are denominated in U.S. dollars. As a result, the Company has certain exposures to foreign currency risk. However, management believes that such exposure does not present a significant risk due to a relatively limited number of transactions and operations denominated in foreign currency. Approximately $107.3 million or 28.3% of the Company’s revenues are denominated in the international currencies. Transaction gains and losses on U.S. dollar denominated transactions are recorded within sundry expenses in the consolidated statements of operations and were not material.

The Company may use foreign forward currency-exchange rate contracts to minimize the adverse earnings impact from the effect of exchange rate fluctuations. No hedging activities existed at year-end 2003.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of BancTec, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, comprehensive loss, stockholders’ deficit and cash flows for each of the years in the three-year period ended December 31, 2003. In connection with our audit of the consolidated financial statements, we have also audited the accompanying financial statement schedule as of December 31, 2003 and 2002 and for the years then ended. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position 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 years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule as of December 31, 2003 and 2002 and for the years then ended, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in note A to the consolidated financial statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/ KPMG LLP

Dallas, Texas

March 31, 2004

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 consolidated financial statements.

BANCTEC, INC.

CONSOLIDATED BALANCE 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 consolidated financial statements.

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 consolidated financial statements.

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 consolidated financial statements.

BANCTEC, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

For the years ended 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 consolidated financial statements.

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 Consolidated Financial Statements.

BANCTEC, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

BancTec, Inc., a Delaware corporation, and its subsidiaries (the “Company” or “BancTec”), is a worldwide systems integration and services company with a 30- year history in imaging technology, financial transaction processing 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. See Note K for further discussion of Company business structure.

Principles of Consolidation

The consolidated financial statements include the accounts of BancTec, Inc. and its wholly-owned subsidiaries. The Company accounts for investments in which it does not exercise control (generally ownership of 50% or less) under the equity method of accounting. At December 31, 2003, retained earnings included $1.74 million of undistributed earnings for investments accounted for under the equity method. During 2003, the Company recorded $0.07 million of earnings from these investments in the consolidated statement of operations and received a dividend payment of $0.35 million. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ from those estimates.

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 are similar instruments with original maturities in excess of three months and are valued at cost, which approximates market. Restricted cash at December 31, 2003 of $19.6 million represents the 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, additional write-downs may be required. The inventory write-down calculations are reviewed periodically and additional write-downs are recorded as deemed necessary. Inventory reserves as of December 31, 2003, 2002, and 2001 were $15.0 million, $16.3 million, and $25.7 million, respectively. 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. Depreciation expense for the years ended December 31, 2003, 2002, and 2001 was $21.1 million, $24.0 million, and $32.0 million, respectively.

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 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. There were no changes in the carrying amount of goodwill by segment for the year ended December 31, 2003.

The following is a summary comparison of net income (loss) for the years ended December 31, 2003, 2002, and 2001, as adjusted to remove the amortization of goodwill with indefinite useful 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 Financial Instruments

Derivative financial instruments may be utilized by the Company to reduce interest rate or foreign-currency exchange rate

risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes.

The Company accounts for derivative instruments in accordance with Statement of Financial Accounting Standards No. 133 Accounting for Derivatives Instruments and Hedging Activities (“SFAS 133”), which requires that all derivatives be recognized as assets and liabilities on the balance sheet and measured at fair value. The corresponding derivative gains or losses are reported based on the hedge relationship that exists. Changes in fair value derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133 are required to be reported in earnings. At the time of adoption of SFAS No. 133, the Company determined that the forward foreign-exchange contracts did not qualify as a hedge and marked the contracts to market, reflecting the changes in the statement of operations in gain from discontinued operations. The Company recognized an immaterial transition adjustment at adoption. In 2001, the Company settled the then outstanding remaining yen-denominated foreign-currency forward contracts. The Company realized a gain of approximately $1.1 million in discontinued operations from the yen-denominated foreign-currency forward contracts for the year ended December 31, 2001. At December 31, 2003, and at December 31, 2002, the Company was not a party to any derivative financial instruments.

Revenue Recognition

The Company derives revenue from primarily two sources- 1) 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 recognizes revenue from sales of equipment and supplies upon delivery and transfer of title or upon customer acceptance.

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.

Maintenance contracts are primarily at least one year in duration and the revenue generated is generally recognized ratably over the term of the contract.

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 over time or as services are performed on a “per call” basis. These 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. Research and development costs for the year ended December 31, 2003 and 2002 were $12.5 and $16.0 million.

Income Taxes

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

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”. Foreign currency 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

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk for these instruments are limited due to the large number of customers comprising the Company’s customer base, and their dispersion across different geographic areas.

The Company sells its products to customers under specified credit terms in the normal course of business. These customers’ businesses can generally be classified 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 could have a material adverse effect on the Company. The Company currently receives funds in advance for a significant portion of the Company’s services prior to the performance of the services they relate to and management does not currently consider this source to be a credit risk. Due to the diversity of the Company’s customers, management does not consider there to be a concentration of risk within any single classification. However, 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.

The Company’s hardware and systems solutions are 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 Company generally has contracts with these suppliers that are renewed periodically. The Company has not experienced, nor does it foresee, any significant difficulty in obtaining necessary components or subassemblies; however, if the supply of certain components or subassemblies was interrupted without sufficient notice, the result could be an interruption of product deliveries.

Fair Value of Financial Instruments

The following estimated fair values of financial instruments have been determined by the Company using available market information and valuation methodologies:

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

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

Senior notes: The Company estimated fair value for 2003 based on an average value of recently completed market trades, resulting in a yield-to-maturity of approximately 17%. The number of actual trades is limited, therefore the result may vary if a widely-traded market environment existed.

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

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

	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-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.

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.

Incentive Options. During the year ended December 31, 2000, 1,303,460 incentive options were granted by the Company. During 2001 and 2002, no additional incentive options were granted. During the year ended December 31, 2003, 45,000 incentive options were granted by the Company. 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.

Non-qualified stock options. During the year ended December 31, 2000, 377,040 non-qualified stock options were granted by the Company. During 2001 and 2002, 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.

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 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

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

At December 31, 2003, options to purchase 514,000 shares were outstanding, of which 222,775 were vested. All options

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

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 2001, and all options granted in 2003 and 2000 were issued at or above market price, and therefore no stock-based compensation was recorded.

NEW ACCOUNTING PRONOUNCEMENTS

	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	)

Weighted Average	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

Reclassification

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

The Company has two issues of Preferred Stock as described in Note F – Preferred Stock, contained in Notes to the Consolidated Financial Statements. Series A Preferred Stock has been historically classified in the mezzanine section of the Consolidated Balance Sheets due to the provision providing for mandatory redemption. Both the Series A Preferred and the Series B Preferred include provisions for redemption at the option of holders in certain circumstances including a sale or merger of the Company and redemption at the option of the Company. The Series B Preferred has been historically classified in the stockholders’ equity section of the Consolidated Balance Sheets, however the Company has determined that the Series B Preferred Stock should be classified in the mezzanine section as provided by guidance contained in EITF Topic D-98, “Classification and Measurement of Redeemable Securities.” Under this guidance, classification in the permanent equity section is not considered appropriate if the preferred stock is redeemable upon majority vote of the Board of Directors and such board is controlled by the preferred security holders. At December 31, 2003, preferred security holders comprised 50% of the Board of Directors. As a result, the Series B Preferred Stock is being reclassified into the mezzanine section of the Consolidated Balance Sheets.

On March 31, 2004, the Board of Directors elected a seventh member who is not a preferred security holder. As a result, the preferred security holders will no longer control the Board of Directors and the Series A and Series B Preferred Stock will be classified in the permanent equity section of the Consolidated Balance Sheets at March 31, 2004. In addition, on March 31, 2004, the Board of Directors approved an amendment to the Series A Preferred Stock agreement to remove the mandatory redemption provision.

NOTE B – SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING TRANSACTIONS

The Consolidated Statement of Cash Flows included the following noncash investing and 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 - DISCONTINUED OPERATIONS, RESTRUCTURING AND IMPAIRMENT

Discontinued Operations.

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

respectively, was accrued representing changes in estimate for additional expenses related to the Company’s obligation to complete certain development activities. For financial statement purposes, the Company treated the sale as a discontinued operation, and accordingly, financial statement presentation was made in accordance with APB 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 Transactions”.

2. 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. During 2002, the Company recorded a gain on the disposal of the business of $63.0 (net of income tax expense of $0). Revenue from the discontinued operations of BTJ for the fiscal years 2002 and 2001 was $63,213 and $78,473, respectively. Pretax income from the discontinued operations of BTJ for fiscal 2002 and 2001 was $5,451 and $13,856, respectively. The assets related to BTJ were previously classified in the International segment (See Note K for the discussion of segment data).

Restructuring. As a part of the Company’s focus on cost efficiency, management has targeted and accrued for ongoing staff reductions. Severance charges are included in the Cost of sales, Selling, general and administrative and Product development expense line items in the accompanying Consolidated Statements of Operations. At December 31, 2001, the Company’s balance sheet accrual for severance 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 these accruals, resulting in a liability balance of $1.6 million at December 31, 2002. During 2003, the Company recorded additional accruals of approximately $2.1 million and recorded payments of approximately $3.2 million against these accruals, resulting in a liability balance of $0.5 million at December 31, 2003. As of December 31, 2003, approximately 720 employees have been terminated since 2001, including employees in production, product development, sales and marketing and other administrative functions.

Impairment. Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net operating cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the fourth quarter of 2001, the Company determined that long-lived tangible assets totaling approximately $4.1 million were impaired. Impairment charges are included in Cost of sales, Selling, general and administrative and Product development expenses in the Company’s Consolidated Statements of Operations. The impairments included approximately $1.9 million for capitalized spare parts, which were determined to be obsolete, and approximately $2.2 million for property, plant and equipment (of which $1.5 million was from vacating an owned facility currently being offered for sale).

NOTE D - INVENTORIES

Inventory consists 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

NOTE E - DEBT AND OTHER OBLIGATIONS

Debt and other 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

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 December 31, 2003, the Company had no balance outstanding under the Revolver and an outstanding balance on letters-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 $4.0 million reserve). A commitment fee of 0.5% per annum on the unused portion of the Revolver is payable quarterly.

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. As of December 31, 2002, the Company is in compliance with all covenants. During 2001, the Company repurchased Senior Notes with a face amount of $39.0 million. The Company wrote off a proportionate share of deferred financing-fees, resulting in a gain of approximately $23.9 million. During 2001, the Company repurchased Senior Notes with a face amount of $13.1 million. The Company wrote of a proportionate share of deferred financing-fees, resulting in a gain of approximately $6.8 million. During 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.

Senior Subordinated 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 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. However, as provided under the agreement, the Sponsor Note holder, WCAS, elected to defer quarterly interest payments of $4.0 million for each of the June 2000 through September 2001 quarterly periods. 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. For the years ended December 31, 2001 and 2000, the Company increased the outstanding deferred-interest notes by $17.7 million and $16.1 million, respectively. These increases were comprised of the $4.0 million 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. WCAS may, at its election, defer each future quarterly payment under similar terms. WCAS did not elect to defer quarterly payments due since September 2001. In accordance with the terms of the Sponsor Note, on December 6, 2002, the Company made a $90 million principal payment on the Sponsor Note. The Company wrote off a proportionate share of deferred financing-fees totaling $3.8 million.

Capital Leases. During the first quarter of 2003, the Company entered into a capital lease for $2.4 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 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 Consolidated Balance Sheets and the non-current portion of capital leases are included in Other Liabilities.

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

As of December 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

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

NOTE F - PREFERRED STOCK

SERIES A PREFERRED STOCK

In consideration for amending the Company’s credit agreements with its Lenders, in September 2000, the Company issued 100,000 shares of $0.01 par value Series A Preferred Stock to WCAS, its primary owners. In exchange, WCAS contributed an additional $15.0 million in cash to the Company. Dividends on the Series A Preferred accrue quarterly at an annual dividend rate of 7.0% of the then Stated Value. The Stated Value equals $150.00 per share, plus accumulated and unpaid dividends. Dividends are paid when declared by the Company’s Board of Directors. The aggregate liquidation preference/redemption value is $15.0 million, plus accumulated and unpaid dividends. The Company has the right to redeem the Series A Preferred at any time by paying for each share the Stated Value per share as of the redemption date. In addition, upon the occurrence of certain events, as defined, and upon the approval of a majority of the holders of the Series A Preferred, the Company would be required to redeem the shares. An amendment to the agreement covering the Series A preferred stock to remove the mandatory redemption date was approved by the Board of Directors on March 31, 2004. Each share of Series A Preferred includes a warrant to purchase between 2.5 and 7.75 shares of Common Stock at $0.01 per share. Common stock exercisable by the warrant totals 750,000 shares and may be exercised at any time from the date of purchase. The Company allocated the proceeds from the Series A preferred-stock issuance based upon the relative fair-value of the preferred stock and warrants which resulted in recording preferred stock of $11.3 million and warrants of $3.7 million. The related discount is being accreted over a period of 8 years.

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

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

As of December 31, 2003, the stated value of the Series A Preferred, including accumulated but unpaid dividends, was $187.82.

SERIES B PREFERRED STOCK

In February 2001, the Company issued 35,520 shares of $0.01 par value Series B Preferred Stock (“Series B Preferred”) to its primary owners, WCAS. In exchange, WCAS contributed an additional $5.3 million in cash to the Company. Dividends on the Series B Preferred accrue quarterly at an annual dividend rate of 25.0% of the then “Stated Value.” The Stated Value equals $150.00 per share, plus accumulated and unpaid dividends. Dividends are paid when declared by the Company’s Board of Directors. The aggregate liquidation preference/redemption value at December 31, 2003, is $10.0 million, including accumulated and unpaid dividends. The Company has the right to redeem the Series B Preferred at any time by paying for each share the Stated Value per share as of the redemption date. In addition, upon the occurrence of certain events, as defined, and upon the approval of a majority of the holders of 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 at any time. The number of shares of Common Stock is determined by multiplying the number of shares being converted by $150.00 and dividing the result by $8.325 per share. The conversion rate is subject to various adjustments (for anti-dilution). The Company is required to keep available approximately 640,000 common shares for issuance upon conversion of all outstanding shares of Series B Preferred.

See NOTE A - Summary Of Significant Accounting Policies under Reclassification, contained in Notes to the Consolidated Financial Statements, for a discussion of the reclassification of the Series B Preferred Stock out of permanent equity to the mezzanine section of the Consolidated Balance Sheets under the guidance of EITF Topic D-98, “Classification and Measurement of Redeemable Securities.”

For the years 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 - OTHER ACCRUED EXPENSES AND LIABILITIES

Other accrued 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 income tax expense (benefit) on income (loss) from continuing operations consists of the 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

The difference between the income tax provision on income (loss) from continuing operations computed at the statutory federal income tax rate and the financial statement 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

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

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2003 and 2002 are presented below (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		$	—

A valuation allowance has been provided to reduce the deferred tax assets to an amount management believes is more likely than not to be realized. Expected realization of deferred tax assets for which a valuation allowance has not been recognized is based upon the reversal of existing taxable temporary differences and taxable income expected to be generated in the future. The valuation allowance for deferred 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 ended December 31, 2002 was a decrease of $29,658,000, of which $29,354,000 related to the gain on the disposal of discontinued operations and $304,000 related to income from continuing operations. The net 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 of valuation allowance, $1,416,000 related to prior year true-ups and corrections, and $1,457,000 related to income from continuing operations.

Company’s effective tax rate was (176.1%), 5.1% and (17.2%) for the years ended December 31, 2003, 2002, and 2001, respectively.

The Company’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 period from 2008 through 2012, $78.1 million in the period from 2013 through 2025, and $6.8 million with no expiration.

Components of 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	)

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

NOTE I - EMPLOYEE BENEFIT PLANS

The Company’s Employees’ Savings Plan allows substantially all full-time and part-time U.S. employees to make contributions defined by Section 401(k) of the Internal Revenue Code. Beginning in February 2001, the Company’s 401(k) Plan changed 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 financial objectives. Amounts expensed under the plan for the years ended December 31, 2003, 2002 and 2001 were $0.0 million, $0.0 million and $0.5 million, respectively.

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

The following table provides a reconciliation of the benefit obligation, plan assets 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		%

The components 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 - 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, which is reported as a component of other accrued expenses and liabilities in the accompanying condensed consolidated balance sheet during the year ended December 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

NOTE K - COMMITMENTS AND CONTINGENCIES

Leases. The Company leases certain sales and service office facilities and equipment under non-cancelable operating leases expiring through 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.

Future minimum payments under non-cancelable operating leases, net of expected sublease 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

The Company believes that its facility leases can be either renewed or replaced with alternate facilities at comparable cost.

Litigation. A lawsuit captioned Cerberus International, Ltd., et al. vs. BancTec, Inc., et al. (Case No. 03600287) was filed on January 28, 2003 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 Notes was disclosed in the Company’s Current Report on Form 8-K dated November 27, 2002. This action is in its earliest stages. The Company believes that the allegations are without merit and intends to defend against them vigorously.

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

NOTE L - BUSINESS SEGMENT DATA

Management has 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. and international operations of Plexus® products (“Plexus”). For 2003, CNS reporting includes start-up service operations in Canada and Europe.

US Solutions and International Solutions. USS and INTL offer similar systems-integration and business-process solutions and services and market to similar types of customers. The solutions offered primarily involve high-volume transaction processing using advanced technologies and processes. Key applications include payment and check processing, document imaging and workflow, and ongoing service and support. These segments provide their products and services to customers, including financial-services companies and insurance providers, telecommunications companies, utility companies, governmental agencies, and transportation firms. USS develops and sells the Company’s Pay Courier Archive solution. Plexus offers a complete suite of Internet-enabled document imaging and workflow software-solutions under the Plexus® brand.

Computer and Network Services. The Company is a leading provider of integrated desktop and desk side support, and personal computer repair services in the United States to many customers, including many Fortune 1000 companies. One focus of CNS is providing warranty fulfillment services and related support to manufacturers of desktop/enterprise products. Another focus is the support of desktop/enterprise applications.

Data for all years excludes the impact of discontinued operations.

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

Table 1—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 - GEOGRAPHIC OPERATIONS

The Company 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 for at established transfer prices.

Sales to unaffiliated customers and affiliates for the years ended December 31, 2003, 2002 and 2001, and long-lived assets, other than deferred taxes, at the end of each 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

NOTE N - SUMMARIZED QUARTERLY 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 of and for the quarters ended March 31, June 30 and September 30, 2002 and the filing of Form 10-Q for the respective quarters of 2002, management determined that certain revenue items totaling $1.6 million were not recorded in the proper period. Accordingly, the summarized quarterly data for the first, second and third quarters of 2002 has been restated from amounts reported in the 2002 Form 10-Q’s to appropriately report such revenues. Also, during 2002, the Company recorded as a cumulative effect of a change in accounting principle, a non-cash charge of $6.9 million related to the write off of a portion of the carrying value of goodwill. Net income for the quarter ended March 31, 2002 has been restated to reflect this write off.

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

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

NOTE O - ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss at December 31, 2003 consist of foreign-currency translation adjustments related to the Company’s international operations (a gain of $1.4 million) and minimum pension liability related to the Company’s subsidiary in the United Kingdom ($6.2 million).

NOTE P - SUBSEQUENT EVENTS

None

BANCTEC, INC.

INDEX TO 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 other schedules have been omitted as the required information is inapplicable, not required, or the information is included in the financial statements and notes thereto.

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

None.

ITEM 9A. 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 audit, some of which are the same weaknesses as noted by D&T in their report.

The Company has addressed certain of the individual internal-control weaknesses noted by D&T and KPMG, but analysis of internal control factors continues on an ongoing basis. 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-K. The Company is continuing its efforts to correct the internal-control weaknesses noted by D&T and KPMG. Although the Company believes that it has implemented adequate controls and procedures for the preparation of this report, the actions taken by the Company to correct certain of the previously identified weaknesses will not be fully tested by the Company’s independent accountants until the annual audit for the year ended December 31, 2005.

Within the 90 days prior to the filing date of this report, the Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Company’s management, began an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation completed to date, and the new procedures put in place, the Chief Executive Officer and the Chief Financial Officer believe that 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. The Company will continue to evaluate disclosure controls on an ongoing basis.

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

PART III

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

The following table sets forth the names, ages, and positions of each of the directors and executive officers of the Company as of March 31, 2004.

The Board of Directors elects executive officers annually. No family relationships exist among the directors or executive officers of the Company. Except for traffic offenses or other minor offenses, no director or executive officer has been convicted or named in a criminal 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 April 2001, Mr. Crisman served as Chief Executive Officer of Applied Magnetics Corporation and from November 1995 through April 2001, also served as Chairman of the Board. In January 2000, Applied Magnetics Corporation filed for protection under Chapter 11 of the United States Bankruptcy Code, from which it was discharged in November 2001.

Mr. Stone has 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. From March 1996 through August 1999, Mr. Stone served as Chief Executive Officer of Magnetic Data Technologies, LLC.

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

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

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

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

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

Audit Committee

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

Section 16(a) Beneficial Ownership Reporting Compliance

Not applicable.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth certain information regarding compensation earned during the fiscal years ended December 31, 2003, 2002 and 2001, by the Company’s Chief Executive Officer and each of the Company’s four other most highly 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 earned during each fiscal year.

(2) Options to acquire shares of Common Stock.

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

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

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

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

Option Grants in 2003

The Company did not grant options to any of the named executive officers during 2003.

Aggregated Option Exercises in 2003 and Fiscal Year-End Option Values

None of the named executive officers hold options in the Company.

Compensation of Directors

Directors of the Company are not compensated for their services.

Employment Agreements

During 2003, Mr. Crisman was compensated at an annualized salary rate of $450,000. Mr. Crisman also received a bonus of $158,063 for his services during 2003. Effective July 1, 2002, the Company entered into an employment agreement with Mr. Crisman which provides for the payment of an annual base salary of $450,000, subject to annual review by the Board of Directors, and a discretionary bonus. The agreement initially expired on December 31, 2002 and automatically renews for successive one-year periods unless terminated by either party. The agreement provides for severance in an amount equal to the sum of the then-current salary and the bonus awarded in the preceding 12-month period, in the case of termination for reasons other than cause or without good reason.

During 2001, the Company retained the services of Brian R. Stone, a consultant of ACR/BI Limited Partnership, as Chief Financial Officer of the Company. During 2002, the Company paid to ACR/BI Limited Partnership a monthly fee of $27,083

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

Compensation Committee and Option Committee Interlocks and Insider Participation

The Company did not have a Compensation Committee from the July 23, 1999 merger date 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 Compensation Committee was composed of Robert A. Minicucci.

From July 1, 2000 through December 3, 2000, the Option Committee was composed of Robert A. Minicucci, Anthony J. de Nicola, and Murray Holland (a former director of the Company) and from December 4, 2000 through December 31, 2001, the Option Committee 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 member of the Compensation Committee or the Option Committee was an officer or employee of the Company. No member of the Compensation Committee or the Option Committee was formerly an officer of the Company.

REPORT OF THE COMPENSATION COMMITTEE

Compensation Policy and Executive Compensation. The Compensation Committee is responsible for reviewing and making recommendations as to the annual compensation of the Company’s executive officers, including such components as annual cash compensation, short and long-term incentives, and supplemental benefits.

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

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

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

2003 Total Compensation for the Chief Executive Officer. Craig D. Crisman. When Mr. Crisman became the company’s Chief Executive Officer, the Committee designed a compensation plan which was consistent with that provided to the company’s other executive officers. Although a significant portion of Mr. Crisman’s 2003 compensation consisted of bonus plan payments based on company performance, the Committee did not rely entirely on predetermined formulas or a limited set of criteria when it evaluated the performance of the company’s Chief Executive Officer. The Committee considered:

• Management’s overall accomplishments;

• Mr. Crisman’s individual accomplishments; and

• The company’s financial performance.

The Committee designed a compensation package for Mr. Crisman that provided a competitive salary with the potential of significant bonus plan compensation in the event the company performed well under his leadership. For 2003, Mr. Crisman’s annual salary level as Chief Executive Officer was $450,000 and his total bonus compensation was $158,063.

Base Salary. The base salary for each executive officer is determined at levels considered appropriate for comparable positions at similar companies.

Variable Incentive Awards. To reinforce the attainment of Company goals, the Committee believes that a substantial portion of the annual compensation of each executive officer should be in the form of variable incentive-pay. The Company maintains an incentive plan under which the executive officers may earn an award as a percentage of their base compensation, if the Company meets the EBITDA profit objective set by the Compensation Committee at the beginning of the fiscal year. During 2003, these objectives were determined on a quarterly basis, and as a result of the Company meeting a portion of those objectives, awards were paid to Messrs. Crisman and Stone in the amounts discussed under “Employment Agreements.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of March 15, 2004 regarding the 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 more than 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 Summary Compensation Table; and (4) all executive officers and directors of the Company as a group. Percentage of ownership is based on 17,003,838 shares of Common Stock and 1,181,946 shares of Class A Common Stock (both issued and outstanding at 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 of March 15, 2004. The assumed exercise of the Series A Preferred warrants (“Series A Warrants”) and the assumed conversion of the Series B Preferred (“Series B Conversion Rights”) results in 750,000 and 640,000 additional shares, respectively, of Common Stock. Additionally, the assumed exercise of options results in 185,150 additional shares of Common Stock. Included in the Number of Shares Beneficially Owned are shares attributable to stock options, stock warrants, and conversion rights that are exercisable as of, or will be exercisable within 60 days after, March 15, 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	%

* Less than one percent.

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

(2) Common Stock includes 17,003,838 shares of Common Stock, 1,181,946 shares of 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) 100,000 shares of Series A Preferred includes a warrant to purchase between 2.5 and 7.75 shares of Common Stock. Common Stock exercisable by the warrants totals 750,000 shares.

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

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

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

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

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

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

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

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

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

(13) Mr. Crisman and Mr. Stone hold minority interests in 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

(1) Audit fees consisted of audit work performed in the preparation of the financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, such as statutory audits and reviews of interim financial information.

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

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

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

PART IV

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

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

(b) Reports on Form 8-K:

None

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

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

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

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

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

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

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

4.6 — Exchange and Registration Rights Agreement dated May 22, 1998 by and among the Company, Chase Securities, Inc., Goldman, Sachs & Co. and NationsBanc Montgomery Securities LLC, incorporated by reference to Exhibit 4.1 to the Company’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 several Purchasers named in Schedules I and II thereto, incorporated by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

10.1 — Loan Documents dated July 22, 1999, among the Company, Chase Bank of Texas, as Agent, and Welsh, Carson, Anderson & Stowe, as amended, incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year 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 on Form 10-K for the year ended December 31, 1999.

10.3 — Second Amendment and Waiver dated May 15, 2000 to Loan Documents, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000.

10.4 — Third Amendment and Waiver dated September 15, 2000 to Loan Documents, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000.

10.5 — Stock Subscription Warrant, incorporated by reference to Exhibit 10.3 to the Company’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 the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000.

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

2001.

10.8 — First Amendment to Loan and Security Agreement, dated as of November 8, 2001, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001.

10.9 — Second Amendment to Loan and Security Agreement, dated as of February 5, 2002, between Heller Financial, Inc. and BancTec, Inc., incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

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

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

10.12 — Loan and Security Agreement—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 on Form 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 the Company’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 to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003.

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

21.1 — Subsidiaries of Registrant

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

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

32.1 – Certificate 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.

EXECUTIVE COMPENSATION 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 on Form 10-K for the year ended December 31, 2000.

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

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

SCHEDULE II

BANCTEC, INC.

VALUATION AND QUALIFYING ACCOUNTS

For the Years 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

(a) Write-off of uncollectible accounts.

(b) Severance and related payments.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ Craig D. Crisman
			Craig D. Crisman
			President and Chief Executive Officer

Dated: April 2, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Company and 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