**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, 2006** |
|                                                    |       |                                                                               |
| **OR**                                                  |
|                                                    |       |                                                                               |
| **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 asspecified 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**                |
| **(972)  821-4000**                                             |
| (Address and  telephone number of principal executive offices)  |

 

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

Large accelerated filer  o Accelerated filer  o  Non-accelerated filer  ý

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)  Yes  o     No  ý

 

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

 

| ** **                                 | ** ** | **Number of Shares Outstanding at** |
|--------------------------------------------|------------|-------------------------------------|
| **Title of Each Class**                    | ** ** | **May 15, 2006**               |
| Common Stock, $0.01 par value              |       | 17,003,838                          |   |
| Class A Common Stock, $0.01 par value |       | 1,181,946                           |   |

 

 

----

 

BancTec, Inc.

QuarterlyReport

on

Form 10-Q

ThreeMonths Ended March 31, 2006

 

TABLE OF CONTENTS

 
|     | **PART I**                                                                                                  |         |
|----------|------------------------------------------------------------------------------------------------------------------|--------------|
| ITEM 1.  | ***Financial Statements (Unaudited)***                                                                           |         |
|     | Condensed Consolidated Balance Sheets: March 31, 2006 and December 31,  2005                           | *** *** |
|     | Condensed Consolidated Statements of Operations: Three Months Ended March 31,  2006 and March 31, 2005 |         |
|     | Condensed Consolidated Statements of Cash Flows: Three Months Ended March 31,  2006 and March 31, 2005 |         |
|     | Notes to Condensed Consolidated Financial Statements                                                             |         |
| ITEM 2.  | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                      |         |
| ITEM 3.  | Quantitative and Qualitative Disclosure about Market Risk                                                        |         |
| ITEM 4.  | Controls and Procedures                                                                                          |         |
|     | **PART II**                                                                                                 |         |
| ITEM  1. | Legal  Proceedings                                                                                               |         |
| ITEM  1A | Risk  Factors                                                                                                    |         |
| ITEM 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |         |
| ITEM 3.  | Defaults Upon Senior Securities                                                                                  |         |
| ITEM 4.  | Submission of Matters to a Vote of Security Holders                                                              |         |
| ITEM  5. | Other  Information                                                                                               |         |
| ITEM 6.  | Exhibits and Reports on Form 8-K                                                                            |         |

 

2

----

 

**PART I**

 

**ITEM 1. FinancialStatements                            FINANCIAL INFORMATION**

**BANCTEC, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                              | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                              | ** ** | **(In  thousands)**      | ** ** |
| CURRENT  ASSETS:                                                                                                                                                                                                                                        |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                               |       | $                        | 11,860     |                        | $          | 18,540 |   |
| Restricted cash                                                                                                                                                                                                                                         |       | 2,434                    |       | 3,205                       |       |
| Accounts receivable, less allowance for doubtful accounts of  $1,200 and $1,110 at March 31, 2006  and December 31, 2005                                                                                                                      |       | 60,081                   |       | 58,020                      |       |
| Inventories, net                                                                                                                                                                                                                                        |       | 22,839                   |       | 19,807                      |       |
| Prepaid expenses                                                                                                                                                                                                                                        |       | 8,536                    |       | 5,488                       |       |
| Other current assets                                                                                                                                                                                                                                    |       | 1,069                    |       | 1,115                       |       |
| Total current assets                                                                                                                                                                                                                                    |       | 106,819                  |       | 106,175                     |       |
|                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| PROPERTY, PLANT AND EQUIPMENT, net                                                                                                                                                                                                                      |       | 31,037                   |       | 29,924                      |       |
|                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| OTHER ASSETS:                                                                                                                                                                                                                                           |       |                     |       |                        |       |
| Goodwill                                                                                                                                                                                                                                                |       | 41,973                   |       | 41,973                      |       |
| Other intangible assets, less accumulated amortization of $531 and  $297 at March 31, 2006 and December 31, 2005                                                                                                                              |       | 4,825                    |       | 5,018                       |       |
| Deferred income tax benefit                                                                                                                                                                                                                             |       | 10,224                   |       | 10,336                      |       |
| Other assets                                                                                                                                                                                                                                            |       | 3,940                    |       | 3,788                       |       |
| Total other assets                                                                                                                                                                                                                                      |       | 60,962                   |       | 61,115                      |       |
|                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| TOTAL ASSETS                                                                                                                                                                                                                                            |       | $                        | 198,818    |                        | $          | 197,214 |   |
|                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| Current obligations under capital leases, financing arrangements and  revolver                                                                                                                                                                          |       | $                        | 4,289      |                        | $          | 1,095 |   |
| Trade accounts payable                                                                                                                                                                                                                                  |       | 18,603                   |       | 19,870                      |       |
| Other accrued expenses and liabilities                                                                                                                                                                                                                  |       | 34,008                   |       | 31,293                      |       |
| Deferred revenue                                                                                                                                                                                                                                        |       | 25,410                   |       | 21,505                      |       |
| Maintenance contract deposits                                                                                                                                                                                                                           |       | 34,121                   |       | 33,453                      |       |
| Income taxes payable                                                                                                                                                                                                                                    |       | 5,546                    |       | 4,947                       |       |
| Total current liabilities                                                                                                                                                                                                                               |       | 121,977                  |       | 112,163                     |       |
|                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| OTHER LIABILITIES:                                                                                                                                                                                                                                      |       |                     |       |                        |       |
| Long-term debt                                                                                                                                                                                                                                          |       | 198,466                  |       | 199,063                     |       |
| Non-current maintenance contract deposits                                                                                                                                                                                                               |       | 9,241                    |       | 11,466                      |       |
| Pension liability                                                                                                                                                                                                                                       |       | 22,719                   |       | 22,719                      |       |
| Other non-current liabilities                                                                                                                                                                                                                           |       | 5,607                    |       | 5,748                       |       |
| Total other liabilities                                                                                                                                                                                                                                 |       | 236,033                  |       | 238,996                     |       |
|                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| Total liabilities                                                                                                                                                                                                                                       |       | 358,010                  |       | 351,159                     |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                           |       |                     |       |                        |       |
|                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| SERIES A PREFERRED STOCK – issued and outstanding, 100,667  shares at March 31, 2006 and December 31, 2005                                                                                                                          |       | 18,040                   |       | 18,040                      |       |
|                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                                                                                                             |       |                     |       |                        |       |
| Cumulative preferred stock - authorized, 200,000 shares of $0.01 par value  at March 31, 2006 and December 31, 2005  Series B preferred stock - issued and outstanding, 35,520 shares at March 31,  2006 and December 31, 2005 |       | 13,520                   |       | 13,520                      |       |
| Common stock authorized, 21,800,000 shares of $0.01 par value at  March 31, 2006 and December 31,  2005:                                                                                                                                      |       |                     |       |                        |       |
| Common stock-issued and outstanding  17,003,838 shares at March 31, 2006 and December 31,  2005                                                                                                                                          |       | 170                      |       | 170                         |       |
| Class A common stock-issued and outstanding 1,181,946 shares  at March 31, 2006 and December 31,  2005                                                                                                                                   |       | 12                       |       | 12                          |       |
| Subscription stock warrants                                                                                                                                                                                                                             |       | 3,726                    |       | 3,726                       |       |
| Additional paid-in capital                                                                                                                                                                                                                              |       | 122,715                  |       | 122,655                     |       |
| Accumulated deficit                                                                                                                                                                                                                                     |       | (299,051                 | )          | (293,542                    | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                    |       | (18,324                  | )          | (18,526                     | )          |
| Total stockholders’ deficit                                                                                                                                                                                                                        |       | (177,232                 | )          | (171,985                    | )          |
|                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                        |       | $                        | 198,818    |                        | $          | 197,214 |   |

 

See notesto unaudited condensed consolidated financial statements.

 

3

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**BANCTEC, INC.**

# **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                          | ** ** | **Three  Months Ended****March 31,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(In  thousands)**                       | ** ** |
| REVENUE                             |       |                                      |       |   |   |
| Equipment and software              |       | $                                         | 30,412     |   | $ | 34,411 |   |
| Maintenance and other services      |       | 59,266                                    |       | 54,224 |   |
|                                |       |                                      |       |   |   |
|                                |       | 89,678                                    |       | 88,635 |   |
| COST OF SALES                       |       |                                      |       |   |   |
| Equipment and software              |       | 17,865                                    |       | 20,225 |   |
| Maintenance and other services      |       | 52,934                                    |       | 44,199 |   |
|                                |       |                                      |       |   |   |
|                                |       | 70,799                                    |       | 64,424 |   |
|                                |       |                                      |       |   |   |
| Gross profit                        |       | 18,879                                    |       | 24,211 |   |
|                                |       |                                      |       |   |   |
| OPERATING EXPENSES                  |       |                                      |       |   |   |
| Product development                 |       | 1,762                                     |       | 2,251 |   |
| Selling, general and administrative |       | 16,578                                    |       | 17,044 |   |
|                                |       |                                      |       |   |   |
|                                |       | 18,340                                    |       | 19,295 |   |
|                                |       |                                      |       |   |   |
| Income from operations              |       | 539                                       |       | 4,916 |   |
|                                |       |                                      |       |   |   |
| OTHER INCOME (EXPENSE):             |       |                                      |       |   |   |
| Interest income                     |       | 90                                        |       | 227 |   |
| Interest expense                    |       | (4,821                                    | )          | (4,759 | ) |
| Sundry, net                         |       | —                                    |       | (476 | ) |
|                                |       |                                      |       |   |   |
|                                |       | (4,731                                    | )          | (5,008 | ) |
|                                |       |                                      |       |   |   |
| LOSS BEFORE INCOME TAXES            |       | (4,192                                    | )          | (92 | ) |
| INCOME TAX EXPENSE                  |       | 1,317                                     |       | 1,352 |   |
|                                |       |                                      |       |   |   |
| NET LOSS                            |       | (5,509                                    | )          | (1,444 | ) |
|                                     |            |                                           |            |  |  |  |  |

 

See notesto unaudited condensed consolidated financial statements.

 

4

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**BANCTEC, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three  Months Ended March 31** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(In  thousands)**                   | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                               |       |                                  |       |   |   |
| Net loss                                                                           |       | $                                     | (5,509     | ) | $ | (1,444 | ) |
| Adjustments to reconcile net loss to cash flows used in operations:                |       |                                  |       |   |   |
| Depreciation and amortization                                                      |       | 4,253                                 |       | 3,571 |   |
| Provision for doubtful accounts                                                    |       | 98                                    |       | (88 | ) |
| Deferred income tax expense                                                        |       | 166                                   |       | 132 |   |
| Loss on disposition of property, plant and equipment                               |       | 86                                    |       | 482 |   |
| Other non-cash items                                                               |       | 114                                   |       | 23 |   |
| Changes in operating assets and liabilities:                                       |       |                                  |       |   |   |
| Increase in accounts receivable                                                    |       | (1,886                                | )          | (6,697 | ) |
| (Increase) decrease in inventories                                                 |       | (2,938                                | )          | 703 |   |
| Increase in other assets                                                           |       | (2,977                                | )          | (1,187 | ) |
| (Decrease) increase in trade accounts payable                                      |       | (1,320                                | )          | 812 |   |
| Increase (decrease) in deferred revenue & maintenance  contracts deposits |       | 2,330                                 |       | (8,711 | ) |
| Increase in other accrued expenses and liabilities                                 |       | 2,988                                 |       | 2,716 |   |
| Cash flows used in operating activities                                            |       | (4,595                                | )          | (9,688 | ) |
|                                                                               |       |                                  |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                               |       |                                  |       |   |   |
| Purchases of property, plant and equipment                                         |       | (5,198                                | )          | (1,789 | ) |
| Decrease in restricted cash                                                        |       | 771                                   |       | 2,255 |   |
| Cash flows (used in) provided by investing activities                              |       | (4,427                                | )          | 466 |   |
|                                                                               |       |                                  |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |                                  |       |   |   |
| Payments of current maturities of capital lease and financing  obligations         |       | (713                                  | )          | (215 | ) |
| Proceeds (payments) on revolver, net                                               |       | 3,199                                 |       | (1 | ) |
| Debt issuance costs                                                                |       | (200                                  | )          | — |   |
| Cash flows provided by (used in) financing activities                              |       | 2,286                                 |       | (216 | ) |
|                                                                               |       |                                  |       |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            |       | 56                                    |       | (127 | ) |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                          |       | (6,680                                | )          | (9,565 | ) |
| CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD                                 |       | 18,540                                |       | 47,431 |   |
|                                                                               |       |                                  |       |   |   |
| CASH AND CASH EQUIVALENTS—END OF PERIOD                                       |       | $                                     | 11,860     |   | $ | 37,866 |   |
|                                                                               |       |                                  |       |   |   |
| SUPPLEMENTAL DISCLOSURES INFORMATION:                                              |       |                                  |       |   |   |
| Cash paid during the period for:                                                   |       |                                  |       |   |   |
| Interest                                                                           |       | $                                     | 2,668      |   | $ | 2,737 |   |
|                                                                               |       |                                  |       |   |   |
| Taxes                                                                              |       | $                                     | 790        |   | $ | 446 |   |

 

See notesto unaudited condensed consolidated financial statements.

 

5

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**BANCTEC, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****                                      NATURE OF BUSINESS AND BASIS OFPRESENTATION**

 

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

 

The accompanying unaudited condensedconsolidated balance sheet at March 31, 2006, and the unaudited condensed consolidated statements ofoperations and cash flows for the interim periods ended March 31, 2006 and2005, should be read in conjunction with BancTec, Inc. and subsidiaries (“BancTec”or the “Company”) consolidated financial statements and notes thereto in themost recent Annual Report on Form 10-K filed with the Securities andExchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financialstatements contain all material adjustments, consisting principally of normalrecurring adjustments, necessary for a fair presentation of the financialposition and results of operations of the Company. All significant intercompanybalances and transactions have been eliminated in consolidation.

 

**2.****                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

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

 

**Cash and Cash Equivalents andShort-Term Investments**

 

Cash and cash equivalents include cash onhand and on deposit, including highly liquid investments with originalmaturities of three months or less. Restricted cash at March 31,2006 of $2.4 million and at December 31, 2005 of $3.2 million representscash in escrow from a customer deposit.

 

**Property, Plant, and Equipment**

 

Property, plant, and equipment are recordedat cost and are depreciated or amortized principally on a straight-line basisover the estimated useful lives of the related assets. Depreciation expense isreflected in both cost of sales and selling, general and administrative expense.Depreciation expense for the three months ended March 31, 2006 and 2005was $4.0 million and $3.6 million, respectively.

 

**Revenue Recognition**

 

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

 

The Company’s revenue recognition policies are in accordance withStatement of Position (“SOP”) 97-2, *“SoftwareRevenue Recognition,”* as amended by SOP 98-9, “*Modification of SOP 97-2,**Software Revenue Recognition with Respect to CertainTransactions”,*“StaffAccounting Bulletin (“SAB”) No. 101,*“RevenueRecognition in Financial Statements,”** *SABNo. 104,*“Revenue Recognition,”*Emerging Issues Task Force (“EITF”) No. 00-21,*“Revenue Arrangements with Multiple Deliverables,”*and EITF No. 03-5, *“Applicability of AICPA Statement of Position 97-2 toNon-Software Deliverables in an Arrangement Containing More-Than-IncidentalSoftware.”*

 

6

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*Software and software elements (includingequipment, installation and training)*

 

In the case of software arrangements that require significantproduction, modification, or customization of software, or the licenseagreements require the Company to provide implementation services that aredetermined to be essential to other elements of the arrangement, the Companyfollows the guidance in SOP 81-1, *“Accountingfor Performance of Construction—Type and Certain Production—Type Contracts,”*and applies the completed contract method ofaccounting. In compliance with the completed contract method under SOP81-1, revenue is recognized when proof of customer acceptance has been received.In the case of non-software arrangements, the Company applies EITF No. 00-21where revenues related to arrangements with multiple elements are allocated toeach element based on the element’s relative fair value. Revenue allocated toseparate elements is recognized for each element in accordance with theaccounting policies described below. EITF No. 03-5 is applied indetermining whether non-software elements are included with the software inapplying SOP 97-2.

 

If the Company cannot account for items included in a multiple-elementsoftware or non-software arrangement as separate units of accounting, they arecombined and accounted for as a single unit of accounting and generallyrecognized as the undelivered items or services are provided to the customer. TheCompany specifically uses the residual method, under which revenue isrecognized on the delivered elements only when the remaining undeliveredelement is postcontract customer support (PCS).

 

The Company recognizes hardware and software revenue when persuasiveevidence of an arrangement exists, delivery has occurred, the sales price isfixed or determinable and collectibility is reasonably assured. At the time ofthe transaction, the Company determines whether the fee associated with revenuetransactions is fixed or determinable and whether or not collection is reasonablyassured. The Company determines whether the fee is fixed or determinable basedon the payment terms associated with the transaction. If a significant portionof a fee is due after the normal payment terms, which are generally 30 daysfrom invoice date, the Company recognizes revenue as the fees are due. TheCompany assesses collectibility based on a number of factors, including pasttransaction history with the customer and the credit-worthiness of thecustomer. The Company does not request collateral from customers. If theCompany determines that collection of the fee is not reasonably assured, theCompany defers the revenue and recognizes revenue at the time collectionbecomes reasonably assured, which is generally upon receipt of cash. For allsales, the Company generally uses either a binding purchase order or signedsales agreement as evidence of an arrangement.

 

*Non-software equipment*

 

The Company recognizes revenue from sales ofnon-software related equipment and supplies upon delivery and transfer of titleor upon customer acceptance.

 

*Postcontract customer support*

 

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

 

*Maintenance services not classified aspostcontract customer support (PCS)*

 

The Company’s services revenue is primarily billed based on contractualrates and terms, and the Company generally recognizes revenue as these servicesare performed which, in some cases, is ratably over the contract term. Certain customers advance funds prior to theperformance of the services. The Company recognizes revenue related tothese advances as services are performed over time or on a “per call” basis. Certainestimates are used in recognizing revenue on a “per call” basis related tobreakdown rates, contract types, calls related to specific contract types, andcontract periods. The Company uses its best judgment to relate calls tocontracts. In addition, as actual breakdown experience rates are compared to estimates,such estimates may change over time and will result in adjustments to theamount of “per call” revenue. The current and non-current portions of theseadvances are shown as Deferred Revenue or Maintenance Contract Deposits on theCondensed Consolidated Balance Sheets.

 

Certain costs associated with contract acquisition and related directand incremental costs are capitalized in accordance with SOP 81-1 and TechnicalBulletin 90-1. Contract acquisition costs include direct incremental costsassociated with contract negotiation, such as legal fees, and costs incurred totransform customer processes and technology in direct support of implementingthe contract terms and conditions. These costs are amortized on a pro-ratabasis over the term of the contract.

 

**Research and Development**

 

Research and development costs are expensedas incurred. Research and development costs for the three months ended March 31,2006 and 2005, were $1.8 million and $2.3 million respectively.

 

7

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**Foreign Currency Translation**

 

Foreign assets and liabilities are translatedusing the exchange rate in effect at the balance sheet date, and results ofoperations are translated using an average rate for the period. Translationadjustments are accumulated and reported as a component of stockholders’deficit and comprehensive (loss) income. Transaction gains and losses areincluded in results of operations in “Sundry, net”. Foreign currencytransaction losses for the three months ended March 31, 2006 and 2005 were$7,000 and $0.5 million, respectively.

 

**Stock-Based Compensation**

 

Effective January 1, 2006, the Company adopted the provisions ofStatement of Financial Accounting Standards No. 123R, (“SFAS 123R”) “Share-BasedPayment,” which establishes accounting for equity instruments exchanged foremployee services. Under the provisions of SFAS No. 123R, share-basedcompensation cost is measured at the grant date, based on the calculated fairvalue of the award, and is recognized as an expense over the employee’srequisite service period (generally the vesting period of the equity grant).

 

Prior to January 1, 2006, the Company accounted for share-basedcompensation to employees in accordance with Accounting Principles BoardOpinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations. The Company also followed the disclosure requirementsof SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended bySFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”.

 

The Company elected to adopt the modified prospective transition methodas provided by SFAS No. 123R and, accordingly, financial statement amountsfor the prior periods presented in this Form 10-Q have not been restatedto reflect the fair value method of expensing share-based compensation. Underthis application, the Company is required to record compensation cost for allshare-based payments granted after the date of adoption based on the grant datefair value estimated in accordance with the provisions of SFAS 123R and for theunvested portion of all share-based payments previously granted that remainoutstanding which were based on the grant date fair value estimated inaccordance with the original provisions of SFAS 123.

 

Effective July 1, 2000, the Companyadopted the 2000 Stock Plan (the Plan), which provides for the grant toemployees of incentive options, non-qualified stock options, and restrictedstock awards.

 

*Incentive Options.* During the year ended December 31, 2005, theCompany granted 640,000 incentive options. During the three months ended March 31,2006, 195,000 incentive options were granted. Under the Plan, incentive optionsare granted at a fixed exercise price not less than 100% of the fair marketvalue of the shares of stock on the date of grant (or not less than 110% of thefair market value in certain circumstances). Options granted in 2005 and 2006vest over a four-year period at 25% per year.

 

*Non-qualified stock options.* No non-qualified stock options were grantedduring the year ended December 31, 2005 or the three months ended March 31,2006. When granted under the Plan, non-qualified options are granted at a fixedexercise price equal to, more than, or less than 100% of the fair market valueof the shares of stock on the date of grant.

 

8

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At December 30, 2005, with board ofdirectors’ approval, all stock options were repriced from a previous strikeprice of $9.25 to a strike price of $2.25. No other provisions of the stockoptions were modified.

 
| ** **                                       | ** ** | **Incentive  Shares** | ** ** | **Non-qualified  Shares** | ** ** | **Weighted   Average  Exercise  Price** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|-----------------------------------------|------------|
|                                             |       |                  |       |                      |       |                                    |       |
| Options outstanding–January 1,  2005   |       | 1,776,240             |       | 31,760                    |       | 2.25                                    |       |
| Granted                                          |       | 640,000               |       | —                    |       | 2.25                                    |       |
| Forfeited                                        |       | (72,500               | )          | —                    |       | 2.25                                    |       |
| Exercised                                        |       | —                |       | —                    |       |                                    |       |
|                                             |       |                  |       |                      |       |                                    |       |
| Options outstanding–December 31,  2005 |       | 2,343,740             |       | 31,760                    |       | 2.25                                    |       |
| Granted                                          |       | 195,000               |       | —                    |       | 2.25                                    |       |
| Forfeited                                        |       | —                |       | —                    |       |                                    |       |
| Exercised                                        |       | —                |       | —                    |       |                                    |       |
|                                             |       |                  |       |                      |       |                                    |       |
| Options outstanding–March 31,  2006    |       | 2,538,740             |       | 31,760                    |       | 2.25                                    |       |

 

Options and awards expire and terminate theearlier of 10 years from the date of grant or three months after the date theemployee ceases to be employed by the Company. The weighted average remainingcontractual life of the outstanding options is 8.13 years.

 

The following table presents the vestedstatus of all options outstanding at March 31, 2006:

 
| ** **                                                                     | ** ** | **March 31,    2006** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------|------------|
| Total options outstanding                                                      |       | 2,570,500                  |       |
| Vested options                                                                 |       | 693,350                    |       |
| Nonvested options                                                              |       | 1,877,150                  |       |
| Compensation related to  nonvested options                                     |       | $                          | 639        |   |
| Weighted-average period over which remaining compensation is to be  recognized |       | 2.77 years                 |       |
|                                                                                |            |                            |            |  |

 

The following table presents share-based compensation expenses forcontinuing operations included in the Company’s unaudited condensedconsolidated statements of operations:

 
| ** **                                                                                                   | ** ** | **Three  Months Ended March 31, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
|                                                                                                         |       |                                        |       |
| Share-based  compensation expense recorded as Selling,  general and administrative, net of tax benefit of $0 |       | $                                           | (60        | ) |
|                                                                                                              |            |                                             |            |  |

 

The Company had previously adopted the provisions of Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation,” (“SFAS 123”), as amended by SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure” through disclosure only. Under the intrinsic-value method, compensationexpense is recorded only to the extent that the strike price is less than fairvalue on the measurement date. All options granted in 2005 were issued at orabove fair value, and therefore no stock-based compensation was recorded. Inaddition, at December 30, 2005, when the options were repriced, creatingvariable plan accounting, no stock-based compensation was recorded inaccordance with APB 25, as the repriced options had no intrinsic value on thedate of the change. As of December 31, 2005, the options had no intrinsicvalue.

 

9

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The following table illustrates the effects on net income for the threemonths ended March 31, 2005 as if the Company had applied the fair valuerecognition provisions of SFAS 123 to share-based employee awards.

 
| ** **                                                                                                                           | ** ** | **Three  Months Ended March 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
|                                                                                                                                 |       |                                        |       |
| Net loss applicable to common stock, as reported                                                                                     |       | $                                           | (1,444     | ) |
| Total  stock-based employee compensation expense determined under fair-value-based  method for all rewards, net of tax benefit of $0 |       | (14                                         | )          |
|                                                                                                                                 |       |                                        |       |
| Pro Forma net loss                                                                                                                   |       | $                                           | (1,458     | ) |

 

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

 
| ** **                    | ** ** | **Three  Months Ended March 31,** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|
| **Weighted Average**          | ** ** | **2006**                               | ** ** | **2005** | ** ** |
|                          |       |                                   |       |   |   |
| Risk free interest rate       |       | 4.5                                    | %          | 4.6 | % |
| Expected life                 |       | 10 years                               |       | 10 years |   |
| Expected volatility           |       | 40.0                                   | %          | 40.0 | % |
| Dividend yield                |       | —                                 |       | — |   |
| Fair value of options granted |       | $                                      | 0.44       |   | $ | 0.12 |   |
|                               |            |                                        |            |  |  |  |  |

 

**3.****                                      RECLASSIFICATION**

 

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

 

**4.****                                      SUPPLEMENTAL SCHEDULE OF NONCASH INVESTINGAND FINANCING TRANSACTIONS**

 

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

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(In thousands)**                    | ** ** |
| Inventory put in service as fixed asset |       | —                                |       | 351 |   |

 

10

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**5.****                                      INVENTORIES**

 

Inventory consists of the following:

 
| ** **              | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|-------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2006**            | ** ** | **2005**              | ** ** |
| ** **              | ** ** | **(In  thousands)** | ** ** |
| Raw materials           |       | $                   | 10,137     |                  | $          | 9,503 |   |
| Work-in-progress        |       | 4,837               |       | 3,305                 |       |
| Finished goods          |       | 20,703              |       | 19,550                |       |
|                    |       |                |       |                  |       |
|                    |       | 35,677              |       | 32,358                |       |
| Less inventory reserves |       | (12,838             | )          | (12,551               | )          |
|                    |       |                |       |                  |       |
| Inventories, net        |       | $                   | 22,839     |                  | $          | 19,807 |   |

 

**6.****                                      PROPERTY, PLANT AND EQUIPMENT**

 

Property, plant and equipment consist of thefollowing:

 
| ** **                                 | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2006**            | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **(In  thousands)** | ** ** |
| Land                                       |       | $                   | 874        |                  | $          | 874 |   |
| Field support spare parts                  |       | 35,554              |       | 34,853                |       |
| Systems and software                       |       | 50,983              |       | 52,263                |       |
| Machinery and equipment                    |       | 21,550              |       | 21,094                |       |
| Furniture, fixtures and other              |       | 9,677               |       | 9,573                 |       |
| Buildings                                  |       | 20,747              |       | 20,716                |       |
| Construction in process                    |       | 10,554              |       | 5,483                 |       |
|                                       |       |                |       |                  |       |
|                                       |       | 149,939             |       | 144,856               |       |
| Accumulated depreciation and  amortization |       | (118,902            | )          | (114,932              | )          |
|                                       |       |                |       |                  |       |
| Property, plant and equipment,  net        |       | $                   | 31,037     |                  | $          | 29,924 |   |

 

11

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**7.****                                      OTHER ACCRUED EXPENSES AND LIABILITIES**

 

Other accrued expenses and liabilitiesconsist of the following:

 
| ** **                              | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2006**            | ** ** | **2005**              | ** ** |
| ** **                              | ** ** | **(In  thousands)** | ** ** |
| Salaries, wages and other  compensation |       | $                   | 13,660     |                  | $          | 11,903 |   |
| Accrued taxes, other than  income taxes |       | 3,413               |       | 4,376                 |       |
| Accrued interest payable                |       | 5,003               |       | 3,200                 |       |
| Accrued invoices and costs              |       | 1,896               |       | 1,586                 |       |
| Other                                   |       | 10,036              |       | 10,228                |       |
|                                    |       | $                   | 34,008     |                  | $          | 31,293 |   |

 

**8.****                                      DEBT AND OTHER OBLIGATIONS**

 

Debt and other obligations consist of thefollowing:

 
| ** **                                             | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2006**            | ** ** | **2005**              | ** ** |
| ** **                                             | ** ** | **(In  thousands)** | ** ** |
| Senior Notes, due 2008                                 |       | $                   | 93,975     |                  | $          | 93,975 |   |
| Revolving Credit Facility                              |       | 3,200               |       | 1                     |       |
| Senior Subordinated Sponsor  Note, unsecured, due 2009 |       | 103,848             |       | 103,848               |       |
| Financing Arrangement                                  |       | 1,239               |       | 1,860                 |       |
|                                                   |       |                |       |                  |       |
|                                                   |       | 202,262             |       | 199,684               |       |
| Less: Current portion                                  |       | 3,796               |       | 621                   |       |
|                                                   |       |                |       |                  |       |
|                                                   |       | $                   | 198,466    |                  | $          | 199,063 |   |

 

Revolving Credit Facility.****The Company has arevolving credit facility (the “Revolver”) provided by Heller Financial, Inc.(“Heller”). Effective March 31, 2006, the Company and Hellerentered into an amendment to the Revolver which extended the maturity date fromMay 30, 2006 to May 1, 2008. Thecommitted amount is $40 million, with a letter-of-credit sub-limit of $10 million.The Revolver is secured by substantially all the assets of the Company, subjectto the limitations on liens contained in the Company’s existing Senior Notes. Fundsavailability under the Revolver is determined by a borrowing-base formula equalto a specified percentage of the value of the Company’s eligible accountsreceivable, inventory, owned real property, machinery and equipment and pledgedcash. At March 31, 2006, the Company had $3.2 million outstanding underthe Revolver and no outstanding balance on letters-of-credit. The availabilityremaining under the Revolver that the Company can draw was $31.4 million at March 31,2006. A commitment fee of 0.375% per annum on the unused portion of theRevolver is payable quarterly.

 

The interest rate on borrowings under the Revolver is, at the Company’soption, either (1) 0.25% over prime or (2) 1.75% over LIBOR. At March 31,2006, the Company’s weighted average rate on the Revolver was 9.5% utilizingthe prime option.

 

The Revolver contains restrictions on the use of cash for dividendpayments or non-scheduled principal payments on certain indebtedness. TheRevolver contains various representations, warranties and covenants, includingfinancial

 

12

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covenants as to maximum capital expenditures, minimum fixed chargecoverage ratio and minimum average borrowing availability. Effective March 31,2006, the Company and Heller amended the loan and security agreement to statethat a covenant to maintain a specified fixed charge coverage ratio would applyonly if the average daily availability for the three month period ending on thelast day of the most recent calendar quarter is less than $15.0 million. At March 31,2006, the Company was in compliance with all covenants under the Revolver.

 

Senior Notes.  TheCompany’s Senior Notes (the “Senior Notes”) accrue interest at a fixed 7.5%rate which is due and payable in semi-annual installments. The Senior Notescontain covenants placing limitations on the Company’s ability to permitsubsidiaries to incur certain debts, incur certain loans and liens, and engagein certain sale and leaseback transactions.

 

Senior Subordinated Unsecured Sponsor Note.The Company’s $160.0 million Sponsor Note, payable to Welsh, Carson, Anderson& Stowe (“WCAS”), the majority shareholder of the Company, bears interestat 10.0%, due and payable quarterly. The Sponsor Note is subordinate only uponbankruptcy or insolvency of the Company, or if upon maturity of the SeniorNotes, the Senior Notes remain unpaid. The Sponsor Note matures on July 22,2009. WCAS may, at its election, defer each future quarterly payment undersimilar terms. WCAS has elected not to defer the quarterly payments since September 2001and currently does not intend to elect deferral of the quarterly payments inthe near future.

 

Financing Arrangements.  During 2005, the Company entered into afinancing arrangement for $2.1 million that pertained to computer software. At March 31,2006, the Company had financing arrangement balances outstanding of $1.2million, of which $0.6 million was classified as current and $0.6 million wasclassified as long-term. This arrangement accrues interest at a fixed 8.0% rate.This arrangement is due in three annual installments beginning January 2006.

 

Capital Leases.  During 2005, the Company entered into acapital lease for $1.2 million that pertained to computer hardware. Amounts dueunder capital leases are recorded as liabilities. The Company’s interest inassets acquired under capital leases is recorded as property and equipment onthe accompanying condensed consolidated financial statements. The gross amountof assets held under capital lease were $1.5 million as of March 31, 2006and December 31, 2005. Amortization of assets recorded under capitalleases is included in depreciation expense. The current obligations undercapital leases are classified in the Current Liabilities section of theaccompanying unaudited condensed consolidated balance sheets and thenon-current portion of capital leases are included in Other Liabilities. At March 31,2006, the Company had capital lease balances outstanding of $1.1 million, ofwhich $0.5 million was classified as current and $0.6 million was classified aslong-term.

 

The Company had no outstanding foreign-creditborrowings as of March 31, 2006.

 

**9.****                                      INTANGIBLEASSETS**

 

TheCompany accounts for goodwill in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets”. Goodwill is not amortized but rather is tested at least annually forimpairment. The impairment test is based on fair value compared to the recordedvalue at a reporting unit level. Reporting units are defined as an operatingsegment or one level below. Valuation methods used in determining fair valueinclude an analysis of the cash flows that the reporting units can be expectedto generate in the future (“Income Approach”) and the fair value of a reportingunit as compared to similar publicly traded companies (“Market Approach”). Inpreparing these valuations, management utilizes estimates to determine fairvalue of the reporting units. These estimates include future cash flows, growthrates, capital needs and projected margins, among other factors. Estimatesutilized in future calculations could differ from estimates used in the currentperiod. Future years’ estimates that are unfavorable compared to currentestimates could cause an impairment of goodwill. The Company performs theannual test for impairment as of December 31, each year. No impairment of goodwill hasbeen deemed necessary for 2005.

 

Components of the Company’s goodwill and other intangibles includeamounts that are foreign currency denominated. These goodwill amounts aresubject to translation at each balance sheet date. The Company records thechange to its Accumulated Other Comprehensive Loss on the accompanying condensedconsolidated balance sheet.

 

13

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**10.****                               PENSIONBENEFITS**

 

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

 
| ** **                               | ** ** | **Three  Months Ended March 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(In  thousands)**                    | ** ** |
| Components of net period  benefits cost: |       |                                   |       |   |   |
| Service cost                             |       | $                                      | 194        |   | $ | 98 |   |
| Interest cost                            |       | 413                                    |       | 349 |   |
| Expected return on plan assets           |       | (236                                   | )          | (241 | ) |
| Recognized actuarial loss                |       | 141                                    |       | 95 |   |
|                                     |       |                                   |       |   |   |
| Net periodic benefit cost                |       | $                                      | 512        |   | $ | 301 |   |

 

**11.****                               TAXES**

 

The Company’s provision for income taxes forthe three months ended March 31, 2006 and 2005, was $1.3 million and$1.4 million, respectively, reflecting an effective tax rate of 31.4% and1,469.6%, respectively. The effective tax rate differs from the statutory rateprimarily due to the impact of different effective rates in some overseasjurisdictions and the impact of changes in the valuation allowance on netdeferred tax assets.

 

A valuation allowance has been provided toreduce the deferred tax assets to an amount management believes is more likelythan not to be realized. Expected realization of deferred tax assets for whicha valuation allowance has not been recognized is based upon the reversal ofexisting taxable temporary differences and taxable income expected to begenerated in the future. The need for a valuation allowance on deferred taxassets is evaluated on a jurisdiction by jurisdiction basis. As a result,certain of the foreign subsidiaries deferred tax assets are not reserved with avaluation allowance due to their history of profitability.

 

Components of the valuation allowance are as follows:

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(In thousands)**                    | ** ** |
| Valuation allowance at beginning of year  |       | $                                     | 78,832     |   | $ | 76,184 |   |
| (Release) Increase in valuation allowance |       | (35                                   | )          | (118 | ) |
| Loss from continuing operations           |       | 2,617                                 |       | 1,815 |   |
|                                      |       |                                  |       |   |   |
| Valuation allowance at end of period      |       | $                                     | 81,414     |   | $ | 77,881 |   |

 

14

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**12.****                               COMPREHENSIVELOSS**

 

The components of comprehensive loss were as follows:

 
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(In thousands)**                    | ** ** |
| Net loss                                 |       | $                                     | (5,509     | ) | $ | (1,444 | ) |
| Foreign currency translation adjustments |       | 202                                   |       | (306 | ) |
|                                     |       |                                  |       |   |   |
| Total comprehensive loss                 |       | $                                     | (5,307     | ) | $ | (1,750 | ) |

 

**13.****                               BUSINESS SEGMENT DATA**

 

In 2006 and 2005, the Companyreported its operations as three primary segments: 1) Americas, 2) Europe,Middle East and Asia (“EMEA”), and 3) Information Technology Service Management(“ITSM”).

 

*Americas and Europe, MiddleEast and Asia.*Americasand EMEA offer similar systems-integration and business-process solutions andservices and market to similar types of customers. The solutions offeredprimarily involve high-volume transaction processing using advancedtechnologies that capture, process and archive paper and electronic documents.

 

*Information Technology ServiceManagement.*ITSMprovides quality integrated support services to the evolving InformationTechnology industry, with focused deployment and ongoing support solutions forthe OEM, Enterprise and Fortune marketplaces. ITSM provides coverage in NorthAmerica and Europe, and customers include OEM providers, defense and aerospacecompanies, strategic outsourcing organizations, and consumer electronicsmanufacturers.

 
|                                            |   | **Americas**        | ** ** | **ITSM** | ** ** | **EMEA** | ** ** | **Corp/Elims** | ** ** | **Total** |   |
|-------------------------------------------------|--------|---------------------|------------|----------|------------|----------|------------|----------------|------------|-----------|--------|
|                                            |   | **(In  thousands)** |       |
| For the three months ended March 31,  2006 |   |                |       |     |       |     |       |           |       |      |   |
|                                            |   |                |       |     |       |     |       |           |       |      |   |
| Revenue from external customers                 |   | $                   | 31,544     |     | $          | 31,521   |       | $              | 26,613     |      | $      | — |   | $ | 89,678 |   |
| Intersegment revenue                            |   | 1,058               |       | 29       |       | 3,361    |       | (4,448         | )          | —    |   |
| Segment gross profits                           |   | 8,444               |       | 1,043    |       | 9,944    |       | (552           | )          | 18,879    |   |
| Segment operating income (loss)                 |   | 3,668               |       | (645     | )          | 3,817    |       | (6,301         | )          | 539       |   |
| Segment identifiable assets                     |   | 91,266              |       | 29,184   |       | 47,186   |       | 31,182         |       | 198,818   |   |
| Capital appropriations                          |   | 1,596               |       | 926      |       | 542      |       | 2,134          |       | 5,198     |   |
|                                            |   |                |       |     |       |     |       |           |       |      |   |
| For the three months ended March 31,  2005 |   |                |       |     |       |     |       |           |       |      |   |
|                                            |   |                |       |     |       |     |       |           |       |      |   |
| Revenue from external customers                 |   | $                   | 29,719     |     | $          | 31,156   |       | $              | 27,760     |      | $      | — |   | $ | 88,635 |   |
| Intersegment revenue                            |   | 1,155               |       | —   |       | 2,191    |       | (3,346         | )          | —    |   |
| Segment gross profits                           |   | 9,931               |       | 3,577    |       | 10,714   |       | (11            | )          | 24,211    |   |
| Segment operating income (loss)                 |   | 4,643               |       | 2,063    |       | 3,834    |       | (5,624         | )          | 4,916     |   |
| Segment identifiable assets                     |   | 84,338              |       | 23,993   |       | 47,182   |       | 52,581         |       | 208,094   |   |
| Capital appropriations                          |   | 423                 |       | 332      |       | 550      |       | 836            |       | 2,141     |   |

 

15

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**ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

THE FOLLOWING DISCUSSION SHOULD BE READ INCONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THERELATED 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 andResults of Operations and Quantitative and Qualitative Disclosure About MarketRisk contains forward-looking statements as that term is defined in the PrivateSecurities Litigation Reform Act of 1995 (the “PSLRA”) that involve risksand uncertainties, as well as assumptions that, if they never materialize orprove incorrect, could cause the results of BancTec, Inc. and itsconsolidated subsidiaries (the “Company”) to differ materially from thoseexpressed or implied by such forward-looking statements. All statements otherthan statements of historical fact are statements that could be deemedforward-looking statements, including any projections of earnings, revenues, orother financial items; any statements of the plans, strategies, and objectivesof management for future operations; any statements concerning proposed newproducts, services, or developments; any statements regarding future economicconditions or performance; statements of belief and any statement ofassumptions underlying any of the foregoing. The risks, uncertainties andassumptions referred to above include the ability of the Company to retain andmotivate key employees; the timely development, production and acceptance ofproducts and services and their feature sets; the challenge of managing assetlevels, including inventory; the flow of products into third-party distributionchannels; the difficulty of keeping expense growth at modest levels while increasingrevenues; and other risks that are described from time to time in the Company’sSecurities and Exchange Commission reports, including but not limited to theitems discussed in “Factors Affecting the Company’s Business and Prospects” setforth in this report, and items described in the Company’s other filings withthe Securities and Exchange Commission. The Company undertakes no obligation toupdate or revise forward-looking statements to reflect changes in assumptions,the occurrence of unanticipated results or changes to future operating resultsover time.*

* *

**Overview**

 

The Company believes severalfactors continued to create a challenging and competitive sales andcost-containment environment during the three months ended March 31, 2006.These factors include: ongoing competitive pressures; the ongoing plannedchange in revenue mix within the Company’s Americas and EMEA segments; and a highly leveraged financialposition. The change in revenue mix is partially a result of trends in paymentprocessing, including truncation, which impacts domestic and internationalmarkets. Additionally, during the three months ended March 31, 2006, the EMEAand ITSM segments experienced revenue declines in the maintenance business, theduration of which the Company cannot predict.

 

Expected economic and businessconditions for the remainder of 2006 indicate a cautious outlook regarding theCompany’s near-term revenue and earnings growth prospects. Many of theCompany’s product offerings represent a significant capital expenditure for itscustomers. General economic conditions and the impact of check truncation havecaused a continued weakening in demand for payment and check solutions productsoffered in North America. The Company continues to introduce new product offeringsin its Electronic Content Management (“ECM”) solutions as well as the continuedexpansion of its managed services business into North America.Product-development efforts are focused on ECM and managed service solutions.By incorporating more third-party products into the Company’s solutions ratherthan developing the products, the Company can more easily target its effortsand expenditures to these core products and solutions. In addition, the Companycontinues to seek reductions in operating costs.

 

**RESULTS OF OPERATIONS**

 

**Comparison of Three MonthsEnded March 31, 2006 and Three Months Ended March 31, 2005**

 

Consolidated revenue of $89.7 million for thethree months ended March 31, 2006 increased by $1.1 million or 1.2% fromthe comparable prior-year period.

 

16

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•                  The Americas revenue increase of $1.8 million wasprimarily due to the start of managed services in the United States. Thisincrease was partially offset by a decline in revenues related to the sale andinstallation of hardware and software products. This decline was primarilyrelated to a weak market for payments solutions due to market trends, includingreduced check volume, check truncation, and the passage of Check 21. During thequarter ended March 31, 2006, maintenance revenue decreased only slightlydue to the addition of contracts related to the maintenance of third-partyequipment offsetting the loss of maintenance revenue on company manufacturedequipment.

 

•                  Decreases in EMEA of $1.1 million are the resultof the impact of a stronger dollar on the conversion of revenue stated inforeign currencies and weaker sales in Europe of ECM solutions, partiallyoffset by the continued growth in the United Kingdom of managed services.

 

•                  An increase in ITSM of $0.4 million resulted fromincreased revenue from the expansion by ITSM of operations in Europe, offset bydecreased revenue in the United States resulting from pricing decreases,domestic competitive pressure, and decreased volume under certain maintenanceprograms.

 

Factors expected to impact future revenueinclude corporate-customer spending for large systems-solutions, the continuedimpacts of check truncation, on-going competitive pressures, and fluctuationsin international currencies.

 

Consolidated gross profit of $18.9 million decreasedby $5.1 million or 21.3% from the comparable prior-year period. Gross profitdecreased for Americas by $1.5 million or 15.2%, decreased by $2.5 million or69.4% for ITSM, and decreased by $0.6 million or 5.7% for EMEA.

 

•                  Although revenue increased in Americas, theimpact to gross profit was offset by a decrease in the Americas gross profitpercentage from 32.1% to 25.9%. The start-up nature of the Company’s managedservices business contributed to the reduction in the America’s gross profitpercentage relative to the amount of revenue generated.

 

•                  Decreases in EMEA gross profit resulted partially from decreased revenue, including theimpact of currency conversion as well as a decline in the gross profit marginfrom 35.8% to 33.2%. This decrease in gross profit margin is primarily a resultof product mix. The gross profit margin for EMEA on managed services isslightly lower than for product sales.

 

•                  ITSM’s gross profit percentage decreased from11.5% to 3.3%, due to higher expenses in the domestic operations that did notmatch decreases in domestic revenue. ITSM is the major component in themaintenance and other services category on the Condensed ConsolidatedStatements of Operations, and therefore is a significant contributing factor inthe decreased gross profit in the maintenance and other services category.

 

Operating expenses of $18.3 million decreased$1.0 million compared to the prior-year period. Product-development expensesdecreased by $0.5 million or 21.7% primarily due to the timing of researchprojects and the use of product development staff on customer projects. Selling,general and administrative expenses (“SG&A”) decreased by $0.5 million or 2.9%primarily due to decreases in marketing and sales expenses when compared withthe prior year period.

 

Interest expense for the threemonths ended March 31, 2006 of $4.8 million was unchanged from the comparableprior-year period.

 

Sundry items did not impact the results for the three months ended March 31,2006, compared to a net loss of $0.5 million, in the comparable prior-yearperiod. Foreign exchange losses were negligible for the three months ended March 31,2006, and were the primary cause of the net loss for the comparable prior yearperiod.

 

An income tax provision of $1.3 million for the three months ended March 31, 2006 is compared to a correspondingprior-year period income tax provision of $1.4 million. The income taxprovision for both periods related primarily to income from the Company’s internationalsubsidiaries. The Company’s effective tax rate was approximately 31.4% for thethree months ended March 31, 2006as compared to 1,469.6% for the corresponding prior-year period.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s working capitalrequirements are generally provided by cash and cash equivalents, fundsavailable under the Company’s revolving credit facility, which matures May 30,2008, and by internally generated funds from operations. Funds availabilityunder the revolving credit facility is determined by a borrowing-base formulaequal to a specified percentage of the value of the Company’s eligible accountsreceivable, inventory, owned real property, machinery and equipment and pledgedcash. 

 

As a result of the Company’shigh debt to equity ratio, the Company is required to devote significant cashto debt service. This limits the Company’s future operating flexibility andcould make the Company more vulnerable to a downturn in its operatingperformance or a decline in general economic conditions. Such a decline inoperating performance, decreased revenues from the Company’s maintenancecontracts, and the requirement to obtain performance bonds or similarinstruments could have a material impact on the Company’s future liquidity. TheCompany believes that cash flow from operations, as well as availableborrowings under its revolving credit facility and other sources of funding,will be sufficient to fund its operations for at least the next 12 months.

 

The Company’s cash and cash equivalentstotaled $11.9 million at March 31, 2006, compared with $18.5 million at December 31,2005. Working capital decreased $9.2 million during the three months ended March 31,2006 to a working capital deficit of $15.2million compared to a working capital deficit of $6.0 million at December 31,2005. The change in working capital resulting from a $4.6 million increase indeferred revenue and maintenance contract deposits, an increase inaccrued liabilities of $2.7 million, an accounts payable increase of $1.9million, offset by an accounts receivableincrease of $2.1 million, an inventory increase of $3.0 million and a prepaidexpense increase of $3.0 million.

 

During the three months ended March 31,2006, the Company relied primarily on cashreserves and borrowing under the Revolver to fund operations. At March 31,2006, the Company had available $31.4million of borrowing capacity under the Revolver.

 

Operating activities used $4.6 million ofcash and $9.7 million of cash in the three months ended March 31,2006 and 2005, respectively, a decrease of$5.1 million. The net loss increased $4.1 million from the prior-year period. Inaddition, cash utilized by changes in operating assets and liabilities was $8.6million less than in the prior-year period. The continued utilization of cashto fund operating activities has necessitated that the Company borrow from itsRevolver during the three months ended March 31, 2006. The Company anticipatesthat this trend will continue through the remainder of 2006 and anticipatesadditional borrowing on the Revolver will be required.

 

Investing activities used net cash of $4.4million and provided net cash of $0.5 million in the three months ended March 31,2006 and 2005, respectively. The Companyused cash for purchases of property, plant and equipment of $5.2 million and$1.8 million in the three months ended March 31, 2006 and 2005, respectively. These were offset bydecreases in the amount of restricted cash of $0.8 million and $2.3 million forthe same periods.

 

Financing activities provided $2.3 millionfor the three months ended March 31, 2006 compared with a use of $0.2million for three months ended March 31, 2005. The financing activities for the three monthsended March 31, 2006 increased the Company’s debt while the use of cash inthe prior year’s period related primarily to the reduction of the Company’sdebt.

 

At March 31, 2006, the Company’s principal outstanding debtinstruments consisted of (i) $3.2 million outstanding under the revolvingcredit facility maturing May 30, 2008 (which is more fully describedbelow), (ii)  $94.0 million of 7.5% Senior Notes due 2008, and (iii) $103.8million of Sponsor Notes due 2009. The Company or its affiliates may fromtime to time purchase, redeem or pay deferred interest on some of itsoutstanding debt or equity securities. The Company would only make thesepayments in compliance with the covenants of its debt instruments.

 

The Company continually reviewsits various lines of business to assess their contribution to the Company’sbusiness plan and from time to time considers the sale of certain assets inorder to raise cash or reduce debt. Accordingly, the Company has explored andmay explore possible asset sales by seeking expressions of interest frompotential bidders. However, the Company has not entered into any bindingagreements or agreements in principle to sell any assets and there can be noassurance that any such asset sales will occur or, if they occur, as to the timingor 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”). Effective March 31,2006, the Company and Heller entered into an amendment to the Revolver whichextended the maturity date from May 30, 2006 to May 1, 2008. The committed amount is $40 million,with a letter-of-credit sub-limit of $10 million. The Revolver is secured bysubstantially all the assets of the

 

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Company, subject to the limitations on liens contained in the Company’sexisting Senior Notes. Funds availability under the Revolver is determined by aborrowing-base formula equal to a specified percentage of the value of theCompany’s eligible accounts receivable, inventory, owned real property,machinery and equipment and pledged cash. At March 31, 2006, the Companyhad $3.2 million outstanding under the Revolver and no outstanding balance onletters-of-credit. The availability remaining under the Revolver that theCompany can draw was $31.4 million at March 31, 2006. A commitment fee of0.375% per annum on the unused portion of the Revolver is payable quarterly.

 

The interest rate on borrowings under the Revolver is, at the Company’soption, either (1) 0.25% over prime or (2) 1.75% over LIBOR. At March 31,2006, the Company’s weighted average rate on the Revolver was 9.5% utilizingthe prime option.

 

The Revolver contains restrictions on the use of cash for dividendpayments or non-scheduled principal payments on certain indebtedness. TheRevolver contains various representations, warranties and covenants, includingfinancial covenants as to maximum capital expenditures, minimum fixed chargecoverage ratio and minimum average borrowing availability. Effective March 31,2006, the Company and Heller amended the loan and security agreement to statethat a covenant to maintain a specified fixed charge coverage ratio would applyonly if the average daily availability for the three month period ending on thelast day of the most recent calendar quarter is less than $15.0 million. At March 31,2006, the Company was in compliance with all covenants under the Revolver.

 

**Senior Notes**. In August 1998, the Company exchanged thepublic Senior Notes (the “Senior Notes”) for the notes sold in a May 1998 Rule 144Aprivate offering. Interest is fixed at 7.5% and is due and payable insemi-annual installments, which began December 1, 1998. The Senior Notesmature on June 1, 2008. The Senior Notes contain covenants placinglimitations on the Company’s ability to permit subsidiaries to incur certaindebts, incur certain loans, and engage in certain sale and leasebacktransactions.

 

**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 theCompany, or if upon maturity of the Senior Notes, the Senior Notes remainunpaid. The Sponsor Note matures on July 22, 2009. WCAS may, at itselection, defer each future quarterly payment under similar terms. WCAS has notelected to defer the quarterly payments since September 2001 and currentlydoes not intend to elect deferral of the quarterly payments in the near future.

 

**Financing Arrangements.**During2005, the Company entered into a financing arrangement for $2.1 million thatpertained to computer software. At March 31, 2006, the Company hadfinancing arrangement balances outstanding of $1.2 million, of which $0.6 millionwas classified as current and $0.6 million was classified as long-term. Thisarrangement accrues interest at a fixed 8.0% rate. This arrangement is due inthree annual installments beginning January 2006.

 

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

 

**Off BalanceSheet Arrangements.**The Company currently does nothave any off balance sheet arrangements.

 

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### **Contractual Obligations and CommercialCommitments.**

###  

In the normal course of business, the Company enters into variouscontractual and other commercial commitments that impact, or could impact, theliquidity of operations. The following table outlines the commitments at March 31,2006:

 
| ** **                              | ** **         | **Total  Amounts** | ** ** | **Less than****1 Year** | ** ** | **1-3****Years** | ** ** | **4-5****Years** | ** ** | **Over 5  Years** | ** ** |
|-----------------------------------------|--------------------|--------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ** **                              | **(In  Millions)** | ** **         |
| Long-term debt                          |               | $                  | 199.1      |                    | $          | 0.6              |       | $                | 94.7       |              | $          | 103.8 |   | $ | — |   |
| Interest obligations on  long-term debt |               | 50.0               |       | 17.5                    |       | 29.0             |       | 3.5              |       | —            |       |
| Capital leases                          |               | 1.1                |       | 0.5                     |       | 0.6              |       | —           |       | —            |       |
| Operating leases  (non-cancelable)      |               | 13.2               |       | 5.3                     |       | 5.4              |       | 1.4              |       | 1.1               |       |
|                                    |               |               |       |                    |       |             |       |             |       |              |       |
| Total Contractual                       |               | $                  | 263.4      |                    | $          | 23.9             |       | $                | 129.7      |              | $          | 108.7 |   | $ | 1.1 |   |
|                                    |               |               |       |                    |       |             |       |             |       |              |       |
| Unused lines of credit                  |               | $                  | 31.4       |                    | $          | 31.4             |       | $                | —     |              | $          | — |   | $ | — |   |
|                                    |               |               |       |                    |       |             |       |             |       |              |       |
| Total Commercial                        |               | $                  | 31.4       |                    | $          | 31.4             |       | $                | —     |              | $          | — |   | $ | — |   |
|                                         |                    |                    |            |                         |            |                  |            |                  |            |                   |            |  |  |  |  |  |  |  |  |  |  |

 

**RECENT ACCOUNTINGPRONOUNCEMENTS**

 

There are no issued accounting pronouncements that have not yet beenadopted that would have a material effect on the company’s financial positionor results of operations.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK.**

 

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

 

**Interest Rate Risk**

 

The Company utilizes long-term fixed rate andshort-term variable rate borrowings to finance the working capital and capitalrequirements of the business. At March 31, 2006, the Company hadoutstanding Senior Notes, due in 2008, of $94.0 million, with a fixed interestrate of 7.5%. At March 31, 2006, the Company also had the Sponsor Note,due 2009, with a balance of $103.8 million. The Sponsor Note bears interest ata fixed rate of 10.0%.

 

The interest rate on loans under the Revolver is, at the Company’soption, either (1) 1.25% over prime or (2) 2.75% over LIBOR. Under anamendment effective September 1, 2003, the interest rate margins overprime and LIBOR may be increased by 0.25% increments when the fixed chargecoverage ratio falls below (1) 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 fixedcharge coverage ratio is greater than (1) 1.75 to 1.0, (2) 2.0 to1.0, and (3) 2.25 to 1.0 (total rate decrease of 0.75%). At March 31,2006, the Company’s weighted average rate on the Revolver was 9.5% under theprime option. A balance of $3.2 million wasoutstanding under the Revolver at March 31, 2006. Based on $3.2 million inborrowings under the Revolver, a one hundred basis point change in the bank’sprime or LIBOR rate would impact net interest expense by $32,000 over atwelve-month period

 

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**Foreign Currency Risk**

 

The Company’s international subsidiariesoperate in approximately 11 countries and use the local currencies as thefunctional currency and the U.S. dollar as the reporting currency. Transactionsbetween the Company and the international subsidiaries are denominated in U.S.dollars. As a result, the Company has certain exposures to foreign currencyrisk. However, management believes that such exposure does not present asignificant risk due to a relatively limited number of transactions andoperations denominated in foreign currency. For the three months ended March 31,2006, approximately $34.7 million or 38.6% of the Company’s revenues aredenominated in the international currencies. Transaction gains and losses onU.S. dollar denominated transactions are recorded within Sundry, net in theaccompanying consolidated statements of operations and were not material.

 

The Company may use foreign forwardcurrency-exchange rate contracts to minimize the adverse earnings impact fromthe effect of exchange rate fluctuations. No hedging instruments existed at March 31,2006.

 

**ITEM 4. CONTROLS ANDPROCEDURES.**

 

As of the end of the period covered by this report, March 31,2006, the Chief Executive Officer and the Chief Financial Officer of theCompany, with the participation of the Company’s management, evaluated theeffectiveness of the Company’s disclosure controls and procedures pursuant toExchange Act Rule 13a-15. Based upon this evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer believe that the Company’s disclosurecontrols and procedures are effective in making known to them materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in this report. In addition, the disclosure controls andprocedures are effective to ensure that information required to be disclosed inthis report is recorded, processed, summarized and reported within 90 days of March 31,2006, and such information required to be disclosed is accumulated andcommunicated to management as appropriate to allow timely decisions regardingrequired disclosure. The Company will continue to evaluate disclosure controlson an ongoing basis.

 

Disclosure controls and procedures, no matter how well designed andimplemented, can provide only reasonable assurance of achieving an entity’sdisclosure objectives. The likelihood of achieving such objectives is affectedby limitations inherent in disclosure controls and procedures. These includethe fact that human judgment in decision-making can be faulty and thatbreakdowns in internal control can occur because of human failures such assimple errors or mistakes or intentional circumvention of the establishedprocess. The Company’s disclosure controls and procedures are designed toprovide reasonable assurance of achieving their objectives, and the ChiefExecutive Officer and Chief Financial Officer believe that the Company’sdisclosure controls and procedures are effective at that reasonable assurancelevel.

 

There were no significant changes in the Company’s internal controlsover financial reporting or in other factors that could significantly affectinternal controls, known to the Chief Executive Officer or the Chief FinancialOfficer, during the first quarter of 2006.

 

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**BANCTEC, INC.**

**PART II**

**OTHERINFORMATION**

 

**ITEM 1. Legal Proceedings**

** **

The Company is a party to various legalproceedings. None of those current proceedings is expected to have an outcomethat is material to the financial condition or operations of the Company.

 

**ITEM 1A. Risk Factors**

** **

Information provided by the Company in this Quarterly Report on Form 10-Qand other documents filed with the Securities and Exchange Commission include “forward-looking”information, as that term is defined in the Private Securities Litigation Reform Actof 1995 (the “PSLRA”). All statements otherthan statements of historical fact could be deemed forward-looking statements. TheCompany cautions investors that actual results or business conditions may differmaterially from those projected or suggested in such forward-looking statementsas a result of numerous factors beyond the Company’s control. The Companyundertakes no obligation to update or revise forward-looking statements toreflect changes in assumptions, the occurrence of unanticipated results orchanges to future operating results over time. The following is a descriptionof some of the important factors that may cause the actual results of theCompany’s operations in future periods to differ materially from thosecurrently expected or desired.

 

***Business and Economic Conditions***

 

The Company’s business partially depends on business conditions incertain industries. The Company’s sales are concentrated to businesses inindustries involving high volume transaction processing, including banking,financial services, insurance, health care and high technology, and togovernmental agencies. Business or economic conditions, such as consolidationwith the industry, that cause customers in these industries to reduce or delaytheir investments in document processing products and solutions, such as thoseoffered 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 materialadverse effect on demand for the Company’s products and services, andconsequently on the Company.

 

***Technological Changes and Product Transitions***

 

The Company’s industry is characterized by continuing improvement intechnology, which results in the frequent introduction of new products, shortproduct life cycles and continual improvement in product price/performancecharacteristics. The Company must incorporate these new technologies into itsproducts and solutions in order to remain competitive. The Company may notbe able to continue to manage technological transitions. A failure on the part ofthe Company to effectively manage these transitions of its product lines to newtechnologies on a timely basis could have a material adverse effect,specifically reductions in sales, on the Company. In addition, the Company’sbusiness depends on technology trends in its customers’ businesses. Many of theCompany’s traditional products depend on the efficient handling of paper-basedtransactions. To the extent that technological changes impact the future volumeof paper transactions, the Company’s traditional business may be adverselyimpacted.

 

***Dependence on Suppliers***

 

The Company’s hardware products depend on the quality of componentsthat are procured from third-party suppliers. Reliance on suppliers, as well asindustry supply conditions, generally involves several risks, including thepossibility of defective parts (which can adversely affect the reliability andreputation of the Company’s products), a shortage of components and reducedcontrol over delivery schedules (which can adversely affect the Company’smanufacturing efficiencies) and increases in component costs (which canadversely affect the Company’s profitability).

 

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The Company has several single-sourced supplier relationships, eitherbecause alternative sources are not available or the relationship isadvantageous due to performance, quality, support, delivery, capacity or priceconsiderations. If these sources are unable to provide timely and reliablesupply, the Company could experience manufacturing interruptions, delays orinefficiencies, adversely affecting its results of operations. Even wherealternative sources of supply are available, qualification of the alternativesuppliers and establishment of reliable supplies could result in delays and apossible 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 equityratio, the Company is required to devote significant cash to debt service. Thislimits the Company’s future operating flexibility and could make the Companymore vulnerable to a downturn in its operating performance or a decline ingeneral economic conditions.

 

***International Activities***

 

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

 

***Fluctuations in Operating Results***

 

The Company’s operating results may fluctuate from period toperiod and will depend on numerous factors, including the following: customerdemand and market acceptance of the Company’s products and solutions, newproduct introductions, product obsolescence, varying product mix,foreign-currency exchange rates, competition and other factors. The Company’sbusiness is sensitive to the spending patterns of its customers, which in turnare subject to prevailing economic conditions and other factors beyond theCompany’s control. In addition, recent laws governing check truncation couldreduce the demand for the Company’s payment products. Any unfavorable change inone or more of these factors could have a material adverse effect on theCompany.

 

***Product Development Activities***

 

The strength of the Company’s overall business depends in part onthe Company’s ability to develop products and solutions based on new orevolving technology and the market’s acceptance of those products. There can beno assurance that the Company’s product development activities will besuccessful, that new technologies will be available to the Company, that theCompany will be able to deliver commercial quantities of new products in atimely manner, that those products will adhere to generally accepted industrystandards or that products will achieve market acceptance. Many of the Company’scustomers use its products in highly regulated or technologically demandingindustries. As a result of products introduced by the Company’s competitors,generally accepted industry standards can change rapidly in ways that arebeyond the control of the Company.

 

**ITEM 2. UnregisteredSales of Equity Securities and Use of Proceeds**

** **

None

 

**ITEM 3. Defaults UponSenior Securities**

** **

None

 

**ITEM 4. Submission of Matters to a Vote ofSecurity Holders**

 

None

 

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**ITEM 5. Other Information**

** **

None

 

**ITEM 6. Exhibits and Reports onForm 8-K**

 

(a)          Exhibits:

 

31.1 – Certification of Chief ExecutiveOfficer pursuant to Rule 15d-14(a) under the Securities Exchange Act

 

31.2 – Certification of Chief FinancialOfficer pursuant to Rule 15d-14(a) under the Securities Exchange Act

 

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

 

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

 

(b)         Reports onForm 8-K:

 

No reports on Form 8-K were filed during the three months ended March 31,2006.

 

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**SIGNATURES**

 

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

 

**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 24, 2006

 

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