UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the quarterly period ended March 31, 2005

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

(972) 821-4000
(Registrant’s telephone number, including area code)

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

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

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

Title of Each Class		Number of Shares Outstanding at May 12, 2005

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

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

BANCTEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	March 31, 2005			December 31, 2004
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $1,801 and $4,056 at March 31, 2005 and December 31, 2004	$	39,667		$	51,487
Accounts receivable, less allowance for doubtful accounts of $1,040 and $931 at March 31, 2005 and December 31, 2004	51,973			45,772
Inventories, net	23,188			24,466
Prepaid expenses	6,413			4,950
Other current assets	1,995			1,984
Total current assets	123,236			128,659

PROPERTY, PLANT AND EQUIPMENT, net	32,175			34,254

OTHER ASSETS:
Goodwill	41,476			41,476
Deferred income tax benefit	6,742			6,874
Other assets	4,465			4,802
Total other assets	52,683			53,152

TOTAL ASSETS	$	208,094		$	216,065

CURRENT LIABILITIES:
Current obligations under capital leases and revolver	$	104		$	299
Trade accounts payable	15,171			14,479
Other accrued expenses and liabilities	36,003			34,377
Deferred revenue	22,885			23,778
Maintenance contract deposits	32,694			41,083
Income taxes	3,590			3,112
Total current liabilities	110,447			117,128

OTHER LIABILITIES:
Long-term debt	197,823			197,823
Non-current maintenance contract deposits	21,038			20,547
Other noncurrent liabilities	22,199			22,230
Total other liabilities	241,060			240,600

Total liabilities	351,507			357,728
COMMITMENTS AND CONTINGENCIES

SERIES A PREFERRED STOCK - issued and outstanding, 100,667 shares at March 31, 2005 and December 31, 2004	18,040			18,040

STOCKHOLDERS’ DEFICIT:
Cumulative preferred stock - authorized, 200,000 shares of $0.01 par value at March 31, 2005 and December 31, 2004
Series B preferred stock - issued and outstanding, 35,520 shares at March 31, 2005 and December 31, 2004	13,520			13,520
Common stock authorized, 21,800,000 shares of $0.01 par value at March 31, 2005 and December 31, 2004:
Common stock-issued and outstanding 17,003,838 shares at March 31, 2005 and December 31, 2004	170			170
Class A common stock-issued and outstanding 1,181,946 shares at March 31, 2005 and December 31, 2004	12			12
Subscription stock warrants	3,726			3,726
Additional paid-in capital	122,655			122,655
Accumulated deficit	(287,691		)	(286,247		)
Accumulated other comprehensive loss	(13,845		)	(13,539		)
Total stockholders’ deficit	(161,453		)	(159,703		)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	208,094		$	216,065

See notes to unaudited condensed consolidated financial statements.

BANCTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
	2005			2004
	(In thousands)			(In thousands)
REVENUE
Equipment and software	$	34,411		$	32,526
Maintenance and other services	54,224			56,558
	88,635			89,084
COST OF SALES
Equipment and software	20,225			19,235
Maintenance and other services	44,199			48,746
	64,424			67,981
Gross profit	24,211			21,103

OPERATING EXPENSES
Product development	2,251			2,485
Selling, general and administrative	17,044			14,651
	19,295			17,136
Income from operations	4,916			3,967

OTHER INCOME (EXPENSE):
Interest income	227			138
Interest expense	(4,759		)	(4,773		)
Sundry, net	(476		)	(494		)
	(5,008		)	(5,129		)
LOSS BEFORE INCOME TAXES	(92		)	(1,162		)
INCOME TAX EXPENSE (BENEFIT)	1,352			(370		)
NET LOSS	(1,444		)	(792		)

See notes to unaudited condensed consolidated financial statements.

BANCTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31
	2005			2004
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,444	)	$	(792	)
Adjustments to reconcile net loss to cash flows (used in) provided by operations:
Depreciation and amortization	3,571			3,974
Provision for doubtful accounts	(88		)	(163		)
Deferred income tax expense (benefit)	132			(1,406		)
Loss on disposition of property, plant and equipment	482			131
Other non-cash items	23			82
Changes in operating assets and liabilities:
Increase in accounts receivable	(6,113		)	(7,962		)
Decrease (increase) in inventories	926			(529		)
Increase in other assets	(1,137		)	(2,407		)
Increase (decrease) in trade accounts payable	692			(942		)
(Decrease) increase in deferred revenue & maintenance contracts deposits	(8,791		)	11,016
Increase (decrease) in other accrued expenses and liabilities	2,101			(755		)
Cash flows (used in) provided by operating activities	(9,646		)	247

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment	(1,789		)	(2,039		)
Cash flows used in investing activities	(1,789		)	(2,039		)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments of current maturities of capital lease obligations	(215		)	(266		)
Payments on short-term borrowing, net	(1		)	—
Cash flows used in financing activities	(216		)	(266		)

EFFECT OF EXCHANGE RATE CHANGES ON CASH	(169		)	403
NET DECREASE IN CASH AND CASH EQUIVALENTS	(11,820		)	(1,655		)
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD	51,487			61,566

CASH AND CASH EQUIVALENTS—END OF PERIOD	$	39,667		$	59,911

SUPPLEMENTAL DISCLOSURES INFORMATION:
Cash paid during the period for:
Interest	$	2,737		$	2,682
Taxes	$	446		$	1,006

See notes to unaudited condensed consolidated financial statements.

BANCTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

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

The accompanying unaudited condensed consolidated balance sheet at March 31, 2005, and the unaudited condensed consolidated statements of operations and cash flows for the interim periods ended March 31, 2005 and 2004, should be read in conjunction with BancTec, Inc. and subsidiaries (“BancTec” or the “Company”) consolidated financial statements and notes thereto in the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Cash and Cash Equivalents and Short-Term Investments

Cash and cash equivalents include cash on hand and on deposit, including highly liquid investments with original maturities of three months or less. Short-term investments or similar instruments with original maturities in excess of three months are valued at cost, which approximates market. Restricted cash at March 31, 2005, of $1.8 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. 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 March 31, 2005 and December 31, 2004, were $12.9 million and $13.6 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 two 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 three months ended March 31, 2005 and 2004 were $3.6 million and $4.0 million respectively.

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-manufactured equipment 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 initial 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. The current and non-current portions of these advances are shown as Deferred Revenue or Maintenance Contract Deposits on the Consolidated Balance Sheets.

Research and Development

Research and development costs are expensed as incurred. Research and development costs for the three months ended March 31, 2005, and 2004, were $2.0 million and $2.5 million respectively.

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 (loss). Transaction gains and losses are included in results of operations in “Sundry, net”.

Stock-Based Compensation

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

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, 2004, the Company granted 1,419,500 incentive options. During the three months ended March 31, 2005, 175,000 incentive options were granted. Under the Plan, incentive options are granted at a fixed exercise price not less than 100% of the fair market value of the shares of stock on the date of grant (or 110% of the fair market value in certain circumstances). A portion of the incentive options vest over a four-year period at 25% per year beginning January 2, 2001; the remainder vest based on the performance of the Company. As a part of an employee retention program, vesting of 20.0% of the performance-based incentive options was accelerated in October 2000.

Non-qualified stock options. During the year ended December 31, 2004, the Company granted 50,000 non-qualified options. During the three months ended March 31, 2005, no 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.

	Incentive Shares		Non-qualified Shares		Weighted Average Exercise Price
Options outstanding–December 31, 2003	482,240		31,760		9.25
Granted	1,419,500		50,000		9.25
Forfeited	(126,500	)	(50,000	)	9.25
Options outstanding–December 31, 2004	1,775,240		31,760		9.25
Granted	175,000		—		9.25
Forfeited	—		—		9.25
Options outstanding–March 31, 2005	1,950,240		31,760		9.25

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

At March 31, 2005, options to purchase 1,982,000 shares were outstanding, of which 316,125 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. All options granted in 2004 and 2005 were issued at or above market price, and therefore no stock-based compensation was recorded.

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

	Three Months Ended March 31,
	2005			2004
	(In thousands)
Net loss as reported	$	(1,444	)	$	(792	)
Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax	(321		)	(20		)
Pro Forma net loss	$	(1,765	)	$	(812	)

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:

	Three Months Ended March 31,
Weighted Average	2005			2004
Risk free interest rate	4.59		%	3.96		%
Expected life	10 years			10 years
Expected volatility	0			0
Fair value of options granted	$	3.37		$	2.99

3. RECLASSIFICATION

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

4. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING TRANSACTIONS

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

	Three Months Ended March 31,
	2005		2004
	(In thousands)
Capital lease obligation incurred for lease of computer hardware	$	—	$	—
Inventory put in service as fixed asset	351		83

5. INVENTORIES

Inventory consists of the following:

	March 31,			December 31,
	2005			2004
	(In thousands)
Raw materials	$		6,364	$	6,686
Work-in-progress	4,116			5,247
Finished goods	12,708			12,533
	$	23,188		$		24,466

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	March 31,			December 31,
	2005			2004
	(In thousands)
Land	$		2,860	$	2,860
Field support spare parts	37,903			38,057
Systems and software	51,505			49,785
Machinery and equipment	22,262			23,360
Furniture, fixtures and other	10,154			12,098
Buildings	27,241			26,529
	151,925			152,689
Accumulated depreciation and amortization	119,750			118,435
Property, plant and equipment, net	$	32,175		$	34,254

7. OTHER ACCRUED EXPENSES AND LIABILITIES

Other accrued expenses and liabilities consist of the following:

	March 31,		December 31,
	2005		2004
	(In thousands)
Salaries, wages and other compensation	$	13,272	$	10,081
Accrued taxes, other than income taxes	3,658		4,868
Accrued interest payable	4,963		3,204
Accrued invoices and costs	1,155		1,191
Other	12,955		15,033
	$	36,003	$	34,377

8. DEBT AND OTHER OBLIGATIONS

Debt and other obligations consist of the following:

	March 31,		December 31,
	2005		2004
	(In thousands)
7.5% Senior Notes, due 2008	$	93,975	$		93,975
Subordinated Sponsor Note, unsecured, due 2009	103,848		103,848
	197,823		197,823
Less: Current portion	—		—
	$	197,823	$	197,823

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. 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 March 31, 2005, the Company had no balance outstanding under the Revolver and an outstanding balance on letters-of-credit totaling $1.7 million. The balance remaining under the Revolver that the Company can draw was $17.2 million at March 31, 2005 ($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) 1.25% over prime or (2) 2.75% over LIBOR. Under an amendment effective September 1, 2003, the interest rate margins over prime and LIBOR may be increased by 0.25% increments when the fixed charge coverage ratio falls below (1) 1.5 to 1.0 and (2) 1.25 to 1.0 and (total rate increase of 0.50%) or decreased by 0.25% increments when the fixed charge coverage ratio is greater than (1) 1.75 to 1.0, (2) 2.0 to 1.0, and (3) 2.25 to 1.0 (total rate decrease of 0.75%). The interest rate was remeasured as of the effective date of September 1, 2003 under this amendment. At March 31, 2005, the Company’s weighted average rate on the Revolver was 7.5% under the prime option.

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 March 31, 2005 of $1.8 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. Effective December 31, 2004, the Company and Heller amended the loan and security agreement to decrease the minimum fixed charge coverage ratio at December 31, 2004 to 1.1 to 1.0. Effective March 31, 2005, the loan and security agreement was further amended to add a triggering event for the fixed charged coverage ratio covenant. No fixed charge coverage ratio covenant applies when cash balances exceed $20 million and the outstanding balance on the revolver is less than $250,000. If either of these conditions is not met, then the fixed charge covenant ratio requirement becomes 1.1 to 1.0. At March 31, 2005, the Company was in compliance with all covenants under the Revolver.

Senior Notes. Interest on the Senior Notes is fixed at 7.5% and is due and payable in semi-annual installments. Payments began December 1, 1998. The Notes contain covenants placing limitations on the Company’s ability to permit subsidiaries to incur certain debts, incur certain loans, and engage in certain sale and leaseback transactions. The estimated fair value of the Senior Notes as of March 31, 2005, is approximately $66.9 million based on an average value of the most recently completed market trades, resulting in a yield-to-maturity of approximately 20%. The number of actual trades is limited; therefore the result may vary if a widely traded market environment existed.

Subordinated Unsecured Sponsor Note. The Company’s Sponsor Note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid. The payments began September 30, 1999. As provided under the agreement, however, the Sponsor Note holder, Welsh, Carson, Anderson & Stowe (“WCAS’), elected to defer quarterly interest payments of $4.0 million for each of the September 2000 through September 2001 quarterly periods resulting in an increase in the principal amount of the Sponsor Note totaling $33.8 million. Such election required a deferred financing-fee of 30.0% of each of the interest payments being deferred. The Company accounts for the additional financing fees as a change in the effective interest rate of the debt. WCAS may, at its election, defer each future quarterly payment under similar terms. WCAS has not elected to defer the quarterly payments since September 2001. In accordance with the terms of the Sponsor Note, on December 6, 2002, the Company made a $90.0 million principal payment on the Sponsor Note. The estimated fair-value of the Sponsor Note and deferred interest and fees as of March 31, 2005, is approximately $63.3 million assuming a yield-to-maturity of 25%.

The Company had no outstanding balances on foreign credit agreements at March 31, 2005.

Capital Leases. Amounts due under capital leases are recorded as liabilities. The Company’s interest in assets acquired under capital leases is recorded as property and equipment on the Condensed Consolidated Balance Sheets. Amortization of assets recorded under capital leases is included in depreciation expense. The current obligations under capital leases are classified in the current liabilities section of the Condensed Consolidated Balance Sheets and the non-current portion of capital leases are included in Other Liabilities. At March 31, 2005, the Company had capital lease balances outstanding of $0.3 million, of which $0.1 million was classified as current and $0.2 million was classified as long-term.

9. GOODWILL AND INTANGIBLE ASSETS

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

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 three months ended March 31, 2005 or March 31, 2004.

10. PENSION BENEFITS

Net periodic pension costs included the following components for the three months ended March 31:

	Three Months Ended March 31,
	2005			2004
	(In thousands)
Components of net period benefits cost:
Service cost	$	98		$	112
Interest cost	349			397
Expected return on plan assets	(241		)	(274		)
Recognized actuarial loss	95			108
Net periodic benefit cost	$	301		$	343

11. TAXES

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below (dollars in thousands):

	March 31,			December 31,
	2005			2004
	(In thousands)
Gross deferred tax assets:
Net operating losses	$	51,237		$	47,335
AMT credit carryforwards	101			101
Inventory reserves	4,751			4,948
Receivable allowance	194			205
Intangible assets previously deducted	796			905
Deferred revenues	12,902			15,450
Deferred compensation	3,154			2,639
Foreign timing differences, net	9,088			9,088
Other	5,833			5,723
Total gross deferred tax asset	88,056			86,394
Gross deferred tax liabilities:
Depreciation	(1,449		)	(1,352		)
Total gross deferred tax liability	(1,449		)	(1,352		)
Deferred tax asset valuation reserve	(77,881		)	(76,184		)
Net deferred tax asset	$	8,726		$	8,858

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.

Components of the valuation allowance are as follows:

	Three Months Ended March 31,
	2005			2004
	(In thousands)
Valuation allowance at beginning of year	$	76,184		$	63,874
(Release) Increase in valuation allowance	(118		)	(258		)
Income from continuing operations	1,815			69
Prior year true-ups and corrections	—			—
Valuation allowance at end of period	$	77,881		$	63,685

Undistributed earnings of foreign subsidiaries included in continuing operations were approximately $ 19.6 million and $17.7 million at March 31, 2005 and December 31, 2004, respectively. No taxes have been provided on the undistributed earnings as they are considered to be permanently reinvested.

12. 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 three months ended March 31, 2005 are summarized as follows:

	(In thousands)
Balance at December 31, 2004	$	180
Warranties issued	120
Claims paid/settlements	(61		)
Changes in liability for pre-existing warranties	—
Balance at March 31, 2005	$	239

13. COMPREHENSIVE LOSS

The components of comprehensive loss were as follows:

	Three Months Ended March 31,
	2005				2004
	(In thousands)
Net loss	$		(1,444	)	$	(792		)
Foreign currency translation adjustments	(306			)	463
Total comprehensive loss	$	(1,750		)	$		(329	)

14. BUSINESS SEGMENT DATA

The Company segments its operations based on geographical areas (North American Operations (“NAOPS”) and European Operations (“EUOPS”)) and product lines (Computer and Network Services (“CNS”). EUOPS offers similar products as NAOPS and consists primarily of operations throughout the world excluding the United States and Canada. The Company recently realigned its reporting structure and began reporting under the new alignment in the first quarter of 2005. Under this new structure. NAOPS includes the operations of the Company’s Canadian operations and the operations of Plexus® products (“Plexus”) that were previously reported in International Solutions. The operations of Plexus and Canada are not material to EUOPS or to NAOPS. Under the new structure the composition of CNS remains unchanged. Prior period information has been reclassified to reflect the new alignment.

	North American Operations		Computer & Network Services				European Operations			Corp/Elims				Total
	(In thousands)
For the three months ended March 31, 2005

Revenue from external customers	$	29,927	$	31,156			$		27,552	$	—			$	88,635
Intersegment revenue	1,484		—				1,862			(3,346			)	—
Segment gross profits	10,401		3,577				10,244			(11			)	24,211
Segment operating income (loss)	4,826		2,063				3,651			(5,624			)	4,916
Segment identifiable assets	85,812		23,993				50,279			48,010				208,094
Capital appropriations	427		332				546			836				2,141

For the three months ended March 31, 2004

Revenue from external customers	$	32,587	$		31,616		$	24,881		$		—		$		89,084
Intersegment revenue	1,607		—				1,247			(2,854			)	—
Segment gross profits	10,350		2,382				8,791			(420			)	21,103
Segment operating income (loss)	3,830		(41			)	2,982			(2,804			)	3,967
Segment identifiable assets	80,961		26,575				56,699			84,004				248,239
Capital appropriations	850		696				562			36				2,144

15. PREFERRED STOCK

SERIES A PREFERRED STOCK

The Company allocated the proceeds from its Series A preferred stock issuance based upon the relative fair value of the preferred stock and warrants issued. The related discount was being accreted over a period of 8 years through March 31, 2004, when the mandatory redemption provision was removed from the Series A Preferred Stock. Effective January 1, 2005, the Series A Preferred Stock agreement was amended to eliminate the dividends payable on the Series A Preferred Stock. As a result, no dividends were accrued during the three months ended March 31, 2005. As of March 31, 2005, the stated value of the Series A preferred stock, including accumulated but unpaid dividends, was $201.32 per share.

SERIES B PREFERRED STOCK

Effective January 1, 2005, the Series B Preferred Stock agreement was amended to eliminate the dividends payable on the Series B Preferred Stock. As a result, no dividends were accrued during the three months ended March 31, 2005. As of March 31, 2005, the stated value of the Series B preferred stock, including accumulated but unpaid dividends, was $380.63 per share.

16. RECENT ACCOUNTING PRONOUNCEMENTS

On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company is required to adopt SFAS No. 123(R) in fiscal 2006, beginning January 1, 2006. The Company is currently assessing the final impact of this standard on the company’s consolidated results of operations, financial position, and cash flows. This assessment includes evaluating option valuation methodologies and assumptions as well as potential changes to the Company’s compensation strategies.

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

RESULTS OF OPERATIONS.

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

FORWARD-LOOKING STATEMENTS

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

Overview

The Company believes several factors continued to create a challenging and competitive sales and cost-containment environment during the three months ended March 31, 2005. 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 North American Operations (“NAOPS”) and European Operations (“EUOPS”) 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 the three months ended March 31, 2005, the NAOPS and EUOPS segments experienced revenue declines in the maintenance business, the duration of which the Company cannot predict.

Expected economic and business conditions into the remainder of 2005 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. General economic conditions and the impact of check truncation have caused a continued weakening in demand for payment and check solutions products offered in North America. The Company continues to introduce new product offerings in its Enterprise Content Management (“ECM”) solutions as well as expand its managed services business into North America. In addition, the Company continues to seek reductions in operating costs. Product-development efforts are focused on ECM solutions as well as hardware enhancements. By incorporating more third-party products into the Company’s solutions rather than developing the products, the Company can more easily target its efforts and expenditures to these core products and solutions.

RESULTS OF OPERATIONS

Comparison of Three Months Ended March 31, 2005 and Three Months Ended March 31, 2004

Consolidated revenue of $88.6 million for the three months ended March 31, 2005 decreased by $0.5 million or 0.6% from the comparable prior-year period. The North American Operations (“NAOPS”) revenue decrease of $2.7 million was partially related to a 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 on these end-of-life products. In addition, a decline in revenues related to the sale and installation of hardware and software products was primarily related to a weak market for payments solutions due to market trends, including reduced check volume, check truncation, and the recent passage of Check 21. Increases in European Operations (“EUOPS”) of $2.7 million are the result of the impact of the weakening dollar on the conversion of revenue stated in foreign currencies and the continued growth in the United Kingdom of managed services as well as increased sales in Europe of ECM solutions. A decrease in Computer & Network Services (“CNS”) of $0.4 million resulted from pricing decreases, domestic competitive pressure, and decreased volume under certain maintenance programs, partially offset by revenue increases from the expansion by CNS of operations in Europe. Factors expected to impact future revenue include corporate-customer spending for large systems-solutions, the continued impacts of check truncation, on-going competitive pressures, and fluctuations in international currencies.

Consolidated gross profit of $24.2 million increased by $3.1 million or 14.7% from the comparable prior-year period. Gross profit remained flat for NAOPS, increased by $1.2 million or 50.0% for CNS and increased by $1.4 million or 15.9% for EUOPS. Although revenue decreased in NAOPS, the impact to gross profit was offset by an increase in the NAOPS gross profit percentage as a result of ongoing cost-containment efforts aimed at improving efficiency in the maintenance organization. The NAOPS gross margin percentage increased from 31.8% to 34.8%. Increases in EUOPS gross profit resulted partially from increased revenue and including the impact of currency conversion. Continued efforts to provide proven deliverables as well as targeted new offerings, including EDM solutions, archive solutions and hardware enhancements, which, along with ongoing cost-containment efforts, allowed for cost reductions to strengthen the EUOPS gross profit. CNS’ gross profit percentage increased from 7.6% to 11.5%, due to cost-containment efforts and the expansion by CNS of operations in Europe. CNS is the major component in the maintenance and other services category on the Consolidated Statements of Operations, and therefore is a significant contributing factor in the increased gross profit in the maintenance and other services category.

Operating expenses of $19.3 million increased $2.2 million compared to the prior-year period. Product-development expenses decreased by $0.2 million or 8.0% primarily due to the timing of research projects. In the first quarter of 2004, development was being completed on the Company’s new high speed scanner introduced in 2004. Selling, general and administrative expenses (“SG&A”) increased by $2.3 million or 15.6% primarily due to increased marketing activities related to an expansion and refocus of the corporate marketing strategy, increased sales expense resulting from an expansion of the sales force to support new product strategies, and increased depreciation expense.

Interest expense for the three months ended March 31, 2005 of $4.8 million was unchanged from the comparable prior-year period.

Sundry items resulted in a net loss for the three months ended March 31, 2005, of $0.5 million, which was unchanged from the comparable prior-year period. Foreign exchange losses are the primary cause of the net loss for both the three months ended March 31, 2005 and the comparable prior year period.

An income tax provision of $1.4 million for the three months ended March 31, 2005 compared to a corresponding prior-year period income tax benefit of $0.4 million. The income tax provision for the current-year period related primarily to income from the Company’s international subsidiaries. The Company’s effective tax rate was approximately (1,469.6%) for the three months ended March 31, 2005 as compared to 31.8% 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 will mature May 30, 2006, and by internally generated funds from cash flows from operations. Funds availability under the revolving credit agreement is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable, inventory and pledged cash. General economic conditions, the current weakness in demand for the Company’s systems solutions products and the requirement to obtain performance bonds or similar instruments could have an impact on the Company’s future liquidity.

The Company’s cash and cash equivalents totaled $39.7 million at March 31, 2005, compared with $51.5 million at December 31, 2004. Working capital increased $1.2 million during the three months ended March 31, 2005 to working capital of $12.8 million compared to working capital of $11.5 million at December 31, 2004. The change in working capital included a current liability decease of $6.7 million resulting from $9.3 million decrease in deferred revenue and maintenance contract deposits, an increase in accrued liabilities of $1.6 million, an accounts receivable increase of $6.2 million, an inventory decrease of $1.2 million and a prepaid expense increase of $1.5 million.

During the three months ended March 31, 2005, the Company relied primarily on cash reserves to fund operations. At March 31, 2005, the Company had available $21.2 million of borrowing capacity under the Revolver, of which the Company can draw $17.2 million.

Operating activities used $9.6 million of cash and provided $0.2 million of cash in the three months ended March 31, 2005 and 2004, respectively, a decrease of $9.8 million. The net loss increased $0.6 million from the prior-year period. In addition, cash generated by changes in working capital assets and liabilities was $10.7 million less than in the prior-year period.

Investing activities used net cash of $1.8 million and $2.0 million in the three months ended March 31, 2005 and 2004, respectively. Both uses of cash related to purchases of property, plant and equipment.

Financing activities used $0.2 million for each of the three months ended March 31, 2005 and 2004, respectively. Both uses of cash related primarily to the reduction of the Company’s debt.

At March 31, 2005, the Company’s principal outstanding debt instruments consisted of (i) no balance outstanding under the revolving credit facility maturing May 30, 2006 (which is more fully described below), (ii) $94.0 million of 7.5% Senior Notes due 2008, and (iii) $103.8 million of Sponsor Notes due 2009. The Company or its affiliates may from time to time purchase, redeem or pay deferred interest on some of its outstanding debt or equity securities. The Company would only make these payments in compliance with the covenants of its debt instruments.

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

Revolving Credit Facility. The Company has a revolving credit facility (the “Revolver”) provided by Heller Financial, Inc. (“Heller”), which will mature on May 30, 2006. Effective May 7, 2003, the Company and Heller entered into an amendment to the Revolver which reduced the committed amount from $60 million to $40 million, while increasing the letter-of-credit sub-limit from $30 million to $40 million. The Revolver is secured by substantially all the assets of the Company, subject to the limitations on liens contained in the Company’s existing Senior Notes. 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 March 31, 2005, the Company had no balance outstanding under the Revolver and an outstanding balance on letters-of-credit totaling $1.7 million. The balance remaining under the Revolver that the Company can draw was $17.2

million at March 31, 2005 ($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. 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 mature on June 1, 2008. 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.

Subordinated Unsecured Sponsor Note. The Company’s Sponsor Note bears interest at 10.0%, due and payable quarterly. The Sponsor Note is subordinate only upon bankruptcy or insolvency of the Company, or if upon maturity of the Senior Notes, the Senior Notes remain unpaid. The payments began September 30, 1999. The Sponsor Note matures on July 22, 2009. As provided under the agreement, however, the Sponsor Note holder, WCAS, elected to defer quarterly interest payments of $4.0 million for each of the September 2000 through September 2001 quarterly periods resulting in an increase in the principal amount of the Sponsor Note totaling $33.8 million. Such election required a deferred financing-fee of 30.0% of each of the interest payments being deferred. The Company accounts for the additional financing fees as a change in the effective interest rate of the debt. WCAS may, at its election, defer each future quarterly payment under similar terms. WCAS has not elected to defer the quarterly payments since September 2001. In accordance with the terms of the Sponsor Note, on December 6, 2002, the Company made a $90.0 million principal payment on the Sponsor Note.

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 was being accreted over a period of 8 years through March 31, 2004, when the mandatory redemption provision was removed from the Series A Preferred Stock. Effective January 1, 2005, the Series A Preferred Stock agreement was amended to eliminate the dividends payable on the Series A Preferred Stock. As a result, no dividends were accrued during the three months ended March 31, 2005. As of March 31, 2005, the stated value of the Series A preferred stock, including accumulated but unpaid dividends, was $201.32 per share.

Preferred Stock – Series B. Effective January 1, 2005, the Series B Preferred Stock agreement was amended to eliminate the dividends payable on the Series B Preferred Stock. As a result, no dividends were accrued during the

three months ended March 31, 2005. As of March 31, 2005, the stated value of the Series B preferred stock, including accumulated but unpaid dividends, was $380.63 per share.

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 March 31, 2005:

	Total Amounts		Less than 1 Year		1-3 Years		4-5 Years		Over 5 Years
	(In Millions)
Long-term debt	$	197.8	$	—	$	—	$	197.8	$	—
Capital leases	0.3		0.1		0.2		—		—
Purchase Obligations	2.0		0.7		1.3		—		—
Operating leases (non-cancelable)	14.5		5.3		6.1		2.1		1.0
Total Contractual	214.6		6.1		7.6		199.9		1.0

Unused lines of credit	$	16.8	$	16.8	$	—	$	—	$	—
Standby letters of credit	1.7		1.7		—		—		—
Total Commercial	$	18.5	$	18.5	$	—	$	—	$	—

Purchase Obligations – Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including fixed or minimum quantities to be purchased: fixed, minimum, or variable price provisions: and the approximate timing of the transaction. Purchase obligations do not include contracts that may be cancelled without penalty.

RECENT ACCOUNTING PRONOUNCEMENTS

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

On October 22, 2004, a new tax law was passed, the American Jobs Creation Act of 2004 (the “Jobs Creation Act”), which raised a number of issues with respect to accounting for income taxes. In response, on December 21, 2004, the FASB issued two FASB Staff Positions (FSP), FSP 109-1—”Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American

Jobs Creation Act of 2004” and FSP 109-2—”Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” which became effective for the Company upon issuance.

The Jobs Creation Act provides a deduction for income from qualified domestic production activities, to be phased in from 2005 through 2010, which is intended to replace the existing extra-territorial income exclusion for foreign sales. In FSP 109-1, the FASB decided the deduction for qualified domestic production activities should be accounted for as a special deduction under SFAS No. 109, rather than as a rate reduction. Accordingly, any benefit from the deduction will be reported in the period in which the deduction is claimed on the tax return and no adjustment to deferred taxes at December 31, 2004, is required.

The Jobs Creation Act also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and uncertainty remains as to how to interpret numerous provisions in the Act. FSP 109-2 addresses when to reflect in the financial statements the effects of the one-time tax benefit on the repatriation of foreign earnings. Under SFAS No. 109, companies are normally required to reflect the effect of new tax law changes in the period of enactment. FSP 109-2 provides companies additional time to determine the amount of earnings, if any, that they intend to repatriate under the Jobs Creation Act’s provisions. As of March 31, 2005, the Company was not in a position to decide on whether, and to what extent, foreign earnings that have not yet been remitted to the U.S. may be repatriated.

FACTORS AFFECTING THE COMPANY’S BUSINESS AND PROSPECTS

Information provided by the Company in this Quarterly Report on Form 10-Q 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.

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.

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.

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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company utilizes a revolving credit facility to support working capital needs. The interest rate on loans under the Revolver is, at the Company’s option, either (1) 1.25% over prime or (2) 2.75% over LIBOR. Although no

actual balances were outstanding under the Revolver at March 31, 2005, assuming $1.0 million in borrowings under the Revolver, a one hundred basis point change in the bank’s prime or LIBOR rate would impact net interest expense by $10,000 over a twelve-month period.

ITEM 4. CONTROLS AND PROCEDURES.

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

The Company has addressed the individual internal-control weaknesses noted by D&T and KPMG, and 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 put in place procedures addressing the adequacy of disclosure controls, including obtaining certifications from each member of management involved in the preparation and review of this Form 10-Q. The Company believes that it has implemented adequate controls and procedures for the preparation of this report.

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, continued to evaluate 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 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.

			BancTec, Inc.


	By	/s/ Jeffrey D. Cushman
		Jeffrey D. Cushman
		Senior Vice President on behalf of the registrant and as Chief Financial Officer


Dated: May 20, 2005